A better alternative to GST.

This paper is titled “A Better Alternative to GST.” The GST is a one -track-mind solution that simply erodes purchasing power and is a further burden on the middle-income and poor. With the GST, all the government is trying to do is it increase its revenue base.  In this paper we will argue that there are far easier alternatives that provide win win solutions to both the government and the rakyat.

Reading the New Economic Model, all credit must be given to the NEAC for the  honesty and truth in its analysis. Most importantly it was a document free of politics.  It is critical yet fair and it not only says what we as a people need to do, it spells out why we need to do it and what it foresees as our challenges in doing it.

The NEAC says our challenges come down to two: “the  political will to change and the social cohesion required  to enable change.” In the absence of political will and social cohesion, we will be mired in this constant venom spitting that plays in our news everyday.

We should think back for a moment of what were the conditions that allowed Malaysia to be the only one of thirteen countries in the world to achieve 25 years of 7% growth consistently.  Our greatest success arose from our greatest tragedy,  May 13,  and that success was based on 3 things – the Rukun Negara which unified the society with a vision of the greater good, the creation of Barisan National (BN) which gave rise to political unity and the NEP which provided economic unity.

Unfortunately every success, when not well managed gives rise to unintended consequences and we had many along the way and each unintended consequence eroded our unity bit by bit and by 2008 all that was left was political rhetoric, slogans and visions of grandeur that not many believed in nor bought into.

We now sit at this critical inflection point where we know for a fact that not only are the best of Malaysians leaving for “greener pastures” so is Malaysian capital. More Malaysian money is being invested abroad than at home.

While we have the ETP, GTP etc. that promises to transform the country, to many  Malaysians especially the bottom 40% of households that live on less than RM1,222 per month, all of these acronyms rings hollow.  By the way, the next 40% live on RM2,957 per month while the top 20% live on RM8,157 per month.  Nothing destroys the fabric of society more than unjust income distribution.

 In the words of Mahbub-ul-Haq: “We took care of GDP but GDP didn’t take care of poverty. We took care of poverty and poverty took care of GDP”

While the ETP’s and GTP’s are needed and will surely yield results we need to look for faster and more efficient ways of helping the lower-income population without invoking subsidies or revoking subsistence.  The policy responses highlighted in the NEM -2 publication are good recommendations.

However, we believe there are some really easy things we can do, where the mechanisms, rules and practices are all already available and in place.  We would like to give three simple things that we can do, very quickly and efficiently.  All it needs is for us to stand back, look at the problem from the perspective of society and not industry and the solutions become obvious and the benefit of each solution flows into the next.

The fastest and easiest way to help the lower-income group is to change our paradigm on pricing of goods and services. This requires us to look at the issue from the point of view of the lower-income segment who have limited cash. The lower-income person see two things; quantity purchased and frequency of purchase.  Because of limited cash, the lower income tend to buy small quantities but with high repeat rates of purchase. This often means paying the highest unit cost and incurring the most inconvenience.  This pricing model is good for the producers as they earn the highest marginal profits and achieve better inventory turnover but what is good for the producer is not necessarily good for the lower-income.

However, if we changed our paradigm on pricing, especially for public services, we can actually end up with a win-win solution for both the provider and the consumers. Instead of pricing for quantity, lets say we price for convenience.

Let’s take a real example, public transport (we can use any category of consumer goods or service – toothpaste, diapers, milk and this will hold true).  A one day RapidKL pass is RM 10, thus the daily cost of transportation is RM 10 and it has to be renewed every day. If you had a lot  more cash you can buy a 30 day pass for RM150 and now your per day cost is RM5 and you only renew once a month. The one who has more money enjoys both a lower daily cost of transport and the convenience of renewing one a month. The lower-income individual pays the highest rate per day and suffers the most inconvenience of having to renew his pass everyday.

What if we change the model and made the daily pass RM5 and the monthly pass RM300? What would happen? Presumably,  a lot more people will take the LRT on a daily pass and presumably the congestion to renew the pass on a daily basis will go up. For those who can only afford the daily pass they benefit from a cheaper ride. For those who don’t want the inconvenience of renewing everyday they just have to  buy the more expensive 30 day pass.

From a usage point of view the system is now fair as everyone can ride the LRT for RM5 per day. But for those who also want the convenience, they can but they will have to pay more for that convenience.

Will the service provider earn more or less? I am willing to guess that they will earn more as more people can afford RM5 as compared to RM10 per day. This is an amazing real, tangible 100% cost reduction to the rakyat while increasing the utility value of a public good.

The second perceptive change that we should think of is ownership of  public goods.  Lets take the example of the NKVE, which was built to benefit the public. It is the longest toll road in the country and is very well managed. At the time of this writing, It was owned by PLUS a listed entity and EPF and UEM  were in the process of buying it over from PLUS for RM 23 billion. This transaction is meant to address a number of issues, one of it which I guess,  is how to deploy the huge savings in the EPF into productive assets for the long term benefits of its savers.

While this provides a long term benefit, it really doesn’t help the lower-income group. Can it be better done in a better way? Yes, if we changed our paradigm of the problem and look at it from a lower-income stand point.  What if a RM23billion unit trust was created and we called it the PLUS Unit Trust. Its units are priced at RM1.  First preference is given to the lower-income group to either buy the units directly or by using their EPF money.  Now the lower-income group gets direct ownership in a real asset, enjoy the utility of the asset, earns back their investments through the dividends and hopefully growth their wealth through capital appreciation of the underlying asset. This how the rich get richer. All we are doing is extending the option to the lower income by making the entry price affordable.

Can the lower-income group afford RM 1 to invest? Of course. They just saved a real RM5 per day on the LRT which they now can use to invest in a real asset which otherwise would never be affordable to them.

What can PLUS do with RM23 billion?  Invest in new public goods and services like building the MRT. Now we are really starting to see alignment between the government as the “wakil” of the rakyat and how it is aligning its actions for the benefit of the rakyat in a real and tangible manner. PLUS has been a trusted guardian of public interest and they probably have the skills and competence to keep on doing more good for the rakyat. This is now real corporate social responsibility. It is win-win-win for everyone.

The third perceptive change that we need then has to do with our RM407billion public debt.  At 53.1% of GDP, we are sitting close to the edge of a cliff. The nature of public debt is that it is the safest form of debt for any lender but for the borrower it is a noose around our neck.

As much as we the rakyat resent the fact that the “our wakil” has racked up this debt, the reality is that we  the rakyat will have to pay for it.  With a deficit, the rakyat either pays through higher taxes to fund the deficit, or the government borrows and we and our children and maybe grandchildren pay via taxes tomorrow to repay the borrowing. There is no free ride. Since we are going to have to pay for it, why don’t we deal with the problem now rather than later.

The current debt service charge in the 2011 budget is at RM18.517 billion or 2.1% of GDP. This money simply vaporizes and has no productive impact. At the same time the IMF estimates that the savings rate in Malaysia is reported to be about 32% of GDP or RM256billion.  Mind you this is not how much we have saved, but how much we are saving in a year. 

What if, the Government, instead of borrowing this year, issues RM 200 billion of shares to the public (take your pick of the number, this is just outlining the concept) at RM 1 per share and the share would pay a divided equal to or a fraction of the growth rate of the GDP? (2011 growth rate is estimated at 5.5%)  Wouldn’t it be a better return for the rakyat then putting our savings in a savings account today? if nothing else it will pay 2.1% as that is the interest cost to GDP at the moment.

The funds can immediately settle a huge portion of the debt which we are  going to have to pay for anyway. The rakyat become investors and stakeholders into the economy and because this is a share, it can be traded on the stock exchange. If the government  holds it self to good governance, we can envision the share price going up, and if the government doesn’t we will see the share price going down.

The government can even offer the government servants a share option scheme in the fortunes of the country and hopefully motivate them to work harder and be more productive. And mind you a large part of the low-income workforce is in the government. BNM can use a part of its reserves to hold some quantity of these shares. If there is a lack of  liquidity in the market, BNM buys back the shares which will send the price up, and if there is too much liquidity, BNM can sell and price will come down.

The above are three simple things that we can do fairly quickly and will really help the lower-income segment of the population.  They are practical and easy to do and will make a huge difference. But they do present a paradigm challenge.

Before you say no, at least take a moment to think about it. Ask, if we do it, will it help the lower-income groups in our society, will it help in the growth of  the economy, will it help improve governance and will it unite us into a new shared vision for Malaysia?

Questions and comments are most welcome.