Boycotting restaurants and the economic cycle

RECENTLY several newspapers reported that the Minister of Economy, Rafizi Ramli, had blamed restaurant owners for the inflation issue. Upon observing that many restaurants still refuse to lower prices despite the fall in the prices of food raw materials, he urged consumers to teach stubborn restaurant owners a lesson by boycotting those restaurants. In this way, he hopes restaurants will lower prices, alleviating the country's inflation problem.

The approach he is taking to solve the inflation problem is similar to what many economists recommend: reducing aggregate demand. However, what financial policymakers in most countries do for this purpose is more macro or extensive and focused on more than just the restaurant sector. The action they take is to raise interest rates in the financial market, such as raising the Overnight Policy Rate or OPR in the case of Malaysia.

Any increase in interest rates will increase the cost of loans, thereby deterring potential borrowers, whilst existing borrowers will face increased debt servicing payments. This situation will reduce 'consumption' or aggregate economic demand, lowering the inflation rate.

Using interest rates to control inflation is based on the fact that the banking industry is the leading supplier of currency in the country's economic system through the provision of debt or loans. When loans decrease due to interest rate increases, consumption will decrease.

However, one fact that the community must realise is that the decrease in consumption will negatively impact many businesses, especially businesses with a high debt burden. For example, suppose an entrepreneur has opened a restaurant using funds borrowed from a bank. The costs incurred by the entrepreneur will involve not only loan payments to the bank but also utility costs, employee wage costs, rental costs, and other costs. In most cases, profits in the restaurant sector are minimal because of the fierce competition. Therefore their mode of operation is to survive rather than to reap extraordinary profit. Due to this situation, many restaurants refuse to lower the selling price even if the cost of raw materials has decreased.

If the amount of income to the restaurant sector declines, either as a result of the economic minister's recommendation to boycott them or as a result of the economic slowdown caused by the increase in OPR, then it is very likely that the restaurant traders will face severe financial problems and default on their loans to the bank. As a result, many restaurants will lay off employees or cease operations. Thousands of workers in this sector will lose their jobs. Imagine what would happen in the economy if this case involved thousands of restaurants.

People also need to be aware that business activities in an economy are related. For example, the restaurant business sector needs to buy raw materials from the agricultural industry, the restaurant equipment sector and others. Therefore, the restaurant sector's contraction will also affect other sectors. Sooner or later, other economic sectors such as construction, hospitality, transport and others will also be affected. We must remember they are already suffering from the increase in OPR rates.

Fluctuations in demand in the economy are normal. However, the extent of the effects is highly dependent on the country's debt level. For example, if most restaurants do not have enormous debt burdens, a revenue drop will not affect them badly. They can still survive and continue to operate despite reduced profits. However, if most restaurants in the country are heavily dependent on debt, any reduction in the number of customers can result in many bankruptcies and total closure of operations. If this happens in other sectors of the economy, millions of workers will lose their jobs. Eventually, a severe economic crisis will hit the country.

When a country faces an economic crisis, the government will inevitably spend money to stimulate the economy. For example, the government will subsidise businesses or provide financial assistance directly to desperate families. However, since the government has run out of funds, the source of funds to carry out economic stimulus measures had to be obtained from funds borrowed from the financial industry. At the same time, the banking sector will create new money to lend to the government. This stimulus measure will raise the level of consumption. Households can spend more to buy food from supermarkets or restaurants.

This increased demand will likely cause inflation to occur again. Regardless of whether it is the existing or new one, the government will be under pressure again to solve this inflation problem. The economy minister at that time will likewise suggest that households reduce spending in restaurants to force them to lower prices. So the same story repeats itself, even though the government and ministers may have changed.

In summary, price increases or inflation is a 'natural' thing in a debt-based economic system. The adverse effects will occur depending on the level of debt in the country's economy. If the level of debt is high, then the adverse effects are worse than if the level of debt is low. There may even be an economic crisis, which means that the steps to solve the problem will also become more complicated. However, the same cycle will continue. What is even sadder is that the low-income group will be more and more miserable while the rich, especially the owners of the banking industry, will become more prosperous.

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