Lessons on being good consumers

SPEND WISELY: We don’t always have to keep up with the Joneses.

WHILE we know that investments by both the public and private sectors are instrumental to economic growth, we need to appreciate equally the role of consumption in sustaining aggregate demand.

As expected, the ratio of consumption in developed countries can be as high as 70 to 80 per cent of total demand while the percentage for developing countries tends to be lower, in the region of about 50 to 55 per cent. Contraction of aggregate demand is a cause of recession.

Malaysia’s share of consumption in aggregate demand has risen consequent upon a slowing investments demand and lately by a moderating external sector. Malaysian affinity for festivities, given our multiethnicity, makes private consumption a significant part of the macro economy.

Consumption has an important role to play; it provides market for local production while providing a significant share of total employment, especially in the distributive sectors.

In addition, it enables the workforce to enjoy the fruits of their labour and improves their quality of life, in particular, if their consumption is beyond basic essentials.

As such, authorities often defend living standards by having “safety-net” measures to ensure that the consumption of low income population is insulated from the full impact of recession. We must also be wary of conspicuous private consumption or rising consumption for purpose of keeping up with the Joneses, especially among the low-income population as they may be drawn to high indebtedness, given the easy access to credit in a country like ours.

Indeed, our easy access to credit cards and consumption loans has, perhaps, led to a high percentage of household debt of about 75 per cent of gross domestic product. Our policy to encourage home and car ownership is one factor contributing to this trend.

The authorities may be well advised to mount a campaign on good consumption habit, good credit culture and how to manage personal finances. Given that many of our workers do not earn high monthly incomes, such a campaign will make them spend prudently and be less exposed to pecuniary embarrassment.

Many people do not even know that one should not take loan, the servicing of which exceeds 25 to 30 per cent of total monthly income because the remainder of the income has to be committed to food, housing, travels, and other essential household expenses (all totalling about 50 to 60 per cent of total expenditures). The lower the income, the higher is the share of food and essentials.

by Tan Sri D. Sulaiman Mahbob.

Read more @ http://www.nst.com.my/opinion/columnist/lessons-on-being-good-consumers-1.191889

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