Ideas: Tough policy choices needed for Malaysia to achieve Shared Prosperity Vision 2030

This article first appeared in Forum, The Edge Malaysia Weekly, on January 20, 2020 - January 26, 2020.
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The federal government’s Budget 2020 is themed “Driving Growth and Equitable Outcomes Towards Shared Prosperity”. This followed the launch of the Shared Prosperity Vision (SPV) 2030 last October by Prime Minister Tun Dr Mahathir Mohamad. During the launch, Mahathir mentioned that the “SPV 2030 is an effort to make Malaysia a country that is developing sustainably with fair economic distribution as well as equitable growth at all levels of incomes, ethnics, regions and supply chains by 2030”.

Although the SPV is a multidimensional document, we believe the heart of the matter is the inequality debate in Malaysia, which has three dimensions: inter-racial, intra-racial and inter-regional.

This statement by the prime minister does allude to it: “The main reasons stunting the development and distribution of the country’s economy (pie) are corruption and abuse of power …”

“Shared prosperity” is not a new concept. The World Bank in its report titled Poverty and Shared Prosperity: Piecing Together the Poverty Puzzle (2018) also emphasised the same and defined it in terms of both absolute poverty and inequality. The report stated: “We also need to recognise that societies have not stopped thinking or caring about poverty even if it has become much less apparent in its extreme forms. There is a need to expand our understanding of poverty as a complex, multifaceted problem and identify pockets of people who are impoverished but who have remained unnoticed.”

Despite the notion of sharing prosperity among Malaysians, our country still faces enormous challenges to overcome inequality. The introduction of the New Economic Policy (NEP) in 1970 successfully reduced the relative income between the T20 (top 20%) and B40 (bottom 40%) groups from 9.67 times in 1970 to 5.64 times in 2016, as reported by Khazanah Research Institute. However, the same report pointed out that the absolute income gap between the T20 and B40 households rose from RM3,253 in 1970 to RM13,230 in 2016. This may have to do with a general rise in the standard of living. It means either T20’s household income level has grown faster or B40’s has grown slower, or it may be both.

Besides the significant increase in the absolute income gap, Malaysia is also facing the problem of gaps in wealth ownership. According to United Nations Development Programme, the top 40 richest Malaysians’ wealth ownership rose from 15.7% of GDP in 2006 to 22.4% of GDP in 2012. To put this into perspective, we can look at the distribution of Amanah Saham Bumiputera in 2017. As reported by ASB, 76% of its unitholders owned less than 3% of the units while 10% of its unitholders owned more than 80% of the units. This is a good indicator of how skewed the wealth distribution in Malaysia is.

Moreover, wages in Malaysia have not kept pace with productivity, particularly in low-paid sectors. As reported by Bank Negara Malaysia, Malaysia’s ratio of wages to productivity in subsectors such as mining, manufacturing, construction, services, retail, IT, finance and utilities is way below those of developed nations such as the UK, the US, Germany and Singapore. This is reflected in the significant gaps in the per capita incomes of these countries.

The big question now is, can Malaysia achieve SPV in 10 years? The answer is ­multidimensional. Part of it lies in increasing government fiscal reserves without resorting to an increase in tax rates. Another part of it lies in encouraging the private sector to increase wages. To some extent, this can happen by increasing automation.

Since the reversal of the Goods and Services Tax (GST) to the Sales and Services Tax (SST), fiscal sustainability has been a considerable discussion in the public policy sphere. Without a reliable value-added tax, the government might face difficulties in attending to the needs of the B40 in the long run. As for now, Pakatan Harapan has improved fiscal discipline but its reliance on the dividend from petroleum has increased, which is not sustainable.

The reintroduction of value-added tax like GST must be done in a way where it addresses the concerns that led to its abolition, including that the tax burden fell disproportionately on the middle class. To address this, we at IDEAS propose the introduction of different GST rates for different purchases, including a higher “luxury” rate for purchases associated with higher-income households. For instance, if someone can afford to buy a RM1,000 handbag, they should be subject to higher rates of value-added tax to encourage a fairer tax system where the rich pay more tax instead of the middle class.

To further enhance our fiscal sustainability, the government may consider implementing a progressive Capital Gains Tax (CGT) on profits made from the disposal of assets, including company shares. A progressive CGT will not only reallocate resources but can also be a tool to be utilised during the fluctuation of the business cycle. For example, when the economy is overheating, CGT will help to rein in speculative investments and when the economy is stagnating, CGT will encourage investors to leave their money in the capital market to support more sustainable development.

SPV 2030 per se has a noble economic objective: fairer distribution of income. It is possible to achieve this by making tough policy choices, but it should not come at the cost of growth, private sector mobilisation and a competitive economy.

Adli Amirullah is a senior economist and Ali Salman is CEO at the Institute for Democracy and Economic Affairs

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