Correct Facts, But Wrong Diagnosis [OPINION]

Malaysia’s cost-of-living problem is getting worse.

By
Emeritus Professor Dr. Mohd Nazari Ismail
Faculty of Business and Economics
Universiti Malaya

Recently, former governor of Bank Negara Malaysia (BNM), Tan Sri Muhammad Ibrahim, was reported to have said that the salary rate for Malaysians has declined threefold over the past 40 years. He also said that the fresh graduates today are not earning enough. According to him, fresh graduates’ salaries today should be closer to RM7,000 to RM8,000 when adjusted for a five per cent annual inflation rate. He then identified several factors that contributed to the situation: high dependence on foreign manpower, failure to create high-paying and quality jobs, and flaws in the education system.

In this short article, I will explain why his diagnosis of the root cause of the problem is flawed, even though his contention that fresh graduates today are not earning enough is very accurate.

I started working in 1984, the same year as Tan Sri Muhammad Ibrahim. At that time, the starting salary for fresh graduates was around RM1,200. Now, i.e. forty years later, the starting salary is around RM2,500 per month, double that of a fresh graduate in 1984.

However, the cost of living in 1984 was much lower. For example, with my monthly salary of RM1,100, I could still sustain my family of four. I was renting a three-bedroom, single-storey terraced house in Section 10, Shah Alam, at a rate of RM250 per month. At that time, a typical lunch or dinner at a restaurant was around RM2. I also used to buy two packets of nasi ayam for my family for dinner, and I only had to pay less than RM4 to the seller.

However, this is no longer the case. As pointed out by Tan Sri Muhammad, due to inflation, a typical meal at a restaurant in Section 17, Petaling Jaya, now costs more than RM10, a fivefold increase. Accommodation costs have also increased. A small three-bedroom apartment in Petaling Jaya will cost around RM1400 monthly to rent, a more than fivefold increase compared to the 1980s.

In other words, even though the monthly salary increased by around 100 per cent after 40 years, monthly rental and food costs have increased by 500 per cent, a far greater increase. In other words, Malaysia’s cost-of-living problem is getting worse.

Tan Sri Muhammad, therefore, recommended that the Malaysian government implement policies increasing workers’ salaries, as is happening in some other developed countries such as Singapore.

But he seems oblivious that the cost-of-living problems in those so-called developed countries are also as bad, if not worse, than in Malaysia. To illustrate this point, let us compare the case of a fresh graduate working as a teacher in Malaysia and Singapore. With a starting salary of RM2500 a month in Malaysia, the teacher can rent an apartment in Petaling Jaya for RM1500 a month and end up with a balance of RM1000 ringgit to spend on food and other expenditures. In Singapore, the starting salary for a teacher is around SGD 3,250 (approximately RM9,800). At first glance, Singapore has successfully pursued a policy of increasing the wages of its workers compared to Malaysia. However, we must consider the cost of living in Singapore, which is much higher than in Malaysia, where the rental prices for HDB flats in Singapore generally range from SGD3,000 to SGD4,350 per month, meaning there is no balance to spend on food. Of course, he can completely forget about renting a terraced house because it costs around SGD8000 per month (around RM26,000), or more than twice his monthly income.

In other words, we need to realise that even in developed countries, especially where the banking system is more developed, a higher monthly income for the workers is not going to make life easier because everything else, such as house prices, rental rates, food prices, etc., will also be higher relative to the average salary in the country. Salary increases cannot keep pace with the rise in the prices of goods and services.

The above discussion brings us to the next question: What causes the price of goods and services to increase constantly, even in developed countries, such that the high monthly wages are not enough to pay for the cost of living? To answer this, we must understand the nature of the monetary system that is practised in all countries, including developed countries.

The most important fact that most people are unaware of is that almost all of the money in the banking system is created by commercial banks when they issue loans, as explained by the Bank of England in one of its documents (Quarterly Bulletin 2014 Q1) :

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

Therefore, the banking industry continuously creates vast amounts of new money to fuel economic growth. As a result, even though the economy experiences fast economic growth, the purchasing power of the funds continuously declines. In other words, there will always be inflationary pressure, which in the case of Malaysia is around 5 per cent annually. This is the main reason why the cost of a basic meal is now more than RM10 compared to just RM2 when I started my job at Universiti Malaya.

But why is the salary not increasing as fast as the price increases? It is not because Malaysian workers lack skills or that local universities are not producing quality graduates. After all, many of our graduates are good enough to be employed by well-known multinational companies. Many are also able to qualify to further their studies at top-ranked universities in Europe and the United States. Moreover, thousands of international students are also enrolling at Malaysian universities, undoubtedly impressed by the quality of courses offered.

The real reason why employers are not paying high wages is because in an economy fueled by bank loans, all employers are burdened by massive debt. In Malaysia’s government’s case, the total debt is more than RM1.5 trillion. An enormous amount of debts similarly burden commercial firms. Some corporations had to rely on the government to pay off their debt to prevent them from going bankrupt, as in the case of Sapura Energy, whose total borrowings as of the end of January 2025 were a whopping RM10.8 billion. Its total liabilities were RM18.04 billion. Under such a situation, many firms are forced to optimise their costs, including human resource costs, hence their inability to increase their workers’ salaries to match the cost of living in the country.

In conclusion, the problem of low salaries among workers relative to the cost of living is tied to the debt-based economic system being practised. That is why the situation is present in Malaysia and almost all countries worldwide, including developed countries such as Singapore, Japan, and the US, where workers are highly skilled. The long-term solution to the problem is to revamp the entire economic system so that economic growth is no longer fueled by bank loans but rather by savings and equity financing, where new money is not created to finance almost all economic activities. Moreover, we must teach the new generation the habit of saving so they do not need to borrow money from banks to fund their expenditures.