Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

An Anti-Inflation Rally?

Written by johnleemk on 2:25:55 am Jan 17, 2008.
Categories: ,

Rallies cannot do anything about larger trends in the economy. We would not rally against economic globalisation, because we know it is all but certainly futile to fight it. (Except for a few nutters during the 1990s, but their time seems to have gone.) So why would we hold a rally against inflation?

The opposition parties and a bunch of non-governmental organisations have done just that — they have organised a rally at KLCC to protest the rising cost of living in the country. Presumably they want someone to do something about this.

But who is the target of their fury? Businesses? The government? Perhaps you could force businesses to lower prices with a rally, but it is highly questionable whether this would have any significant impact on the economy at large.

Presumably they demand government action to moderate the increase in prices. But do price controls really work? Do we expect the government to mandate that shopkeepers charge lower prices? There is no evidence that this is a successful approach to controlling inflation — its side-effects of shortages and potentially bankruptcies on the part of merchants are probably worse than inflated prices.

Alternatively, they could be demanding that the government subsidise certain basic goods and services. Two popular targets have been road tolls and fuel costs.

Now, there is actually a good argument for regulating toll tariffs. In light of the monopoly power wielded by those companies the government has contracted the maintenance of our roads to, it is probably wise to implement a regulatory structure which would either limit the amount by which tolls can rise, or better yet, inject the element of competition into the business of maintaining highways. A competitive tendering process, with contracts which have to be renewed every few years, would be a good idea.

But what about fuel prices? As some have noted, our lopsided subsidies make us prime targets for smuggling fuel into countries with less generous policies. Worse still, these subsidies encourage pollution and distort the market. People who do not need to use so much fuel will end up using more because they have an incentive to. If anything, conventional economics suggests we ought to tax petroleum-based fuels because of the pollution associated with their use.

But all this focus on micro factors ignores the larger, macro issues linked with inflation. We have to ask ourselves why there is inflation in the first place. If this inflation is simply supply-side, if it is because foreign countries have raised the prices of their goods which we import or because we are running out of natural resources, no amount of government intervention can reduce inflation.

And if this inflation is demand-side, which it very well may be, then the solution would be to moderate consumer and investment demand by raising interest rates — a decision made by the central bank, which is supposed to be independent from the government. There is a good chance that the government's persistent running of budget deficits is contributing to demand-side inflation by causing overheating, but the effects of this fiscal policy are uncertain, and could very well be minimal.

If we want to reduce inflation, it is also likely that in the short run we will see increased unemployment. The reduction in overall demand which would result from lowered government spending and private consumption/investment would cause businesses to lay off some of their workers, and until the economy recovers in the long run, there would be more suffering.

As a result, I have mixed feelings about the upcoming "anti-inflation rally". It seems to be protesting an economic phenomenon without much of an idea of what it wants the government to actually do.

I would argue that inflation should not be a primary worry of ours, although it is the most tangible sign of our government's horrible economic management. We cannot permanently end inflation, but we certainly can shape our country's economic policies for the better, and better prepare ourselves to compete in a cutthroat global economy.

We must end this government's poorly thought out economic initiatives, which overinvest in certain sectors of the economy and are predicated on strong state control. We ought to demand greater flexibility for our entrepreneurs and incentives for Malaysian enterprise. If we can turn our country's economic malaise around, inflation will no longer be the great concern it presently is.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

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