Income Disparity - Threat in the economy of Malaysia

Most of the people fall in the mid­dle-income group, but even then they now struggle to make ends meet. Luxuries have to make way for bills, the children’s education or an upgrade of the 10-year-old family car. Sadly, luxuries have become rarer in the past few years. For instance, there seems to be more prudent spending this Hari Raya. If middle-income earners are counting every ringgit, what more those in the bottom 20%, who earn less than RM2,000 a month? This downturn in spending has been observed in the United Nations Develop­ment Programme’s (UNDP) 2014 

Human Development Report.

The annual report has found that con­sumption growth among the bottom 40% of the country (that’s those who mostly earn below RM5,000) is slower compared to the general population. Malaysia’s consumption growth for the population as a whole was over 12%, but the poorest 40% lagged behind at about 8% of growth. As of 2010, the Statistics Department in its household income survey showed that 66.3% of Malaysia’s 6,353,470 house­holds earn less than RM5,000, and of that, about 22% earn less than RM2,000 — an amount which, for a family of four, is practically impossible to live on.

Malaysia should address income disparity by imposing proportionately higher taxes on the top 20% of the country’s wealthiest. Economist Dr Choy Yee Keong of Kyoto University in Japan said despite Malaysia’s impressive development record, the country is the most unequal in terms of income distribution in the Association of South-East Asian Nations (ASEAN). He also disclosed that despite the New Economic Policy (NEP) the 

Bumiputera’s mean monthly income is the lowest among the three major ethnic groups. Dr Choy said the top 20% of Malaysia’s population hold more than 51% of the country’s wealth, with the top 10% owning more than 35%. The bottom 20% has less than 5% of the country’s wealth. Dr Choy, who undertook his study between 2007 and 2012, however, said that there is no one-size-fits-all solution to the problem of income inequality.

Malaysia University of Science and Technology School of Business dean Dr Yeah Kim Leng tells The Heat the report’s observation is not surprising. “Lower income groups tend to con­sume less in relation to their purchasing level, but what is worrying is that lower income groups also have lower rates for saving. They consume more of their disposable income, although overall they consume less, so the long-term implication is that they are much more vulnerable to economic shocks, like sud­den unemployment,” he says. “If you want to boost consumption in order to boost the economy, you run the risk of increasing household debt, be­cause if 60% of the population is spend­ing only what they can afford, which is not much, increasing consumption only increases debt. “We may have reached a plateau where a large majority of people can only afford to consume so much without going into debt, and we know household debt poses long-term risks to savings and the economy,” he adds.

According to Bank Negara’s Annual Report 2010, Malaysia’s household debt at end of 2010 was RM581 billion or 76% of gross domestic product. This has leapt to 86.8% of GDP at the end of last year. Malaysian household debt service ratio (how much of monthly income is spent on repaying loans) was an alarming 47.8% in 2010, which means almost half of household income goes just towards paying debts. Aside from the growing inequality, the report also highlighted the preferential policies practised in Malaysia as counter­intuitive to addressing issues of equality.

As articulated under the New Economic Model, we must stubbornly pursue the ideals of inclusiveness and sustainability. This cannot be compromised. Governments around the world struggle with achieving the balance between economic growths and providing job opportunities so their citizens can enjoy the prosperity created. It is not surprising that many developed countries tend to have the first envelope – economic growth – down pat, but they still struggle with dealing with the bottom 40% of society. An incredible number of good people are hard at work addressing the kinks in our current education system. The ongoing subsidy rationalisation will also provide for a more efficient social safety net tackling poor households. Solutions to resolve poverty are not easy, challenging even the most advanced nations. The path ahead in building a better, richer life for all Malaysians can be daunting. I have faith we are on the right track, but we must have the gumption to keep going even as the going gets tough.