KRI: Redefining the demarcation of households

This article first appeared in City & Country, The Edge Malaysia Weekly, on September 30, 2019 - October 06, 2019.
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Malaysian households are currently classified under three categories — the Bottom 40 (B40), Middle 40 (M40) and Top 20 (T20). The government adopted this classification for the 9th Malaysia Plan (9MP) and it was applied extensively as a policy targeting mechanism for 11MP.

Khazanah Research Institute (KRI) has proposed an alternative classification, dividing households into B20, M50 and T30.

“We feel that B40 is both too wide and too narrow a target. If we really want to raise the livelihoods of people above the minimum standard of our society, we think this is too big [of a group] because 40% of the households translates into 2.6 million,” said KRI senior research associate Hawati Abdul Hamid. She was speaking at the press conference after the Sept 23 presentation of KRI’s discussion paper on “Demarcating Households: An Integrated Income and Consumption Analysis” that defines the categorisation.

She said government aid to the current B40 is spread thinly as it is a large group.

“We believe the B40 group could be defined better and, therefore, we did this study. We now have a B20, which would reduce the funding needed to cover B40,” added KRI director of research Dr Suraya Ismail.

The distinct characteristics of the B20, as well as the similarities found among the M50 households, suggest that government social policies matter to households beyond the B40 group.

These findings entail different policy descriptions, whereby direct welfare assistance in the form of cash transfers and subsidies would need to be confined to the neediest group (B20) while improving living standards and widening access to opportunities is required to assist the M50 households.

Suraya said that through the analysis, KRI believes that the B20 is the most vulnerable, whereas the current M40 group does not exhibit the characteristics of a middle-income class.

“Therefore, we find that the middle-income class, or what we term the aspirational class is in [our paper’s] T30 distribution,” she said.

Based on the definition in the paper, B20 households are only able to fulfil basic needs (food, housing and clothing) with an equivalised income (EI) of below RM1,196 per month.

T30 households exhibit traits of the aspirational or middle-income class consumption with EI of above RM3,015. They consume a more diverse set of goods and services as they become richer.

However, the consumption patterns of the M50 with EI between RM1,196 and RM3,015 appeared to be similar to the T30 group but exhibit trade-offs between aspirational goods and basic needs goods.

In terms of housing for the M50, Suraya said the prices need to be affordable and the extension of financial instruments does not help this group of people. “What is more important is to ensure we have decent shelter but at an affordable price.”

This paper is based on the 2014 Household Income and Expenditure Survey by the Department of Statistics Malaysia.

The paper, co-authored by Suraya, Hawati and KRI research associate Gregory Ho Wai Son, proposes that the current classification can be refined by adopting disposable or net income in measuring the welfare of households, taking into account income disparities in different locations and factoring in the size of households to better compare living standards.