This article first appeared in Forum, The Edge Malaysia Weekly on January 6, 2020 - January 12, 2020

Malaysia’s economic growth and transformation from the 1970s have involved profound changes, including generally improved material well-being that involves upward social mobility for much of the population.

Socioeconomic indicators for basic amenities, poverty, health, education, occupations and real incomes all point to improved living standards for most Malaysians, with inter-ethnic and spatial disparities narrowing, albeit unevenly.

In the last decade, the Malaysian government has grudgingly acknowledged the World Bank’s finding of income inequality by focusing on social policy interventions on the poorest 40% of households (B40) regardless of the actual distribution of well-being.

The official B40 demarcation does not consider elements of well-being other than household incomes. Even varying household sizes and composition do not figure in official analysis and policymaking.

Using Department of Statistics’ (DoS) 2014 Malaysian household income and consumption data, the Khazanah Research Institute (KRI) study, “Demarcating Households: An Integrated Income and Consumption Analysis”, proposes better demarcation to improve policy.

While the government has long claimed to have eradicated hardcore poverty, “relative poverty” — defined by the study as earning less than 60% of median income — has increased by more than half to three million households from 1995. Thus, the bottom 40% of the country’s 7.5 million households are deemed relatively poor.

Inequalities matter

Malaysia’s household income inequality Gini coefficient declined from 0.513 in 1970 to 0.399 in 2016. However, the gap between the T20 (the top 20% of households by income) and the M40 (the next 40% of households) rose from RM6,000 to RM10,000, while the T20/B40 gap rose from RM8,000 to RM14,000 from 1995 to 2016 before adjusting for inflation.

Also using DoS data, KRI’s “State of Households 2018: Different Realities” noted that despite the declining Gini inequality coefficient for income distribution, the absolute earnings gap between the top quintile and others nearly doubled in the two decades up to 2016. Over the two decades, average differences in household income, adjusted for inflation, almost doubled.

The average T20 household income rose from about RM9,000 in 1995 to RM16,000 in 2016, while the average M40 income increased from around RM3,000 to RM6,000, and the B40 average also doubled from about RM1,000 to RM2,000, reducing overall inter-household income inequality.

Another KRI study, “Demarcating Households”, used both income and consumption data to argue that the government’s social policy focus should be on the B70, or poorer 70% of Malaysian households, comprising the “bottom 20%” of deprived households and the “middle 50%” of modest means.

In 2016, households with monthly incomes under RM2,000 spent 94.8% of their incomes on consumption, leaving them very vulnerable to sudden shocks, while those earning over RM15,000 monthly consumed only 45%.

More schooling, less mobility?

A KRI survey, “A Rising Tide Lifts All Boats? Intergenerational Social Mobility in Malaysia”, found almost no one from the children’s generation, regardless of parental economic status, with lower educational levels than their parents. With more time spent in education, this implies the children had less work experience, seniority and income compared with their parents.

Children, including the poor, became better off in terms of education, occupation, income and well-being, living longer than earlier generations. More schooling for most Malaysians narrowed spatial and ethnic differences, while children of parents with incomes under RM1,000 monthly had earnings more than twice those of their parents.

But although upward mobility is often related to education, it did not ensure higher incomes. While the share of children with higher education was almost double their parents’ generation, most did not earn more than their parents, whose generation had far fewer people with tertiary education.

Those with tertiary education rose from 1.8% in 1974 to 6.1% in 1982 and almost 30% in 2016. Meanwhile, most children born during between 1975 and 1990 began working after the 1997/98 Asian financial crisis, when economic, industrial and income growth slowed.

It has been harder for the children of better-off parents to surpass their parents’ socioeconomic status compared with the children of low-income parents, owing to their parents’ different standing and socioeconomic status. Also, the parents’ generation benefited from rapid economic, industrial and income growth before the 1997/98 financial crisis.

Meanwhile, an estimated seven million foreigners work in Malaysia, which has an official labour force of 15 million, including over two million documented foreigners. Willing to take on dirty, demeaning and dangerous work, their presence has depressed working conditions, especially for less-skilled, low-income Malaysians.

Managing social expectations

After two decades of rapid socioeconomic progress in the 1970s and before the 1997/98 financial crisis, Malaysian social mobility expectations remain high despite recessions every 11 years or so since the mid-1970s, partly mitigated by government interventions.

Improving wealth and income distribution as well as opportunities for advancement and upward mobility for the current and future generations are priorities in order to achieve social progress in Malaysia. Managing unrealistic expectations in the face of powerful private-sector and market forces may well be the major challenge for the authorities in these challenging times.

Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought, and a member of the Economic Action Council.

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