About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Why Focusing on Cost of Living is Misguided

Published in The Edge Malaysia, 8 - 14 May 2017.

In March 2017, the Economist Intelligence Unit (“EIU”) released its annual Worldwide Cost of Living Survey results. Topping the list of the most expensive cities in the world was Singapore, our neighbours to the south. Indeed, Asian cities dominated the top five spots on this list with Hong Kong, Tokyo and Osaka coming in at second, fourth and fifth respectively; Seoul finished just outside the top five at sixth.

Kuala Lumpur, to the delight of some and puzzlement of many, was rated as the 96th most expensive city in the world, and the least expensive city of all ASEAN cities that were included in this study, namely, Manila, Jakarta, Ho Chi Minh City, Phnom Penh, Hanoi, Bangkok and Singapore. This was seen as a hugely positive piece of news for Malaysia. The Prime Minister himself, Dato’ Sri Najib Tun Razak stated, in a recent speech posted on his blog, “The government believes these efforts [to tackle rising cost of living in Malaysia] have to an extent borne fruit when Malaysia was assessed as the city with the lowest cost of living among the ASEAN countries according to a 2017 global survey on living costs by the Economist Intelligence Unit.”

From the perspective of policymaking, there are, however, very serious problems with regards to taking this survey seriously. The first is methodological, the second is philosophical. I will go through each in turn. Firstly, while the EIU’s Worldwide Cost of Living survey is certainly comprehensive, comparing the prices of 160 goods and services in 133 cities around the world, it is essentially a cost of living index for expatriates, with the consumption basket in the survey being heavily geared towards Western consumption.

Highly paid foreign workers (interchangeable with expatriates) do not consume the same things that the median Malaysian consumes. Breakfast at Harrods Café in Suria KLCC does not cost the same as breakfast at Kedai Kopi Wan Shoon in Damansara Kim. As such, the results of the Survey do not directly translate to that of ordinary Malaysians; Kuala Lumpur may be the cheapest city in ASEAN for highly paid foreign workers but it does not necessarily translate to being the cheapest city for ordinary Malaysians. Furthermore, the Survey also finds that prices in Malaysia today are cheaper than what they were five and ten years ago, which seems counter-intuitive to all available anecdotal evidence today.

Fortunately, in 2015, researchers at the Lee Kuan Yew School of Public Policy at the National University of Singapore (“NUS”) released a study measuring the cost of living for ordinary residents across the globe, the first of its kind. One of the strengths of this study was that it allowed the consumption pattern of ordinary residents to vary from country to country; this is not necessarily true of surveys that measure the consumption pattern of expatriates which typically uses standardized consumption baskets.

The results of their research are striking. When the data is keyed in on ordinary residents, Sydney, Zurich, Oslo, Melbourne and New York made up the top five of the most expensive cities in the world. Singapore, top in the EIU Survey, was 48th, which if you asked ordinary Singaporeans or Malaysians working in Singapore, is probably closer to reality. Kuala Lumpur was 91st, but was no longer the least expensive city in ASEAN for ordinary citizens, with Bangkok and Jakarta coming in at 95th and 97th respectively.

The second problem with taking the EIU Survey seriously is a philosophical one, which is that a focus on cost of living is misguided. Ultimately, whether goods and services are relatively cheap in a given city is not as important as whether the ordinary residents in that city can afford those goods and services. The cost of living is simply a red herring for a more fundamental and structural issue, which is purchasing power. Briefly defined, purchasing power is how affordable goods and services are, given the income levels of ordinary residents.

As an illustrative example, if the average consumption basket in City A costs RM100, and that exact same basket costs RM200 in City B, City A is relatively cheaper. However, if the average ordinary resident of City A makes RM100 in income, but the average ordinary resident of City B makes RM400, the resident in City B is way better off because she has a much higher purchasing power.

Hence, the more relevant comparison on the affordability of cities for the ordinary citizen is not on cost of living per se, but on purchasing power. Fortunately, the same researchers at NUS calculated the purchasing power of ordinary citizens for all 103 cities in their sample. The top five cities in terms of purchasing power were Copenhagen, Lyon, Geneva, Zurich and Oslo. Singapore, which ranked 48th in terms of cost of living, came in at the 21st spot. Kuala Lumpur came in at 74th.

There are two critical observations we can make. Firstly, even if Singapore is still a relatively more expensive city than Kuala Lumpur, it is still a relatively more affordable city for ordinary Singaporeans than Kuala Lumpur is for ordinary Malaysians. Consider, for instance, an internationally-priced good such as airline tickets. On Skyscanner, a return flight ticket from Kuala Lumpur to Singapore on Malaysia Airlines cost RM365 but SGD117. A Malaysian making RM2,500 a month is definitely worse off when purchasing that ticket vis-à-vis a Singaporean making SGD2,500 a month.

The second observation is, in my mind, the best steer for public policy. If we consider the cities with the strongest purchasing power, they are also among the most expensive cities in the world. Therefore, it really does not matter if cities are relatively expensive as long as ordinary citizens are able to afford them. Furthermore, based on the Balassa-Samuelson effect in Economics – where higher-productivity countries tend to also be more expensive – higher costs of living can also be the consequence of increased productivity and economic development, which is something we should strive for. Sometimes, higher prices can be a symptom of positive scenarios.

Thus, the real problem the government should attempt to address is not rising costs of living, but low purchasing power. It should try to increase incomes rather than focus on reducing costs. To be fair to the government, Dato’ Sri Najib is aware of this stating that there is more that the government will do to increase income, citing measures such as the Bantuan Rakyat 1Malaysia and Bumiputera-specific programmes under Teraju, MARA, and TEKUN, while also managing costs via cutting out middlemen, subsidising healthcare costs via Klinik 1Malaysia and increasing affordable housing.

Yet, ultimately, the surest way to improve purchasing power is to increase economic productivity and build robust economic development. This is not easy to do. It requires, among other things, addressing a weakened exchange rate, potential pre-mature de-industrialisation, cultural and societal values, to economic growth, corporate performance, education policy, labour law reform and much more. We need to own the debate on cost of living and shift the conversation towards a focus on enhancing purchasing power rather than, simply, mitigating rising costs.

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