Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : PUTRA WORLD TRADE CENTRE,
KUALA LUMPUR
Tarikh/Date : 12/09/95
Tajuk/Title : NATIONAL SUMMIT ON ACHIEVING
ZERO INFLATION
I would like to thank the organiser,
Asian Strategy and Leadership Institute (ASLI), for
inviting me to officiate this conference `Towards Zero
Inflation: A New National Agenda'. The Government
appreciates very much the organisation of the
conference as it will help the Government's efforts to
achieve zero inflation. It is hoped that this
conference will contribute towards innovative
approaches in combating inflation and reducing it to
zero.
2. Malaysia continues to record impressive rates of
growth averaging more than 8 percent per annum over the
last eight years. This high growth is also forecast to
continue over the next few years. Like all countries,
Malaysia faces inflationary pressures, with inflation
around four percent per annum. It is assumed of course
that since we have growth there must be inflation, the
higher the growth the higher the inflation. But
countries not experiencing growth also suffer from
inflation, in some cases very much higher, running into
more than 1,000 percent per annum. One may therefore
be permitted to question whether growth and inflation
must always go together.
3. Inflation has been variously defined but it is
generally accepted to mean an increase in the price of
goods and services over time. However the Consumer
Price Index (CPI) recognises that the increase in
prices per se does not concern us as much as the
increase in the prices of certain essentials. Thus in
the CPI, food, ordinary food, is given high weightage.
Obviously the increase in the price of caviar or smoked
salmon or a Martini will mean little to the everage
consumer. Other than food, clothing, shelter and
travel receive high weightage in the CPI.
4. Clearly when we talk of inflation we are concerned
with the rise in prices of the essential needs of the
average citizen. We are not really concerned with
luxuries although as the standard of living rises, more
and more items become essential to the life of the
people and must be included in the determination of the
CPI.
5. The fault of the CPI arises from the need to make
worldwide comparisons. Obviously this is quite
meaningless because the essentials in a developed
country may be regarded as luxuries in a developing
country. The items in the CPI basket cannot be the
same for all countries. But as Malaysia is a member of
the world community it must accept world standards,
however irrelevant it may be. Still, for the purpose
of our campaign for zero inflation it would be better
if we determine what should be in our CPI baskets.
These items must reflect the real needs of the average
Malaysian. If the prices of these necessities remain
stable then we can say we have achieved zero inflation.
This is more relevant to our people although the rest
of the world may not agree. They will still say our
inflation is up because the prices of items in the CPI
basket have gone up in Malaysia.
6. We are now familiar with the MacDonald Hamburger
Index, renamed the Purchasing Power Parity. Finally
economists have accepted that it is not how many US
Dollar equivalent you earn that counts, but the
purchasing power locally of what you earn. Again
purchasing power has nothing to do with the number of
units of the local currency which you earn. Big
numbers mean little if the purchasing power or value of
each unit is small. On the other hand if the
Purchasing Power value is high, small amounts of the
currency is much more meaningful. Thus three years ago
the Serbian Government issued a note of 50 billion
dinars. The actual value at the time of issue in
exchange rate terms was 12 US cents or 30 Malaysian
sen. It does not need an economist to tell us that
dinar billionaires are poverty stricken. Yet such is
the glamour of big figures that most people still
believe that higher incomes in terms of figures can
enrich them. That such incomes can only be had if the
cost of living goes up, and therefore the purchasing
power of the income goes down, is still not
appreciated. And so when the cost of living goes up
more income is demanded, giving rise to the now less
often quoted wage/price spiral, which really refers to
the income/price spiral, for prices also go up when
profit margins or executives' pays go up.
7. All that I have said is known to everyone of us.
But we still persist in ignoring these facts when we
think about wages, salaries and profits. If we are to
aim for zero inflation, we can only do so if we can
overcome our obsession with incomes in figures or
exchange rates, but instead focus on purchasing power.
It is just not worthwhile to have more money only to be
able to buy less goods and services.
8. If prices remain static, who gains and who loses?
Obviously the consumer gains. And it must always be
remembered that we are all consumers, even though we
may be the suppliers or sellers. Any increase in the
consumers income will enable him to consume more, not
necessarily of the same thing of course. If he does
not have an increase in income he will not be worse of.
If his income shrinks he will not be as badly of as
when the prices go up i.e. inflation. Of course if
prices go down he would be better off. Even the
supplier would eventually be better off, for although
his profit may decrease, the cost of replenishing his
stock would also go down and his cost of living too
would go down. Clearly static prices or zero inflation
benefits all of us, for we are all consumers. Even
when we function as suppliers we can still benefit from
zero inflation.
9. All these may sound rather idealistic if not pure
flights of fancy. But although inflation is a fact of
life, deflation has occurred before. In fact
deliberate and successful deflation has been achieved.
In 1962 France decided to drop two zeros from the
French franc and call it the Nouveau Franc. The effect
was to reduce the prices and the wages by 10,000
percent. It worked. If deflation (and massive
deflation at that) is actually possible, zero inflation
should also be possible. However, the deflation or
revaluation of the French franc caused the Nouveau
Franc to be valued upwards by the same percentage in
terms of exchange rate. There was no gain in
competitiveness in the international market but it made
the French franc less cumbersome and more credible as a
currency unit.
10. Other countries devalued their currencies against
gold or other currencies in order to be internationally
competitive but did not achieve deflation. Indeed all
that happened was to impoverish their people. The
early gains in terms of competitiveness was soon lost
as workers demand increases in wages and imported
inputs cost more, pushing production costs up.
11. There is also a belief that economic growth,
especially high growth, must cause inflation. This is
said to be due to too much money chasing too few goods.
If this is true than surely the answer lies in
increasing the supply of goods, including the variety.
The other strategy is to increase the interest rates,
the effect of which is to increase cost and actually to
cause inflation. If we do not want inflation induced
by growth, why should we prefer inflation induced by a
deliberate increase in interest rates. In any case
what good is an increase in income if it cannot
increase the purchasing power. It would be far better
if the prices and the income remain static.
12. The management of a country's economy through
fiddling with the values of the currency or interest
rates have never really worked satisfactorily. If they
can work then the economies of every country should be
good because it is really a simple matter to devalue
money or to raise interest rates. They only need the
Government to make a decision.
13. So, if one really cannot control inflation through
currency devaluation or revaluation, or through
manipulating the interest rates or indeed through
limiting growth, what can one do, especially when the
target is so ambitious as to achieve zero inflation.
14. Perhaps the most important thing is the knowledge
of the people as a whole and the workers and
businessmen in particular, about the meaning of
inflation, the methods of containing it, and above all
the roles that all must play. In the first place we
must be realistic and limit zero inflation to those
goods and services which are really basic necessities
for a reasonable standard of living.
15. Secondly, it is necessary that everyone, in
particular wage-earners and traders, to understand that
more money does not mean more wealth. It is the
purchasing power of what is earned that counts. In an
inflationary situation purchasing power will diminish.
Only when there is zero inflation will an increase in
income result in an increase in purchasing power. It
is therefore important that income increases should not
cause inflation, whether the income is in the form of
wages or profit margins, or earnings in whatever form.
This is possible if income increases are accompanied by
a comparable increase in productivity i.e. increase in
income does not affect unit cost.
16. Growth increases wealth. Again if the increase
brings about inflation, the wealth gained will be
diminished or may become totally meaningless. Again
growth need not cause inflation if it is due to
productivity increases. Profits can increase but
through higher volume of business rather than higher
margins.
17. With increases in earnings all round through
higher productivity and increased volume of business,
consumption would go up. It is assumed that there will
be more money chasing less goods. But in the present
world of plenty, there should really be no shortage of
goods or services. There should therefore be no
increases in prices, remembering of course that we are
concerned only with basic necessities, not luxuries.
18. But what about increases in the cost of imported
goods. Actually the inflation rate in the country of
origin, particularly for necessities included in the
Malaysian CPI should cause minimum effect on our rate
of inflation. If the raw sugar from Fiji goes up 10
percent, the increase in sugar price in Malaysia should
not be by 10 percent. This is because the retail price
in Malaysia includes a lot of Malaysian costs which
have not gone up.
19. The Government has a big role to play here. Price
control of certain necessitive must go on even if there
is no shortage. Taxes and other instruments of the
Government should be used to limit price movements in
whatever direction. A strong Ministry of Domestic
Trade is absolutely necessary as traders are usually
not self-regulating and need supervision. The Ministry
of Human Resources must ensure industrial peace by
promoting fair and affordable wages based on
productivity.
20. Price-tagging, particularly of necessities as
listed in the Malaysian CPI must not only continue but
be computerised for quick comparison in terms of
locality and time.
21. Zero inflation is not only desireable but also
achievable. Indeed there is no reason why there should
be inflation for inflation and currency devaluation are
really one and the same thing. No wage-earner or trader
would deliberately demand for his earnings to be
devalued in terms of purchasing power. Yet they could
be willing to contribute directly towards devaluing
their incomes by demanding for wage increases without
productivity or profit increases without proper
justification, all of which will cause inflation and
the effective devaluation of their earnings.
22. When we talk about zero inflation we must
understand that we are demanding for a stable currency,
not so much in terms of exchange rates but in terms of
domestic purchasing power. If we appreciate this then
the road to zero inflation will be facilitated by good
cooperation from all parties, wage-earners, traders and
the Government.
23. On that note, I have the pleasure in declaring
open this very significant conference on Zero
Inflation.
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