This article first appeared in Forum, The Edge Malaysia Weekly on July 5, 2021 - July 11, 2021

One of the strategies employed by private-equity investors to gauge the growth trajectory of an emerging market is to count the number of outlets selling diet supplements in a shopping mall.

It is an obscure approach to investing, but in private market investment and more so in less-developed markets where reliable data and information is hard to come by, it is a practical means to get a sense of the size of the middle class in an economy.

There is also a good reason why the demand for vitamins and supplements is an indicator of the growth potential of the economy.

As a segment of the society with sufficient disposable income and means, the sustained consumption of the middle class beyond the basic goods of food and clothing would drive investment in housing, health and education, and spur industrial production that generates economic growth.

Whether they are blue-collar workers or white-collar professionals, the middle class plays a key role in supporting public spending and social protection systems through its tax contributions.

The view that considers the middle class as a source rather than a product of economic growth is a classic Keynesian economics model. But beyond the well-known theory, it also makes practical sense.

While investment drives economic growth, it is predicated on having a sizeable population with the capacity to consume. The private sector would not be able to make any new investments without sufficient consumption.

Thus, apart from public spending that relies on multiplier effects to stimulate growth, the post-pandemic economic policy also needs to raise consumption to levels that encourage new investments. Framing the policy towards rebuilding the middle class would ensure we achieve sustained growth for the economy.

The recent report published by the Economic Action Council (EAC) about 600,000 middle-income households slipping into the B40 category may have alarmed us. But it is to be expected as the pandemic continues to unleash its devastating impact. A targeted cash transfer policy and a recovering economy would likely reverse the incidence.

What should be of greater concern is the long-standing problem of our middle-class population stagnating instead of expanding even before Covid-19 hit us.

This is reflected in the widening wealth between the different strata in the society and how the incomes and wages of average workers in Malaysia remain languishing despite the remarkable increase in our GDP per capita over the past three decades.

Drawing a comparison with selected economies, Bank Negara Malaysia reported a dismal pay of US$340 (RM1,414) for US$1,000 worth of output produced by Malaysian employees.

It pales in comparison with employees in other selected economies who draw on average US$510 for a similar level of productivity.

Meanwhile, in a study that benchmarked incomes against equity, an Asian Development Bank (ADB) report discovered an increasing level of labour share of income from 31.7% in 2010 to almost 40% in 2019.

The trend appears to move towards a more equitable share for the employees relative to the capital owners.

But lurking beneath the surface is an increasing number of semi-skilled workers and low-skilled foreign labours taking up a substantial portion of the labour share of income.

So, despite the expanding pie for compensation of employees in our GDP, a deeper analysis as presented by the ADB reveals a deep-seated problem.

Therefore, it would not be a surprise that despite the productivity, the wage level of employees in Malaysia remains low compared with their peers in more advanced economies. It shows the continued reliance of our economy on cheap, low-skilled workers.

The level of wealth and wages, and the quality of the labour force determines the size and depth of the middle class.

Hence, without serious reform to address the inequitable income and structural issues relating to the labour market and the productivity of our industries, it would be difficult to create a strong middle class that could promote and sustain economic growth.

At its core is the role of the government to affect policy changes relating to how we tax to close the wealth and income gap and to reverse the inbound migration of semi-skilled and low-skilled labour to encourage creation of quality jobs.

It requires a shift in thinking away from trickle-down economics, which assumes that any benefits investors and capital owners receive in the form of tax cuts, or in the absence of taxes on gains on capital, would be reinvested into the economy and would eventually trickle down to everyone else.

The world has moved away from relying solely on the market to correct the imbalance in the economy. So should we.

Nazim Rahman is chief executive of a retirement fund. The views expressed are his own.

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