THE unprecedented soaring food, energy and commodity prices in 2022 have impacted millions of people around the globe, causing hardship to the poor and low and middle-income households as they struggle with the rising cost of living challenge or crisis.
A cost-of-living crisis is defined as “a situation in which the cost of everyday essentials like groceries and bills is rising faster than average household incomes”.
Increased prices of goods and services relative to income growth and wages have squeezed household budgets, leaving them with little or no savings or even borrowings for meeting emergency or contingency needs.
Given that the cost-of-living crisis is having a scalable global impact, governments in both developed and developing countries have implemented a wide range of short-term stop-gap measures and programmes to ease the impact of inflation and cost of living.
The intervention measures were in the form of energy (fuel and gas) subsidies, a limited free train ride and public transport pass, subsidised rent for targeted households, direct cash transfers, export restrictions on certain food items; and family ration cards for the purchase of essential goods.
Policy response
The policy response and interventions have to be recalibrated at the different stages and pathway of price increases and cost of living trajectory.
The short-term price capping and subsidy interventions come with economic opportunity costs such as unsustainable fiscal cost, wastage and harm to the environment such as fuel.
It has also resulted in misallocation of resources as subsidies divert spending on productive sectors.
Not all policies will be equally effective and some may disproportionately benefit the people. For example, blanket fuel subsidies end up benefitting high-income households more than the lower-income group.
For producers, wholesalers and retailers, the price controls and capping below production cost would mean that businesses will have to absorb the costs.
This squeezes their profit margins and they could end up making losses, and eventually forcing them out of the market. This in turn exacerbates the shortage of supply.
In Malaysia, the cost-of-living challenge has been in existence for years and worsened during the Covid-19 pandemic and even post-pandemic due to income loss or reduced income that could not catch up with the rising price of goods and services.
Over half a million middle-income group (M40) households have slipped into the bottom 40% (B40) category, which is equivalent to 20% of total M40 households.
There were over 405,441 households with monthly incomes below the national poverty line of RM2,208. in 2019. The number of hardcore poor households was 27,158 that year.
Rising cost of living pressures cover expenses on essentials (such as food, clothing, services and other necessities), housing affordability, healthcare and public transportation.
Differences in living costs are notable across states, urban and rural areas with large price differences across the higher cost of living in Kuala Lumpur, Selangor, Penang, and Johor compared to the lower living cost in poorer states (Kelantan, Terengganu and Perlis).
The main factors influencing cost of living pressures across geographical locations are income growth and employment income (wages) not keeping up with the rising cost of living, as well as prices of goods and services.
Between 2016 and 2019, the mean monthly household income grew by an average of 4.4% per year to RM7,901 in 2019 (RM6,958 in 2016).
There was a wide income disparity between rural households (4.7% rise per year to RM5,004 in 2019 from RM4,359 in 2016) and urban (4% rise per year to RM8,635 in 2019 from RM7,671 in 2016).
Moderate wage growth
The employment income growth (low starting salary) for fresh graduates and new entrances to the labour market, as well as moderate wage growth for those with higher qualifications have restrained their cost of living.
Low precautionary savings and the ratio of household debt-to-gross domestic product (GDP) has reverted closer to pre-pandemic levels at 84.5% (December 2021: 89.1%; 2019: 82.8%).
Heavy debt burdens cause financial pressures on most working adults.
Another big financial commitment is deteriorating housing affordability in major cities and towns.
Rental burden is also felt by most working adults. The shortage of affordable housing is most severe for households earning between RM3,000 and RM5,000 per month.
Overcoming the challenge of financial pressures requires a mix of short-term measures to ease immediate cost of living pressures for the targeted households and individuals.
These include direct cash assistance, continued subsidies on essentials, price controls and festive controlled items, freezing of hikes in water, gas and electricity tariffs, a temporary importation of food, discounted unlimited rides for public commuters, and coupons tagged with selected goods and services for targeted users.
Given fiscal constraints and also to ensure that no one is left behind in the vulnerable group, the ministries and agencies concerned must have a good database to identify the deserving recipients and also the participating merchandisers and retailers, including the supermarkets and food chains.
Households and individuals must cultivate smart and prudent spending habits, keeping tabs on their monthly expenses, and comparing prices and looking for substitutes when making purchases, especially since the rising prices of essential items take a toll on their wallets.
The medium and long-term solutions are to increase the supply of food, reduce dependency on imported food and lower the cost of food production.
Solutions needed
Other solutions are to reduce logistics costs of consumer goods distribution; and improve the distribution channels as well as better supply chain management.
Market competition must be encouraged to curb anti-competitive regulations and policies that harm low-income consumers, and curtail the cartels’ behaviour at various levels of the value chain, causing harm to both intermediary customers and the end-consumer.
Structural reforms are needed to boost the employability of and increase incomes of youth, graduates and individuals.
Merely increasing the minimum wage without a matching rise in productivity growth or higher productivity will increase the unit cost of production, and hence, cost-pass through onto consumers.
We have to work on improving household incomes through income security programmes for the targeted vulnerable households; enhancing their employability and earning power through upskilling and reskilling programmes; creating better-paying employment opportunities; implementing a productivity-linked and performance-driven wage system; and encouraging employers to increase the compensation of employees (CE) based on productivity and performance.
Malaysia’s CE-to-GDP ratio of 34.8% in 2021 was lower compared to many developed nations – Singapore (49.6%); Japan (56.1%); the United Kingdom (57.4%); the United States (58.2%); South Korea (58.5%); Australia (59.6%); and Germany (63.2%) in 2019.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.
