MySay: Aiming at targeted income groups

This article first appeared in Forum, The Edge Malaysia Weekly, on May 7, 2018 - May 13, 2018.
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We are almost there. Malaysia’s aspiration to become a high-income nation will be realised in the next few years, says the World Bank. Its 2017 estimate of Malaysia’s average per capita gross national income (GNI) of US$9,660 is roughly 21% below the level needed to achieve high-income nation status, that is, US$12,236 or more. This is based on the so-called Atlas method of estimation that uses average exchange rates adjusted for domestic and global inflation to minimise the effects of currency fluctuations. According to estimates, Malaysia will hit the target between 2021 and 2024, depending on different scenarios.

That is good news. At least, we can be comforted by the fact that we will achieve our per capita income target in just a few years’ time. Economists are fully aware that the Malaysian economy has generally performed well vis-à-vis regional economies in the past several years, especially in 2017. Indeed, its gross domestic product growth rate exceeded its average growth between 2011 and 2016 by roughly 0.8 percentage point — more than Singapore, Indonesia and the Philippines. Investment has picked up pace, as evidenced by its rising contribution to headline growth of roughly 27% in 2017 (from an average of 16% in the preceding two years). Consumer spending has likewise regained momentum, expanding above its long-term average of 7% in 2017.

But as is often argued by many, achieving GNI per capita targets is only one dimension when looking at the prosperity of an economy. This measure alone does not tell the whole story of people’s well-being. The World Bank acknowledges this and propagates the importance of having a multidimensional focus when examining the level of a country’s development. It cites other measures that matter — health, environmental sustainability, wealth and prosperity across geographical regions and so on.

Of these, Malaysians are probably most interested in the last measure — the variability of wealth and prosperity amongst the rakyat across the various parts of the country. The reason for this is pretty obvious: although the economy continues to perform at a level much envied by our peers in Asean, concerns linger about the difficulties of certain groups in coping with the rising cost of living. Not surprisingly, news on Malaysian income levels often grab the headlines. A case in point is the recent comment by the Malaysian Institute of Economic Research — Malaysia’s economic think tank — on the country’s problem of low income (rather than a high cost of living) that became a headline in the media.

There is no doubt that things have improved over the years. Official statistics have shown that based on a survey in 2016, the median income of households has risen roughly 6.6% on a compound average growth rate basis since 2014. The median monthly household income of those who live in urban areas rose 6.4% while for those in the rural areas, it climbed 5.3%. The government has also focused on assisting the needy by targeting the lower-income groups, as evidenced by the reduction in non-discriminatory subsidies that often benefit the higher-income groups, and heightened focus on allocations for the needy through Bantuan Rakyat 1Malaysia (BR1M), for instance. These are respectable measures.

Several statistics, however, caught people’s attention. For example, the income levels of both the urban and rural populations grew slower in 2016 (6.4% and 5.3% respectively from 9.8% and 13.8% in 2014). Also, the national household income ratio of the top 20 to bottom 40 (T20/B40) remained unchanged at 4.4 times in 2016 from 2014. The same ratio for urban areas actually edged up to 4.2 from 4.1 times with the higher number signalling a growing gap between the two groups. Among the rural folks, again, the T20/B40 ratio remained unchanged at 4 times.

The variability of incomes and expenditures in different regions (when compared with national levels) could also explain people’s feeling of not having enough cash to meet their monthly expenses. An example would be the mean income level of those in states like Terengganu — around 17% below the national mean income in 2016.

If we were to examine the other side of the equation, it shows that the gap between Terengganu’s mean expenditure and the national level was just 6%. Similarly, Negeri Sembilan’s mean income gap with the national level was greater than its expenditure gap (15% versus 9% respectively). In other words, the mean incomes of certain states were well below the national level while their expenditures were not that far off the national average. This causes people to feel financially squeezed and implies a low amount of savings at the end of each month, as income growth has not caught up with expenditure growth.

This scenario is worth pondering because we need to know why expenditure gaps between certain regions and the national level were much narrower than their income gaps. The first explanation is, of course, the lack of high-income jobs in these states. Another possible reason is the relatively high prices of basic goods, as a large portion of low-income earners’ pay packets goes towards food, housing and transport. If this is truly the case, policies should be focused on addressing such issues.

This is precisely why the government is keen on providing targeted assistance to the lower-income groups. BR1M, for example, is part of this initiative. However, it is necessary to tweak the BR1M programme to improve its outcomes. For instance, it could distinguish its recipients via the number of people in the respective households: the higher the number of people in a household, the more they should get from BR1M. Also, as often mentioned by the media, the amount of BR1M given to those living in urban and rural areas should be differentiated, as the cost of living in these areas is invariably different. Thirdly, BR1M has to be conditional — given for the purchase of necessities like food and medicine. This is to avoid misuse of the cash on unnecessary items.

Tax exemptions that the government gives to the rakyat can also be differentiated by income level. A case in point is the tax exemption given for the purchase of personal computers. For the lower-income groups, forking out RM2,000 for a personal computer as an investment in their children’s education is a bigger deal than for those who earn more than RM20,000 per month. Thus, the lower-income groups should be given more (for example, full exemption on their purchases) than the latter group, whose exemptions can be reduced or even taken away.

As we head towards the goal of becoming a high-income nation, we should remain focused on reducing the income gap. The people’s well-being is critical as it will not only promote economic sustainability but also enhance the rakyat’s self-esteem.


Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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