This article first appeared in Forum, The Edge Malaysia Weekly on May 8, 2017 - May 14, 2017

The Economist Intelligence Unit (EIU) released its annual Worldwide Cost of Living Survey results in March, and topping the list of the most expensive cities in the world is ­Singapore, our neighbour to the south. Indeed, Asian cities dominate the top five spots on the list with Hong Kong, Tokyo and Osaka coming in second, fourth and fifth respectively; Seoul finished in sixth place.

Kuala Lumpur, to the delight of some and puzzlement of many, was rated the 96th most expensive city in the world and the least expensive of the Asean cities included in the 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 government believes these efforts [to tackle the 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,” Prime Minister Datuk Seri Najib Razak posted on his blog.

But from the perspective of policymaking, this survey cannot be taken seriously for reasons of methodology and philosophy.

First, while the EIU survey is comprehensive enough, comparing the prices of 160 goods and services in 133 cities around the world, it is essentially a cost of living index for expatriates because the consumption basket is heavily geared towards the Westerners.

Highly paid foreign workers (interchangeable with expatriates) do not consume the same things that the median Malaysian does. Breakfast at Harrods Café in Suria KLCC does not cost the same as that at Kedai Kopi Wan Shoon in Damansara Kim.

Therefore, Kuala Lumpur may be the cheapest city in Asean for highly paid foreign workers but it may not necessarily be so for ordinary Malaysians. Furthermore, according to the survey, prices in Malaysia today are cheaper than what they were 5 or 10 years ago, which seems counter-intuitive to current anecdotal evidence.

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 use standardised consumption baskets.

The results of the NUS study are strikingly different from the EIU’s — Sydney, Zurich, Oslo, Melbourne and New York were rated the top five most expensive cities in the world. Singapore was 48th, which, if you ask ordinary Singaporeans or Malaysians working in Singapore, is probably closer to reality. Kuala Lumpur was 91st but no longer the least expensive city in Asean for ordinary citizens. Bangkok and Jakarta came in 95th and 97th respectively.

The second reason to not take the EIU survey seriously is that the focus on cost of living is misguided. Ultimately, whether the goods and services in a given city are relatively cheaper is not as important as whether the ordinary citizens of that city can afford those goods and services. The cost of living is simply a red herring for a more fundamental and structural issue — purchasing power. Briefly defined, purchasing power is how affordable goods and services are, given the income levels of ordinary citizens.

For example, if the average consumption basket in City A costs RM100 and the same basket costs RM200 in City B, City A is relatively cheaper. However, if the average income of the ordinary citizen of City A is RM100 but is RM400 in City B, the ordinary citizen of City B is way better off because his purchasing power is much higher.

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

There are two critical observations we can make here. First, even if Singapore is a more expensive city than Kuala Lumpur, it is still more affordable for ordinary Singaporeans than Kuala Lumpur is for ordinary Malaysians.

Consider an internationally priced good such as an airline ticket. On Skyscanner, a return flight ticket from Kuala Lumpur to Singapore on Malaysia Airlines is RM365 but S$117. A Malaysian making RM2,500 a month is definitely worse off when purchasing the ticket vis-à-vis a Singaporean making S$2,500 a month.

Second, note that the cities with the strongest purchasing power are also among the most expensive in the world. Therefore, it does not really matter if cities are relatively more expensive as long as the ordinary citizens can afford to live in them.

Furthermore, based on the Balassa-Samuelson effect in economics, where countries with higher productivity tend to also be more expensive, a higher cost 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 positive factor.

Thus, the real problem the government should attempt to address is not the rising cost of living but low purchasing power. It should try to increase incomes rather than focus on reducing costs. To be fair to the government, it is aware of this, stating that it will do more to increase income, especially via Bantuan Rakyat 1Malaysia and bumiputera-specific programmes under TERAJU, MARA and TEKUN, while managing costs by cutting out the middleman, subsidising healthcare costs via Klinik 1Malaysia and increasing affordable housing.

But ultimately, the surest way to improve purchasing power is to increase economic productivity and development. This is easier said than done because it requires, among other things, addressing a weakened exchange rate, potential premature de-industrialisation, cultural and societal values, economic growth, corporate performance, education policy and labour law reform. We need to own the debate on the cost of living and shift the conversation towards a focus on enhancing purchasing power rather than simply mitigating rising costs.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division

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