Inflation and the Service Economy: What’s the Connection?
Inflation is a pressing issue that’s impacting nations across the globe. While it’s a universal challenge, not all countries will experience its effects equally. After diving deep into research and analysis, I’ve come to the conclusion that inflation will hit service-based economies harder than others. If you’re in or planning to move to a country where services dominate the GDP, it’s worth understanding why this matters and how to prepare for what’s ahead.
A Historical Perspective: From Producers to Service Economies
Before the era of industrialization and widespread use of fossil fuels, most nations were primarily producers. They manufactured goods, grew food, and created commodities for local use and export. Economies thrived because they had tangible, tradable assets.
But as economies evolved, some nations realized they didn’t have enough physical goods to export. To stay relevant in global markets, they shifted towards a service-based model. This gave rise to what we now call the “service economy,” characterized by industries such as finance, insurance, real estate (FIRE), healthcare, education, tourism, entertainment, consulting, and IT.
The Fallacy of a “Local” Service Economy
Here’s the problem: a purely local service economy isn’t sustainable. Imagine a small country where everyone provides services to each other—"you cut my hair, and I’ll do your nails." Where would the money come from if there’s nothing being exported? Without goods or commodities to trade, the money simply circulates within the economy, creating little to no value.
For a service economy to succeed, it has to operate on a global scale. Services need to be exported, and goods and food are often imported to meet local needs. This reliance on globalization and financialization makes service economies more vulnerable to global market trends, especially inflation.
Why Inflation Hits Service Economies Harder
Let’s dig into why service economies are particularly susceptible to inflation. One major factor is the finance and banking sector. Smaller countries don’t need large amounts of currency for their internal economy to function smoothly. However, in a bid to attract foreign investments and grow their financial sector, they often create an oversupply of fiat currency. This excess money inevitably leaks into the local economy, driving up prices and triggering inflation.
Take this example: A wealthy investor decides to bring $500 million into a small, financialized country to invest in financial products, insurance, or real estate. The ripple effects are significant—bankers, agents, and brokers involved in the deal all earn a cut, which they then spend on luxury goods, fine dining, or real estate. Multiply this scenario by thousands of transactions, and the economy is flooded with money that wasn’t needed in the first place. The result? Rapidly rising prices across the board.
The Domino Effect: Inflation and Healthcare
As inflation takes hold, the cost of living increases. This puts more pressure on governments to provide financial assistance to citizens, particularly through public services like healthcare. In turn, public healthcare systems become overburdened, with longer wait times for treatments and surgeries. In extreme cases, the delay in medical care could mean the difference between life and death.
Private healthcare isn’t immune either. Rising operational costs force private providers to increase their prices, making medical insurance and out-of-pocket expenses significantly more expensive. At the same time, to cut costs, some providers may compromise on quality by opting for cheaper alternatives.
Normalcy Bias: The Danger of Complacency
There’s a psychological concept called normalcy bias—the tendency to underestimate the likelihood or impact of a negative event. In simple terms, it’s the belief that “nothing bad will happen” or that “the government will step in to help.” While comforting, this mindset can leave people unprepared for the very real challenges inflation can bring. Just look at the UK’s National Health Service (NHS). Despite being a cornerstone of public healthcare, it faces significant challenges, from funding shortages to overcrowding and long wait times. These struggles serve as a warning for anyone relying too heavily on public systems without a backup plan.
Planning for the Future: Medical Insurance in Malaysia
If you’re an expat in Malaysia or considering a long-term stay under programs like MM2H (Malaysia My Second Home), proactive planning is key—especially when it comes to healthcare. One of the smartest moves you can make is securing local comprehensive medical insurance. Here’s why:
Affordability: International medical insurance is often linked to developed nations, where inflation drives up costs year after year. While you might afford it now, will it still be feasible in 10 or 15 years—especially if you’re retired and living on a fixed income? Local insurance is significantly cheaper, often costing just 15–30% of international premiums.
Insurability: The best time to buy medical insurance is when you’re healthy. Once you develop pre-existing conditions like diabetes or heart disease, it becomes almost impossible to secure affordable coverage. By planning ahead, you ensure you’re protected when you need it most.
Inflation-Proof Options: Many Malaysian medical plans offer high annual or lifetime limits, making them more resilient to inflation. With these plans, you’re less likely to face coverage gaps in the future.
When you retire: You have to pay from your own pocket which will be very expensive and at the same time, your income is reduced. Furthermore, you may have some illnesses or age-related disease which may make you un-insurable. We have seen many cases of medical bills overwhelming people's finances.
Why Not Stick with International Insurance?
For those who already have international coverage and pre-existing conditions, sticking with your current plan might be the best option—it’s a lifeline you can’t replace. However, if you’re healthy and planning to stay in Malaysia long-term, transitioning to local insurance can save you significant money while still providing excellent coverage.
International insurance premiums are tied to developed nations, where healthcare costs are skyrocketing. As inflation drives these premiums higher, you might find yourself paying unsustainable amounts, especially in retirement. Local insurance offers a cost-effective alternative without compromising on quality.
Combining Local and Travel Insurance: A Winning Strategy
Pairing local medical insurance with travel insurance can provide comprehensive global coverage at a fraction of the cost of international plans. In Malaysia, travel insurance is affordable and covers trips up to 180 days. After that, you can simply purchase a new policy upon returning to the country. Together, these options ensure you’re protected no matter where you go.
The Healthcare System in Malaysia: A Global Benchmark
Malaysia’s healthcare system is divided into three main categories: public, private, and general clinics (GPs). While the public system is affordable and accessible, many middle- and upper-class residents prefer private healthcare for its perceived higher quality and shorter wait times. Private hospitals, supported by affordable comprehensive insurance plans, offer excellent service at a fraction of the cost you’d find in developed countries.
Malaysia’s reputation for high-quality, affordable healthcare makes it an attractive option for expats. By investing in comprehensive local insurance, you can access this world-class system while protecting yourself from rising costs.
The Role of Alter Domus in Your Healthcare Planning
At Alter Domus, we recognize the importance of healthcare planning for expats. In the past, many of our clients overlooked medical insurance because they lacked proper guidance. We’ve since taken an active role in advising clients on the benefits of combining local comprehensive medical insurance with travel insurance. This approach not only protects you against rising inflation but also ensures your healthcare needs are covered—at home and abroad.
Key Takeaways for Expats
Buy local comprehensive medical insurance: It’s more affordable, inflation-resistant, and tailored to Malaysia’s healthcare system.
Consider travel insurance for global coverage: This complements local insurance and provides worldwide protection at a low cost.
Plan early: Secure insurance while you’re healthy. Pre-existing conditions can make coverage costly or unattainable.
Reevaluate international insurance: If you don’t plan to return to your home country, why pay for expensive coverage you might never use?
By understanding these dynamics and planning accordingly, you can protect yourself from the financial strain of rising inflation while ensuring you have access to high-quality healthcare. Whether you’re already in Malaysia or considering a move, taking these steps today can save you significant stress and expense tomorrow. At Alter Domus, we’re here to help guide you through the process, ensuring you make the best choices for your future.