COMMENT
By JAGDEV SINGH SIDHU
IT depends which side of the equilibrium a country is on. To generalise things, if a country is not blessed with abundant raw materials, then the higher price of commodities will be an ever-growing burden with each upward tick in prices in London, Chicago or whichever commodity market in the world.
If a country is a huge exporter, then the reverse is true. Cash will flow like a geyser erupting from the earth, people's wallets would bulge and the good times will roll.
In reality though, the consequences and effects of higher commodity prices on an economy is somewhere between those extremes with productivity, skills, and the dominance of non-commodity dependent businesses having a scale-tipping influence on a country's ability to withstand higher raw material prices.
In the past, supply shocks or war were seen as the primary driver of commodity prices. Not anymore.
In today's world, shocks are amplified by liquidity. Futures contracts which started as a pure hedging instrument and tools of hedge funds seeking to make the most returns they can.
With liquidity pumped into the world economy, thanks to quantitative easing and super low interest rates, money has found its way into all sorts of asset classes including commodities.
The direct consequence of money chasing commodities has been to drive up inflation. The reason why inflation is the scourge of any economy is that it saps investments and makes people spend less. When that happens, growth takes a terrible dip and when wages are raised to keep pace with inflation, that would lead to an inflation spiral.
As raw inputs become more expensive, costs of goods will rise and when salaries do not correspondingly match the increase in inflation in a number of countries, trouble will brew.
In the Middle East, inflation was one of the causes of political turmoil seen there although oppressive regimes are more the real reason for unhappiness there.
In Asia, inflation pressures are being felt in a number of countries and interest rates have been raised as a mechanism to fight inflation. Hiking rates up would crimp on growth and many countries in Asia can afford to do just that as growth in this part of the world has been much higher than any other region in the world.
In Malaysia, policy makers have chosen not to go down the route of any of those avenues. In fact, the one thing that the Government wants to dismantle slowly is actually helping to keep inflation in check subsidies and price controls.
From oil to cooking oil to flour to a host of other food and transport charges, the long and not so invisible hand of the government has worked to keep prices in check.
That has led to distortions, yes, but essentially it has absorbed the cost pressures that otherwise would have been transferred to the public.
With subsidy cuts now being scaled back and the high commodity prices is also helping the government to continue absorbing cost pressures.
As Malaysia is a net oil exporter, the government stands to profit from every US$1 increase in the price of crude oil.
Another way for the country to absorb the higher commodity prices is to produce more food. Even though land in the country is extremely fertile, food production has declined over the years as the country moved towards manufacturing from an agriculture based economy.
Malaysia now spends roughly RM13bil a year importing food like fish, meat, potatoes , fruits and vegetables and if more Malaysians start to see that agriculture could be an profit centre if done on a larger scale, then that would lessen not only the amount of cash going out of the country to purchase basic foodstuff but also lessen the impact of food inflation.
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