I was visiting my daughter at Sekolah Kebangsaan Bukit Jelutong when I met a young teacher who told me that he occasionally read my economic columns in various publications.

I was impressed when I learnt that he took time to learn the technical jargons that most people find intimidating. I honestly think that dedicated teachers who keep abreast with current development locally and globally are members of a productive workforce who deserve more than what they are paid.
 
Policy makers are right that income levels need to be raised if the government wishes to embark on a new economic model based on consumption, as recently mentioned by Tan Sri Nor Mohamed Yakcop.

It is of course, easier said than done. High income is usually the result of a strong economy rather than a prerequisite.

For instance, after policy makers took bold steps to encourage inflows of foreign direct investment following the 1985 recession, Malaysia became a centre for the manufacturing of electrical and electronic products.

In the 1990s, the manufacturing sector was a major contributor to the economy, churning out thousands of jobs for Malaysians, lifting income for a majority of the population.

Because of strong linkages with the services sector, financial services grew rapidly, providing more jobs in the banking, insurance and other sub-sectors. Per capita income almost tripled to RM13,000 in 1997 from RM4,700  in 1987.

Then came the Asian financial crisis.  Economic growth plummeted and never recovered to the levels prior to 1997. Average growth of gross domestic product (GDP) moderated to 5.6% between 1999-2008, 3.7percentage points lower than the 9.3% recorded between 1988-1997.

While exports remained an important growth engine for Malaysia post-Asian financial crisis, private consumption emerged as a driving force for the economy as low interest rate and easy credit fuelled consumers’ appetite.  

As a result, average private consumption’s contribution to economic growth accelerated to 3.7 percentage points between 2000-2008.  It also accounted for 52% of the economy in 2008.  That kept the economy humming in the past several years.

But as evident in the US economy, an economic locomotive will start to sputter when consumers have no means of continuing their consumption patterns.
 
The problem is further magnified by stagnating real wages in the US, especially of those at the bottom in the past few decades, leading to negative savings rate, luring consumers to increase borrowings in order to keep up their consumption habit.  

Having lost a big chunk of their wealth in the real estate and stock market, American consumers can no longer support the economy.  

As recently described by former finance minister Tun Daim Zainuddin, Malaysia can no longer rely on a low-wage policy and therefore productivity-based compensation should be aggressively pursued in both private and public sectors.  

In the public sector, remunerations for those in the education sector such as teachers and lecturers, should commensurate with their increased responsibilities.  After all, they are the backbone of future human resource in the country.

Without elevating the level of incomes for Malaysian workers, many may need to resort to higher debt to pay for essentials. Things are not cheap anymore.  Food items that cost RM5 in 1999 now cost RM6.50, if one were to use the standard gauge of consumer price index or CPI.  Actual increases are normally more than that.

With easy credits offered by financial institutions, it is easy to see how people can be lured to take up more debt.  Statistics reveal that the number of credit cards in circulation for primary holders have more than tripled to 9.67 million units as of March 2009, from just 2.92 million in March 2002.
 
At the same time, the amount of credit line extended for credit card users more than quadrupled to RM103.8 billion versus RM24.3 billion in January 2002.  Not surprisingly, Malaysia’s household debt remains above 60% of gross domestic  product (GDP) despite sliding from its high of 69% in 2005.

Therefore, as in the case of other economic models, a consumption-led economy has its own drawbacks.  Notwithstanding, there are success stories.

In Thailand, Thaksin economic policies or commonly known as Thaksinomics implemented in 2001 had some elements to support consumption in generating economic growth although it was based on dual-track policies, combining the export-led and domestic initiatives to increase overall economic efficiencies.  

No matter what, the task of elevating income levels will become more challenging in the wake of increasing volatility in global economy.

Zahidi is the chief economist at Malaysian Rating Corporation Bhd.

This article appeared in The Edge Financial Daily, June 1, 2009.