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Sunday, 8 June 2008

Oil Price Stagflation - Learn from Miyazawa Plan (Part 1)

[I’ve been getting phone calls on the night the government announced to lift up the subsidy expressing concern on the food products necessities, text messages and email on the same matter asking what’s are my opinion about the decision by the government to increase the oil price from RM 1.92 per litre to RM 2.70 per litre. Actually I’m not very much interested in giving my opinion about the matter, but I do would like to express my disappointment on certain decision pertaining to the nation preparation amid the global tension of oil price hike and I do think that some people need to be blame on the decision making process which put us on the bad situation not to mention future jeopardy of progress and Vision 2020 (if some people still keen to achieve it). Here are my opinions on the subject matter whether you like it or not.]

Malaysia was caught unprepared

The Global trend of the oil price hike were felt not in 2006 when the government decides to increase oil price to 0.30 cents but as early as 2002 when the price of oil changed from USD 19.00 per barrel reach to USD 30.00 per barrel. After experiencing a boring mode of the price curve ranging from USD 17.00 to USD 19.00 per barrel, the year 2003 saw the major changes in the curve mode where it start to reach USD 30.00 per barrel which saw an increase of USD 11 – 12 dollar per barrel in just one year. Never before the world saw the impact that might once again change the way of “civilized” human life affected by the price change on it’s addiction for oil since the Arab-Israeli War in 1970s. But the world has yet to learn from the recession precipitated from the OPEC cartel decision on the oil price in 1970s.

For Malaysian, in facing such a latent threat of nation’s recession taking place due to the price hike, some measures had been put forward to ensure there will be no glitch in domestic economy from the price hike if the government decided to review the subsidies on oil [sooner or later looking at the oil price curve such day will surely come]. Just to name a few some of the projects proposed was the Putrajaya Monorail, Double railway track and the purchases of the renowned Italian excellent motorcycle companies the MV Agusta in keeping Proton technology savvy of the small engines technologies amid the global demand of the small cars that will consume less oil when the price hike of the oil is un attainable. Unfortunately, those three projects that were supposed to prepare Malaysian for public transport and less oil consumption were cancelled without review and MV Agusta itself was sold at Euro 1 far below the market price to a buyers who are unknown without any track records or open biddings [I personally believe Encik Khairy Jamaluddin Abu Bakar was behind the decision].

Those measures were conceived to help Malaysian in coping with the increase of the oil prices and sustaining the consumer and its economic mobility at the same time in keeping pace with the needs for “creative destruction” just like the Japanese manage their economy and economic impetus. The problems with the Malaysian domestic economy and Malaysian way of life is that our addiction for oil is too much to bear amid the global demand and much more worse than the American consumers in as such Malaysian economic activities were based on oil in terms of transportation and production of products [plus the usage of energy in keeping the supply of the raw materials].

The decision of the government to lift up the subsidies leaving Malaysian consumer with no alternative is never a good policy. Plus the shock of the oil subsidies innoculation applied [at .80 cents per litre is too high for Malaysian to absorb] as such it was not adopted gradually which put Malaysian on a bad mode of absorbing the debilitating shocks and another shock of economic self-correction in terms of spending and consumer preparation. What the current government is applying is the classic IMF economic text book of facing recession and inflation - punishing the consumers for global economic problems. The decision to sell MV Agusta, and the cancellation of the double railway track and Putrajaya Monorail will come at a very high cost where Malaysian will be at the losing end. My worries are that consumers spending will stop to a complete halt, bringing down thousand of workers and the economy will be at full stagnant when the shocks is too much to bear at short notice.

Not to mention the increasing of the inflation rate (that had already forecast to happen at 4 %, personally I believe the real rate were at 8%). Methods to deal with this inflation should applied in an unorthodox way when the Keynesian methods are not the only methods of economic management to be applied when inflation and stagnation is moving in tandem. According to Alan Greenspan, under the prevailing Keynesian view of the economy, unemployment and inflation are like kids on a seesaw: when one goes up, the other goes down. To oversimplify, it was argued that the more people there are out of work, the less upward pressure there is on wages and prices. Conversely, when unemployment falls and the labour market gets tight, wage and price increases are likely.

But the Keynesian economic models failed to account for the possibility that unemployment and inflation could climb in tandem. This phenomenon, which came to be called stagflation, put policy makers at a loss. The forecasting tools that had made government economist seem too prescient a decade before were in reality not good enough to let the government fine-tune the economy. With the oil price increase there will be inflation and high rate of jobs retrenchments. The economy will surely will be in recession and methods need to be applied where education is keeping pace with the problems solving methods that will leave Malaysian with an alternative to choose especially in sustaining the current mobility.

The lift up of certain rate of oil subsidy is acceptable, but one need to bear in mind that Malaysian need to prepare beforehand in facing an economic downturn. It is impossible for the current government to revoke its decision, but there are methods that can be applied to help domestic consumer keeping pace with the global recession precipitates from the oil increase. One of the way to deal with such problems I suggest we adopt back the “Look East Policy” and learned how the Japanese deal with its longest historical recession ranging from 1990 to 2005 when it endures the longest stagflation the world had ever seen at the same time preserving and keeping pace with the Japanese way of life, social mobility, kaizen methods of “creative destruction” and nurturing the domestic consumer spending.

To be continued…

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