FRENCH economist Thomas Piketty, who surmised that inequality in wealth and income will only escalate further going forward if nothing is done about it, would likely not be surprised to hear Malaysia’s top 40 richest individuals have gotten a lot richer.
The net worth of the top 40 was 22.4% of Malaysia’s economy in 2012, up from 15.7% in 2006, according to the United Nations Development Programme’s (UNDP) Human Development Report 2013 released on Nov 25.
Juxtaposed against the rise of the super-rich are the “economic vulnerabilities of the average Malaysian”, states the report, whose authors called for urgent policy decisions to tackle “old and new inequalities” in income and wealth distribution that exist across and within the various ethnic and strata groups.
“The super-rich (top 1%) has 22 times more purchasing power than the poor (bottom 40%) and 18 times the median Malaysian,” says the report, which also found the average Malaysian wage earner “has to work 98 years to obtain the same earnings of the average CEO”.
The report also found 26% of Malaysians were without property assets. The situation seems more dire among urbanites, with one-third of urban households belonging to the “have-nots”, compared with 17% among rural households. The figure rises to 50% among households in Kuala Lumpur.
While the report acknowledged that the income disparity between the top 20% and bottom 40% of households have improved using measures such as income share, income ratio and Gini coefficient, it also pointed out that the income gap between the two groups “has actually increased during the period of 1970 to 2012”.
“More importantly, the widening gap appears to have come from increased income disparities within the groups, be it ethnic, strata or gender,” the researchers say, pointing out that the income gap between the rich and the poor, meanwhile, jumped 13 times from RM659 in 1970 to RM10,312 in 2012.
The researchers also found the absolute income gap between the urban and rural folks had widened 11 times from RM228 in 1970 to RM2,262 in 2012. “In terms of ethnicity, the highest gap in absolute terms was registered among bumiputeras, whereas the income gap jumped nearly 20 times compared with 11 times for the Chinese and the Indians during the period of 1970 to 2009.
The intra-ethnic inequality among bumiputeras is seen at the disparity among the top and bottom savers with Amanah Saham Nasional Bhd (ASN). Citing 2012 data, the report says top 0.2% depositors with an average investment of RM692,087 have 1,132 times the financial assets of the bottom 74% combined. Their share of the fund size is also more than double that of the bottom 74% of depositors.
“The extreme distribution of financial assets can be seen from the share of the top depositors; the top 0.2% of [ASN] account holders hold more than the value of assets held by the bottom 80% in 2012. Not surprisingly, the same extreme distribution pattern is replicated in another premier investment avenue for bumiputeras — Tabung Haji. The top 0.1% of investors in Tabung Haji have an average investment of nearly RM1.4 million, while the bottom 87% have an average investment of RM567, translating into a gap of nearly 2,500 times.”
In addition, the report says the share of the poor and middle class had not improved during the same period. “Income share that accrued to the top one-tenth of the population in 2012 at 32% is higher than the income share controlled by the bottom half at 21.5%, and the gap between them has remained steady for the past three decades.”
If that’s not depressing enough, the report also said “a majority of Malaysians would be without any savings for more than a decade after retirement” based on the average life expectancy and current levels of savings with the EPF.
Yet, the authors were “not surprised” to find a lack of savings at more than half of Malaysia’s households, rendering them vulnerable to income or employment shocks.
“Low EPF savings of the bottom 20.5% and high wealth inequality are consequences of disparities in income,” Khazanah Research Institute’s recently released The State of Households report said, explaining that low savings and low wealth accumulation are the result of low income. More than 62% of EPF savers earn less than RM2,000 a month and more than 96% earn less than RM6,000 a month.
Both reports called for policy decisions to alleviate the hardship of those individuals and households in the bottom 40% income bracket, which would likely find it even harder to move up the ladder due to higher levels of debt.
Calling household debt “a new form of liability plaguing the urban poor, and in many instances the rural poor as well”, both reports say the poor and vulnerable — which need help — usually are the ones paying higher finance cost because of the longer tenure of loans, as well as penalties on the occasional defaults and the compounding effect of interest. “The problem of household debt among the poor and vulnerable may also turn into debt bondage when it is obtained from informal moneylenders,” the UNDP report says.
While Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz pointed out that 90% of Malaysia’s households have some form of savings, reportedly in response to questions on the UNDP’s findings on low savings, there is no denying the fact that household debt has increased by more than twofold over the past decade from RM243.2 billion (67.2% of GDP) in 2002 to RM854.3 billion (86.8% of GDP) in 2013.
Even when total household debt was at RM754.6 billion (80.5% of GDP) in 2012, Bank Negara data showed households were already spending 43.9% of income on debt repayment. Not only is this up from 39.1% in 2006, the amount going to debt servicing is above the 30% optimum threshold and 40% recommended ceiling.
Not only does the high level of debt servicing expose them to interest rate adjustments, the lower income group “will remain in a leverage-vicious cycle due to the nature of credit” and likely continue not being able to save for contingencies or their old age.
“Over time, with the majority of lower income and rural households using financing for non-asset generation [personal use and consumption], compared with the higher income groups that use leverage to accumulate assets, the wealth gap will continue to widen,” the UNDP report says.
Put another way, the rich will get richer as they use debt as asset-generating instruments whereas those in the lower-income group spend borrowed money on goods that are less likely to help them build wealth. “The vulnerability of the lower income is evident by the fact that the single biggest usage of credit among the lower-income group is for emergencies and health purposes. The higher-income group, meanwhile, uses leverage to generate assets as credit is used to purchase properties and securities.”
This situation will not change as long as the latter group continues to enjoy better access to financing compared with the poor or the rural folks, the UNDP report says. It calls for greater efforts to provide support to the lower-income groups as well as raise financial literacy to keep the situation in check.
When asked on the low levels of savings and wages here, RHB Research Institute executive chairman Lim Chee Sing says the current situation is a consequence of the over-dependence on cheap unskilled foreign labour and “a reflection of a country stuck in the middle-income trap”.
While cash transfers may well be needed to assist the vulnerable group, they do not address the root of the problem. “It perpetuates the so-called “subsidy-dependency syndrome” and will stifle future progress of the country’s labour force.”
“At the end of the day, there is no short cut or “free lunch” in this world! We need to nurture skills via education and vocational training with the aid of advances in technology. After all, human resource is the greatest asset for any country aspiring to innovate, advance up the value chain and progress towards a developed nation status — the 2020 Vision of the country.”
Higher skill sets would help deliver higher incomes that would aid savings accumulation, the experts say. With Malaysia in the last leg of the race towards 2020, the country needs to make all the right decisions to ensure its people are not left behind in the race to meet the headline KPIs.
This article first appeared in The Edge Malaysia Weekly, on December 1 - 7, 2014.