(May 13): With the one-year anniversary of the Pakatan Harapan-led government now in the rear-view mirror, one thing is certain — much more remains to be done. In particular, the issue of the rising cost of living continues to top surveys as the biggest challenge for Malaysians.
Over the past year, the government has implemented various measures to tackle high living costs, including the reversal of the goods and services tax (GST), reinstating a cap on petrol prices, cutting broadband costs and launching a fixed-priced monthly public transportation pass. It is also looking to dismantle monopolies to promote competition and, it is hoped, lower prices.
But while these moves have tempered inflation somewhat, costs have not fallen. Anecdotal evidence suggests the average Malaysian is still struggling. There is no question that the situation needs to improve further. We know this. The government knows this.
We could probably reduce costs further by leveraging technology and the sharing economy over the longer term. But unless there is outright deflation (which is actually bad news for economies), to raise living standards, we must address the other key issue — wages, income growth and job opportunities.
Ask anyone and they will, almost unequivocally, tell you that salaries are too low and have consistently failed to keep pace with inflation. This is borne out by the downtrend in the national savings rate and rising household debt levels in the country. Malaysians are saving less and borrowing more to maintain their lifestyles.
This perception appears vindicated by a recent Bank Negara study, which starts with the conclusion that Malaysians are not being paid enough for every US$1,000 worth of output produced, compared with that in Singapore, Australia, the UK, the US and Germany.
Labour as a percentage of GDP is also below prevailing levels in these benchmark countries, implying that the greater share of national income is going to capital owners (see Chart 1). Although the study goes on to delve deeper into the underlying causes and suggested solutions, it was the headline that struck a chord and stuck — workers are underpaid.
Making any conclusion based on labour as a percentage of GDP has to be an oversimplification and theoretically flawed. For one, we should take into account the differences in the structure of economies.
Our services sector, for example, is much smaller as a percentage of GDP (see Chart 2). Also, the components that make up the sector are important. If our services sector continues to be driven by employment for maids, retail and restaurant workers rather than software engineers, then, naturally, wages (and share of income) would be low. But this is not our focus this week, though we may explore this in the future.
What we want to focus on is this: While we agree that Malaysians are “lowly paid”, we do not believe that the majority are “underpaid”, contrary to the views held by many. Why do we say this?
Economists classify resources needed to produce goods and services as factors of production — traditionally, land, capital, entrepreneurship and labour. We simplified this equation into:
Using the formula, we tabulated the actual financial performance for companies listed on Bursa Malaysia — 769 in all — based on their latest available annual reports. (We excluded financials and real estate investment trusts, as they have different reporting formats, as well as plantation and oil and gas stocks, where earnings are heavily dependent on volatile commodity prices.)
What we found was that just over one-third of the companies have N + i – kC > 0 while, for the remaining majority, N + i – kC < 0.
This suggests that, for two-thirds of all the companies, labour is, in fact, “overpaid”.
Put another way, N + i < kC.
What this means is that even when companies are profitable, their returns are, in fact, below the required rate of return based on total capital employed and risks.
The issue, therefore, is not about companies not paying their workers enough. The truth of the matter is that many businesses simply cannot afford to pay more — given that capital is also not getting sufficient returns. Returns, in fact, have been falling for some years now.
From 2010 to 2017, investments (net capital expenditure) have grown at a compounded annual rate of 7.9%. Sales, on the other hand, have increased at a slower annual rate of 5.7%. Crucially, Ebitda (earnings before interest, taxes, depreciation and amortisation) and net profit have expanded even slower, at only 4.1% and 3.6% respectively. In other words, investments are not generating enough sales and margins (profitability) are falling.
Businesses cannot pay labour more at the expense of capital. To do so will only drive down new investments. Instead, we must understand and address the more fundamental challenge — of why total returns on factors of production (capital and labour) are low.
These numbers underscore what some of us already know, that the persistently subpar corporate results are reflective of much deeper structural issues.
Although capex is growing, expenditure for R&D is small. As a result, goods produced are low value-added and investments are not generating productivity improvements. These make it increasingly harder for local companies to compete in global markets.
Businesses are not innovating and capitalising on advancements in the knowledge economy and use of technology. This could be related to issues such as the quality of education, lack of training and upskilling, skill-set mismatch, availability of cheap low-skill foreign labour and so on.
There are insufficient investments in new areas of growth and, too often, businesses continue to rely on “old” sectors such as property and construction. Banks too may be guilty of being overly conservative in lending policies, resulting in restrictive funding options for enterprises without land/buildings as collateral or a long profitable track record as well as
start-ups.
Our need to treat the symptoms as they occur is reactive. Rising cost of living? Roll back the GST and cap petrol prices with subsidies. Need to raise incomes for the poor? Increase the Bantuan Sara Hidup (cash aid transfers). These are populist fixes that can provide quick relief in the short term. Some are necessary as stopgap measures. But that is exactly what they are — stopgap. To cure what ails, we have to treat the underlying root cause.
Why are Malaysians having such difficulty in coping with the cost of living? It cannot be that cost of goods domestically is so much higher in a globalised world where there is free movement of people and trade. The answer must then be because our salaries have been too low for too long.
By that I do not mean we should artificially inflate wages through direct government income supplement. Sustainable income growth and job opportunities must be driven by the private sector and based on realistic market prices.
The government has a major role in helping achieve higher incomes for the people — by setting policies to address the underlying structural issues. The fixes will neither be simple nor quick. Some may even be unpopular. Solutions have to be sustainable for the longer term, if we are to arrest and reverse the decline in living standards.
The Global Portfolio did comparatively well, falling just 0.1%, in a difficult and volatile week in which markets were once again buffeted by trade conflict. Notably, shares in Builders FirstSource bucked the broader market’s drop.
Despite last week’s slight decline, the Global Portfolio is now outperforming the benchmark index, up 5.3% since inception. Over the same period, the MSCI World Net Return Index is up a lower 4.1%.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
This story appears in The Edge Singapore (Issue 881, week of May 13) which is on sale now. Subscribe here
