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Monday, 14 July 2008

Working formula to elevate Malaysian from economic recession due to the global oil price hike

By: Ahmad Syah Ejaz Bin Hj. Ismail

The effects of the global upsurge of world oil price which were traded at the New York Mercantile Exchange (NYMEX) are obviously felt by Malaysian especially when the government decided to lift out the heavy oil price subsidies in June 2008. With the increase of the oil price it catapult the domestic Consumer Price Index (CPI) of Malaysia at a very high level from 3% to around 6-7% as such it transpire the difficulties facing the domestic consumers even though the real CPI figure might be much higher by the end of 2008. There were no more acknowledgements of potentialities unto the Asian Tigers nowadays, a stark difference of the earlier decade in 1990s when Gross National Product of Malaysia reaches 8 to 9% per year. Today, the GNP of Malaysia are mingling at 5 – 6% a year, half figures of the previous decade which promised the success of Vision 2020.

Currently, Malaysia was suppressed in every angle to keep their Foreign Direct Investment (FDIs’) within its boundary. The neighbouring countries such as Vietnam, Thailand and India proved to be competitive in terms of their labour cost for Malaysia and in a way had shifted investment from Malaysia. This statement of mine is back up by the clear evidence of newsflash where many factories which operated in Malaysia especially in producing consumer electronics products had closed their operation in Malaysia causing hundred of thousands domestic workers to lose their source of livelihood not only among the direct workers, but also the peripheries stakeholders which involved in non-direct activities involving these FDIs’ such as the food sellers that operated nearby these factories. Some foreign companies however still operates their factories in Malaysia but have adopted cost cutting measures by retrenching partials of their workers and have paid their ex-workers some allocation of reimbursement for compensations to terminate their contract.

It was indeed a very hard time and a dire situation when these unemployed Malaysian were put in harms way next burdened by the inevitable increase of the oil price which further stifle their economic problems. What can be termed from these after effect of economic problems re known as a stagflation. It was a new economic phenomenon which sees the rates hike of domestic inflation in parallel with the high percentage of unemployment. This problem which saw inflation and employment moved in tandem really put policy makers at a lost. The policy makers cannot adopt a disciplinary action of suppressing the inflation down by the increase of the interest rates (which proved workable before) to stem the inflation. Thus why, Malaysian needs to find the right formula to solve this economic downturn of stagflation and put back the nation economy on the right track to achieve Vision 2020.

Even though it is admitted that Malaysia is no more a competitive in terms of its labour cost, but the trend of investment from the multinational companies does not relies solely on the low labour cost per se. The Foreign Direct Investment – FDIs’ on certain nations and MNCs’ were contributed by many factors that includes weather, political stability, geo-strategic location, investment policy of the government in power, the purchasing power of a certain nations and many more. These afore-mentioned factors were known as the comparative advantages. Through these comparative advantages, Malaysian definitely still very attractive to pull FDIs’ among the MNCs thus bringing the much needed new technologies and knowledge for Malaysian in relative advantages from FDIs. These type of economic theory [the comparative advantage], can be seen when millions of Australian pours their Australian dollars to the Island of Bali, Indonesian even though Australian itself were a very attractive place for vacation [with its beautiful beaches and coral sea]. Malaysia must realize its own potentialities and comparative advantages that it has to create a new wealth opportunity for its citizens.

The current stagflation problem will be brought to a worse condition if the government decides to hold and cancel its planned infrastructure. It is understandable that amid stagnant economy such measures of save keeping and prudent spending by the government on the intention and on the basis to save millions of ringgit by scrapping the big scale projects, but the method is misguided. By doing so, it will further escalate the stagnant economic problems and sparking a spiralling inflation problems which will cost investors and those that had invested millions of ringgit in the proposed projects to a bankruptcy. One need to understand that when the government decides to implement certain projects especially the big scale one, this motion will soon be followed by fast takers action from various investors on shares, real estate, products and things pertaining to the implementation of the projects and such it will drive prices up.

In the expectation of seeing the projects to be finish, local banks i.e. merchants or hedge funds will obscure millions of ringgit to the investors for the implementation of the projects and most of the time this value is much more higher compare with the real price. This high level of borrowings and investment can only be turns into profits if the projects are implemented and finish. If the government decides to not go on with the projects, this bubble of prices will then explode and burst in a sudden manner contrary to the way it increases (a level by level). This will not only lead out to bankruptcy, but also an untrustworthy investment feelings among the foreign investors towards the Malaysian development policy and its potentials of growth.

Malaysia current experiencing a very deep identity crisis which sees itself to be confused to pick either between central development methods that was adopted by the ex-Soviet nations before or the capitalistic dogma which emphasized free trade agenda and the non-intervention policy by the government on trades issues and business dealings in the market. I do agreed that in a young capitalist nations such as Malaysia the price control regime is workable, but one need also to bear in mind the after effect of price control mechanism on certain products will only lead to more unnecessary economic problems. Sometimes this short term method of controlling prices to suppressed inflation will only leads to a more worse inflationary problems one after another such as black markets and the shortage of basic necessities.

The effects of the world wide oil price hike are inevitable. But what were needed amid the fears of stagnant consumer spending by the people on the lowest tier are some lights and opportunity arises from smart fiscal policy in helping domestic consumers to adapt with these changes of high inflation starting with the positive mode of spending among the people itself. If the government decides to give cash money to the people, it is forecast that they will only resort to pay up their credit card bills and keep the extras in their bank account in hoping for a better economy to spend. This method does not help in solving the stagflation problems. What was suggested best is that for fiscal policy to take place starting from billions of ringgit from the exports of rubber, petroleum and palm oil to be used through the implementation of the various infrastructure projects aimed to lessen the increasing cost of transportation which relies heavily on petroleum products. This long term implementation of infrastructure projects will of course need money to be spent. To help the people to adapt due to the burden of the inflationary problems, government must create alternatives and opportunities and such can be started from the integrated rail systems of trains.

This integrated transportation infrastructure programme must be planned accordingly and needs to carry out the basic principles of people’s mobility and their choices for better time and cost budgeting. The usage of busses travels are irrelevant due to its reliability on fossil fuel for energy. What need to be developed are the matrix systems of train travel which can operate with a very high load of cargo/ trade products from one place to another in shorter period of time. This type of developmental projects can help in decreasing the transportation cost and at the same time create a relative advantage of means to carry out industrial products in an efficient manner then a wide opportunity of jobs for Malaysian. For an example, when the government decides to lift out the high oil subsidies in June, the bulk quantity of irons that were carried using Lorries on the highways were cut in half as to reduce the transportation cost. This then will lead out to inflationary problems and black market, plus the problems product shortages. If the government decides than to adopt the price control measures on iron, this particular products will be shifted to another place such as China in the lookout for a better profits margin and it is proved that the Chinese are a willing buyers and do pay triple market price just for the sake of continuing their national development agenda. Malaysian then would be at the losing end and with the short term method of suppressing inflation bringing another bad effect of stagflation to the Malaysian as a whole.

The best investment for Malaysia amid global tension of energy and stagnant economy is by creating the trans-peninsular rail track from the west coast to the east which can carries heavy load of trades’ cargo in a shorter period of time. This type of putting ones harbour among the global interest of trades can be seen through Israel experience when it capitalize on the straits of Tiran by opening up the Eilat harbour for ships to dock and transferred its’ cargo from Eilat to Asdod harbour located in the Mediterranean seas through the land route. It was a major breakthrough for trades to Israel when it managed to reap the benefits if world wide trades through the usage of its Eilat harbour even though there are Suez Canal to carry the freighter cargo from the Arab gulf to the Mediterranean Sea. As such, Malaysia must learn from this experience and begin to capitalize on its geo-strategic comparative advantage by creating an opportunity for global trades on its high speed train and efficient manage of large cargo from Penang Harbour to Kuantan Harbour bringing options for world wide player of not to use the Malacca straits. This will then create millions of work opportunity for Malaysian in services and tourism sectors. It’s a win-win situation for globalization and Malaysia.

Apart from them, it is suggested that the government will try to find a holistic approach for the current stagflations problems. By giving vouchers and cuts in public transports fares for pensioners, it will surely elevate Malaysian from the current hike in transportation cost. It was also suggested that free food programs can be introduce for students in primary and secondary schools as to assure the high attendance of students to school amid the increase of transportation cost. The best investment in deterring future economic problems and uncertainties is by educational means and as such opportunities must be created through education.


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