Wan Hong gives a brief economic lesson and helps us figure out who to blame when costs of living increase.
As our nation’s petroleum price has been (yet again) increased, the rakyat are out to grouse and lament about the rising cost of everything. The government tells us that the increased price of petroleum is inevitable – but is it so? This is as much an economic question as it is a social point of contention. Amidst all the complaints and backlash over higher costs of living, the pertinent question often taken for granted is – who and why make the decision for the price increase?
This is a matter of economic management. And unfortunately, the matters of economics are often confusing and misleading to those uninitiated – to an extent, it is somewhat like the lack of understanding of the working of the constitution and parliament. To make matters worse, the way of economics is the complicated workings of graphs, charts, equilibriums, theorems and assumptions. It is not easy to grasp the theorems and diagrams to understand for oneself the true nature of the issue and hence economics are sometimes manipulated and twisted to the benefit of the almighty and powerful. So who exactly is in control of the economy of a country? Where do the rakyat stand in the economy?
In free market capitalism, an economy refers to the money, goods and services produced and purchased in a defined context, say the Malaysian economy. Every single person, whether a consumer or a producer, firms, corporations and even foreigners and foreign businesses are agents of the economy.
A capitalist economy is operated as it is – that is, an economy which runs by itself. An economy is operated by itself, of itself, for itself. However, to operate and to control the economy is not the same thing. The institutions in direct charge of the economy are mainly the executive government and the nation’s central bank. These are the pillars of economic power which have as direct control of the economy as economics allows.
The executive government and the central bank (Bank Negara for us) are caretakers of the economy as they have respective tools and powers to influence the system.
First and foremost, the government sets and implements economic policies. Initiations such as the Johor Iskandar development, the Economic Transformation Programme and the creation of free trade zone are instances of economic and investment planning. The government, under the advice of economists and its think tank, is to implement policies which spur investment and encourage economic growth. In times of need, such as in an economic recession, the government would have to respond to the crisis appropriately by way of economic stimulus packages, austerity and so on. These are the economic responsibilities of the government.
The government’s duty does not end there. It also influences the economy through the “budget” — that is, the revenue of the government minus the expenditure of the government – in running the country. (The budget of the government is not to be confused with the gross domestic product (GDP) of a country. A government’s budget is only part of what makes up the total GDP.)
In life, nothing is certain but death and taxes, be it income tax, corporate tax or government service tax. Taxes are the main source of a government’s revenue. No wonder some say that the income tax department is the most efficient of all government departments. This money is to be spent by the government in a multitude of areas, such as wages for government officials, construction of public projects (think highways/MRT) and also investment. (Yes, the government can use the money to invest in foreign bonds and other financial products). And of course, the government spends money on subsidies – subsidies for petrol, rice, staple food and such. Furthermore, the government is able to borrow money from either the rakyat, foreign countries or also international financial organisations such as the International Monetary Fund (IMF). In short, the government has a balance sheet to manage and, given such an amount of money, it is a big player in the economy.
The government’s bank is the central bank. A central bank differs from commercial banks and investments banks in that the central bank concerns itself not with profit margins but with the economy. Its role is somewhat as guardian of the welfare of the economy. It should be objective and independent from any parties or manipulation.
The ultimate tool in an economy is through the power of setting interest rates. Along with the advice of bank governors, the Central Bank Governor (Tan Sri Dato’ Sri Dr. Zeti, in our case) sets and revises the interest rates as they set fit. The commercial interest rates are influenced by the level of interest rate set by the central bank.
Now that there is a basic understanding of the two big players of the economy, the question is: with such powers, what are they set to achieve in an economy? Quite a handful of goals actually, such as economic stability, control of inflation and unemployment rate, managing the currency’s exchange rate and ultimately, economic growth. With the budget tool of the government and the interest rate setting power of the central bank, these institutions yield the economy to quite an extent.
Here comes the rakyat. We are all both consumers and producers in the economy. As labourers/workers/investors, we are producers of services or goods to the economy; as an individual/family/organisation, we are consumers. We produce and we consume and our tool to influence the economy is our money. This might appear trivial but it is an integral part of the economy which branches out as microeconomics.
Economics 101: Demand and supply set the price. A free market economy operates through the law of demand and supply. Through the “invisible hand” of the workings of the economy, free market economy is a method of allocating resources and distribution of goods/services to those willing to pay the price. The rakyat “vote” for goods/services through demand by payment; a ringgit willingly paid to purchase is a ringgit vote for that good/service bought. The supply side of the economy would then return in favour of profit. This is where the rakyat has a direct say within the scope of the economy.
A question often asked but rarely adequately answered is this – if economics and finance can be calculated and tabulated, why then are there instances of financial crises and economic recessions? Well, this is simply because everybody and nobody controls the economy.
Take the recent 2007 housing bubble in the United States which caused the global great recession. It can be pinpointed that the bankers were at fault for gambling away the financial market’s money. But then again, where did the money come from if not from the people? It is a tango dance of two. Although it is true that the omen and responsibility is on the bankers, government regulators were at fault for lax financial regulation, as well as the people who willingly made irresponsible financial decisions by taking out loans that they had no credibility to repay. Everyone had a hand in it and being in an economy is akin to being stuck in a family. Some things are inevitable.
So then where does this leave the rakyat in the big picture? The single ordinary middle class rakyat on the street certainly does not have much influence over government economic policies, nor does he/she has any say over the central bank’s decision to set the interest rates. As a wage earner and a middle class consumer, the most economic power he/she has is the power of his/her wallet – and this depends on how deep one’s wallet is. The reality is, the bigger your wallet, a bigger player of the economy you are. Corporations and international businesses definitely do yield some influence over the negotiation of economic policies with the government and the industry.
This might appear bleak – the lack of power and say in the hands of the rakyat over the institutions at large. Yet economic power is not the same as political power. The nature of those powers is different. Economics has a different set of goals than that of politics. The economy is not an entity or a thing to be controlled or dominated. There is no such thing as total domination of the economy (unless we’re referring to communism). The free market ‘invisible hand’ economy functions just as it is – leaving it to the market’s freedom of demand and supply to do the work, where everybody and nobody is involved. The point is no one knows every bolt and nut of the operation of any economy. Economics is just a study of the forces of the economy. There are credible economic management theories but when it comes to economic reality, results are sometimes not as expected. The nature of economics just is.
At this point, it is vital to note the faults of the economy – the main one being economic inequality. There is unequal distribution of money, dividing income classes and the rise of the select few of wealthy and powerful. The bigger the economic power one has, the more political influence one yields. This is unlike the more equal political power distribution of one person wielding one vote. Compounded with the association of economics and politics in a national issue, it is indeed a complex situation which often overwhelms the ordinary rakyat. (These issues warrant an article of their own and are not discussed here.)
So, back to the case of the increased petrol price, who is to be responsible? The government has a direct hand in it of course, and the rakyat as well, for being consumers.Ultimately, the nature of economics dictates that there is everyone and no one to be blamed.
In short, the government and the national bank have their prerogatives in their respective economic responsibilities. The rakyat has little direct say in the matter of economics. Vote against the party if the rakyat is unhappy over the economic policies. but there is nothing the rakyat can do to directly influence the national bank. The country may just hope that the powers that make the economic decisions are wise and not corrupt.
Feature image sourced from glogster.com