Business

Saturday November 7, 2009

The first step to moving towards higher income is to let the currency rise

A QUESTION OF BUSINESS
By P GUNASEGARAM


WHO says we don’t top any lists. We have the dubious distinction of coming out top on The Economist’s ranking of most undervalued currencies among 37 developed and developing countries around the world.

Put it another way, The Economist, using its famous Big Mac Index and its burgernomics, estimates that our ringgit, as at January this year, was undervalued by a huge 57% relative to the US dollar (see chart on page 16). That means it needs to more than double, to be precise, increase by 130% to come to its proper value!

That may be too rich a rise by most people’s reckoning, but if we want to become a rich country, that is earn a high income as a nation, that’s what we may have to do: let the ringgit appreciate – appreciably.

But first, the theory behind the hamburger standard. The purchasing power parity concept of currencies says that things should cost the same in different countries. If they don’t, then in the long term, the currencies will adjust so that they do.

Thus, if the Big Mac costs less in Malaysia than it does in the United States, then the ringgit is undervalued and will have to appreciate. But of course that’s a simplification – one should use a basket instead of a single product. But The Economist uses the Big Mac as a uniform, easily measurable product.

To be sure, Malaysia is not the only country whose currency is terribly undervalued. Others include Thailand (50%), Indonesia (51%), Hong Hong (52%), Taiwan (37%), China (48%), Taiwan (37%), South Korea (32%) and Singapore (26%).

A common feature of all of them is that they are all major exporting countries, all of them tied to the belief that an undervalued currency will promote their exports to the most developed countries in the world.

Yes, the exporters benefit and the country accumulates foreign exchange because it sells more than it imports and therefore has surplus money. This shows up as an increase in Bank Negara’s foreign exchange reserves, provided there is no outflow of funds from the country from other sources such as the trade in services and fund movements.

But to us ordinary consumers who work locally and get paid in ringgit that is less than a fair deal. That’s because we pay much more for imported products – and there is imported content in virtually any product.

If you think vegetables grown locally don’t think again – we probably import the fertiliser used on them. And if growers can sell them in Singapore for higher prices, why would they sell it to you for lower. Get the picture?

When we go overseas on holidays we have to shell out more. How much cheaper holidays were overseas when the ringgit traded at 2.5 ringgit to the US dollar against the current 3.5. And to think the fair value of the ringgit is closer to 1.5 ringgit to the US dollar!

Well, if it is still not obvious what we are driving at, let’s say it plain and clear. We can let the currency rise to make all of us rich. That will value our labour more and bring it closer in line with that overseas.

In the last budget, the Prime Minister said we should double our income in 10 years if we want to join the ranks of the rich nations – that’s 7% a year. We could achieve that by giving a push on the currency side – let the ringgit rise by about 7% a year.

In 10 years, that would about double the ringgit relative to the US dollar, and since we can buy a 100% more with the ringgit than before, would not our income have doubled?

Yes, I know, its all rather simplistic and makes too many assumptions. But the point is if we want to become seriously richer, we must look at our exchange rate policy and not keep our currency considerably undervalued and all of us terribly impoverished.

I am not saying that Bank Negara should go out and announce it. Just do it quietly over the next 10 years at 7% a year and keep on saying that “we don’t influence exchange rates”. No one will even notice the currency change, but we will become noticeably and appreciably richer.

You see, when you compare income per person between countries, you use the US dollar. So when your currency appreciates, so does your relative richness.

l Managing editor P. Gunasegaram says that the entire world should have a single currency. That way we don’t have to worry any more about that illusion-delusion called foreign exchange.

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