A fortnight ago, the ground effectively shifted from beneath our development planners when the official narrative about the socio-economic status of the population was challenged by the Malaysia Human Development Report 2013.

Among the shocking findings of the report are that 90% of rural households and 86% of urban households have zero savings to deal with immediate income shocks or emergencies.

In an immediate denial of this worrisome scenario, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz described the finding as misleading, arguing that the report did not consider data from other sources like non-bank financial institutions.

Responding to Zeti’s claim, the report’s editors — Tan Sri Dr Kamal Salih, an adjunct professor of Economics and Development Studies at Universiti Malaya, Dr Lee Hwok Aun, from the UM Department of Development Studies, and Dr Muhammad Khalid of Khazanah Research Institute, who were commissioned by the United Nations Development Programme — pointed out that they had made the discovery after looking into the Household Income Survey, which was provided by the Department of Statistics and the Economic Planning Unit, under the Prime Minister’s Department.

The Household Income Survey data, they said, captures reported interest and dividends from commercial entities, cooperatives and other savings institutions, across both formal and informal sectors.

The issue of primary relevance here is less about research methodology and more about the vulnerability of a large majority of the population to income shocks. Keeping the focus on this tenuous financial position is important in order that the right questions are asked and the correct solutions applied to solve the problem.

Undoubtedly, the circumstances underlying the “zero savings” status of the vulnerable cohort of Malaysians would be complex and interrelated, requiring a clear, holistic analysis before a sound diagnosis can be made. Yet, in the light of the report’s startling finding, it would be tempting to question the outcomes of the government policy thrust that has been the backbone of the country’s development strategy.

How successful, it may be asked, have our economic policies been if more than five decades later, a large portion of the people could be laid flat by an income crisis?

However, such a critique could be misleading because the socio-economic transformation of Malaysia since the 1970s has been nothing short of remarkable. Nevertheless, it would be highly remiss today to neglect the burning question of the need to rectify the wrongs that have blighted Malaysia’s development record.

The report flags a full range of issues that are crying to be addressed before Malaysia can truly claim to be the success story it so much yearns to be. While the reforms proposed include classical economic matters like growth, fiscal and tax policy and the labour market, crucially, they also extend to areas like social justice, equality and social mobility that are key when measuring the state of a nation’s human development.

Indeed, the report makes a strong call for a thorough re-examination of our development paradigm to address “fundamental development pathologies” that require political will and a sustained effort by all parties to the Malaysian compact to overcome.

The report’s theme, Redesigning an Inclusive Future, captures the essence of Malaysia’s development dilemma and identifies gaps that have persisted despite decades of poverty eradication efforts and schemes for the redistribution of income.

A game-changing element in this regard is the measurement of relative poverty, in place of the old favourite, absolute poverty.

Again on the basis of the Household Income Survey, the report finds that one out of five Malaysians is living in relative poverty, based on a household income of RM1,813, or half of the household median income of RM3,626 in 2012.

This finding stands in stark contrast to the government’s standard claim that absolute poverty had been virtually eradicated, being reduced from 49.3% in 1970 to a mere 1.7% in 2012. Absolute poverty is measured based on the declared poverty line, fixed at RM763 in Peninsular Malaysia, RM912 in Sarawak and RM1,048 in Sabah.

However, the report argues that relative poverty is “a better approach to assess inclusiveness”.

The logic of using a broader definition of poverty, its editors state, is clear: “The usefulness of measuring deprivation in relative terms is also corroborated by our observation that, as household income increases, living conditions and human capabilities improve on a continuum, and not with a clear cut-off point marking an escape from poverty.”

Indeed, the report notes that there is a considerable gap between Sabah and Sarawak, relative to Peninsular Malaysia, with the rural areas of the two states particularly lagging behind.

To be sure, the federal government has not been alone in parading its success in reducing absolute poverty. In 2009, the Penang government claimed to be the first in the country to eradicate absolute poverty, although Chief Minister Lim Guan Eng has acknowledged that it still has some way to go to address relative poverty.

However, it should be acknowledged that the federal government has begun to move its focus beyond absolute poverty with the New Economic Model, which sets a target of improving the mean income of the bottom 40% from RM1,440 in 2009 to RM2,300 in 2015.

In 2010, drawing attention to the inadequacies of absolute poverty measurement, the economist Jayanath Appadurai wrote in a report for the Centre for Policy Initiatives that a poverty line income of RM1,886, which was two-thirds of the median income of RM2,830, was more meaningful. Using this measure, the country’s poverty rate would be around 31% or 32%, he noted.

The Selangor government has also taken cognisance of the incidence of relative poverty, and recently raised the state's poverty income threshold to RM1,500 to reflect the higher cost of living in the state.

For public officials who may agonise about the correct way to calculate the poverty line income (PLI), Jayanath had a practical suggestion.

Explaining in an interview with The Malaysian Insider how the government’s PLI works out on an individual basis, he said: “RM5.80 is supposed to pay for three meals, transport costs, rent, recreation and the other components for ONE person in ONE day. Tell me, can a Malaysian in the peninsula even buy three meals a day on RM5.80?

“In fact, I’d challenge our government ministers to try that.”

R B Bhattacharjee is associate editor at The Edge.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.

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