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The Edge: High Income Nation, but Low Income Rakyat

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Malaysia’s current socio economic structure can be summed up in four words, “Rich Malaysia, Poor Malaysians.” Malaysia is blessed with abundant natural resources with petroleum being the most precious. Add the land, other commodity resources, large youthful population and the country has all the essential ingredients to flourish. How then did this small nation of 30 million manage to end up with the unsolicited title of among the region’s most unequal nation between the rich and poor. What happened?

NEP: The Noble Intention, Initially

The NEP that was introduced in 1970 was the grand plan that were two things; our proactive action to begin developing the newly independent nation, and our reaction to the British Divide-and-Conquer system.

Textbooks tell us that the NEP strategy was two-pronged; eradication of poverty, and the restructuring of society. But what popular culture and the masses cannot help but to associate the NEP with is the deeply entrenched Bumiputera agenda at its core which target Bumiputeras to own 30 percent equity share in the Malaysian economy.

But “share of the economy” here apparently has broader connotations and implications. It expands from assets and equity ownership, right down to contract procurement, education quotas, and employment policies. Bumiputeras were the poorest of all ethnic groups. Thus the idea was to positively discriminate Bumiputeras, get them on their tracks, and realize a more equitable ownership of the economy. And thus we began traversing down this path of affirmative action.

As time went by and various development plans under the Malaysia Plan or Rancangan Malaysia were undertaken, tremendous improvements were made. Bumiputeras and Malaysians, in general, now own more assets than their parents. A middle class population burgeoned. Poverty rate, measured on an absolute basis, has gone from as high as 49.1 percent to 1.7 percent as reported in the latest Household Income Survey for 2012 published recently.

The Trickle-Down Disaster

Unfortunately, in the 1990s the equity target was still far off the target. Time was running out and Malaysia took a short cut with the ill-planned “trickledown” effect. Malaysia throttled down the road of enriching and empowering a few Bumiputeras who would go on to be successful entrepreneurs and asset owners and the subsequent multiplier effect will trickle down onto and propel the rest of the Bumiputera community. The philosophy was for this “trickledown” effect that surely, it was believed, would be inevitable.

The trickledown effect did not and does not work. Even the Prime Minister Dato’ Seri Najib Tun Abd Razak himself acknowledged this in a recent interview with Martin Soong of CNBC. In fact, it perpetuated high inequality amongst Malaysians. It became something we so desperately clung on as an economic doctrine and still believed as true.

So even before we got there, we are now taking on a new “Malaysian Dream”. Surely, it is only natural that the next course of action is aiming for a bigger middle class. Or are we really achieving it?

Yet Another Missing Target?

We say High Income Nation is the way to go and have set a new target to achieve a per capita income of US$15,000 by year 2020. It means the Gross National Income (GNI) – a measure of the country’s production adjusted with net incomes from overseas – divided by the country’s population must equal US$15,000. That target, we are told, is achievable by 2017-2018. Currently, our per capital income is $US9,970.

Never mind that many of the relatively lower income-earners find themselves in pretty much the same position on a relative basis. Never mind that Bumiputera households are still the poorest on average in the bottom 40 percent rung of Malaysian households. Never mind that even if most of this nation’s income in year 2020 accrued to say, only 100 of the richest people in the country, we can achieve that $15,000 per capita target because it is grossly divided by the whole population.

Measuring income in US dollar term is already problematic. Many in the research community and the public have expressed concern about this as the US dollar is not the currency that most Malaysians earn and transact in. So when the Ringgit was stronger than US Dollars last year, we have every reason to question whether GNI per capita measured in dollar terms, represented the true magnitude of growth per capita, and whether this target is truly achievable.

But even if we put this currency issue aside, the $US15,000 per capita income target cannot be that headline “dream” we can congratulate ourselves on when achieved.

Here are some reasons why:

Rich Malaysia, Poor Malaysians

Firstly, for majority Malaysian households, about 90 percent of their incomes are attributed to wage and salary, including self-employment. Even for those who can afford to own some assets, this is still true. What more those who do not even own assets, and thus do not have incomes from owning assets.

Note that Malaysian GDP (measured using the income method) will indicate the following breakdown: 28 percent wages and salaries, 67 percent business profits (including mixed income), and 5 percent taxes and subsidies. What does this mean? It means that out of total GDP, only 28 percent is attributable to the working Malaysian population.

For the past 15 years, the contribution of wages and salaries to Malaysian GDP has fluctuated between 26 to 32 percent and the only reason it hiked up to 32 was because of the recession in 2008 when corporate profits declined. In Singapore, this number is already as high as 42 percent in 1997.

In other developed countries such as Korea, Canada, the UK and Japan, the corresponding number is 46 percent, 51 percent, 55 percent and 52 percent, respectively. Malaysians are not getting the bulk of the country’s production into their pockets! This is set to worsen; the ETP’s document (A Roadmap for Malaysia: Chapter 2) itself indicated that forecasted wages over GDP for the NKEAs will drop to as low as 21 percent in 2020! What are we smoking and what are our priorities, really?

In fact, for the past 15 years as well, the salaries of Malaysian workers have been lagging behind our productivity. Productivity growth rates were in line with rates of growth of salary circa 1998, but it has been slowly lagging thereon. As of last year, the productivity in the manufacturing sector is 45 percent above salaries. This roughly translates into the fact that our workers are under-paid by at least 45 percent. All this illustrates how GNI per capita will not represent well the incomes that majority Malaysians will enjoy as wages and salaries.

Secondly, more than 90% of the wage-earning workforce does not even earn much. Only 11.05 percent of government income is generated from personal income tax and only 1.7 million of the 12.4 million workforce is eligible to pay tax. EPF reported that 78.6% of its contributors database earn RM3,000 monthly or less. This is another illustration of how low the majority of the Malaysian people’s incomes are at the individual level. So what is this High Income Nation we are about to achieve in a few years? A High Income Nation with a low earning population?

Thirdly, there is the grave issue of purchasing power. High income alone does not necessarily translate into better economic well-being and quality of life if that high income cannot purchase much. A simple analysis would show how a fresh graduate in 1980 could purchase more compared to today’s graduate. With an estimated pay of RM1,000 a graduate could afford an Opel Gemini costing RM12,400 or about 12 months of his salary and purchase a decent house, perhaps even in Taman Tun, costing at RM62,000 or 56 months of his salary.

Today, a graduate can have a basic pay of RM2,500 which is only 2.5 times higher than a graduate in 1980. But a comparable Mazda 6 now costs RM178,000 or about 71 months of his salary and a decent house far outside Kuala Lumpur, say in Nilai, would cost RM350,000 or 140 months of his salary. The cost of living has spiraled viciously upwards and the purchasing power of the average salary man has slumped.

Fourthly is the issue of inequality, and this is by far the most compelling argument against a headline US$15,000 High Income Nation target. There is a reason that many academics, civil society groups and the people at large have recently been blowing the inequality trumpet; Malaysia has among the highest income disparities in the region. On August 3, 2013 the Second Finance Minister Datuk Seri Ahmad Husni has also acknowledged this.

Income growth measured from 1970 have shown that the Top 20 percent households far overtake that of the Middle 40 percent and the Bottom 40 percent households, while the income gap between them on average is widening. The GINI coefficient, which measures the degree of disparity between the highest income and the lowest income, remained rather stubbornly high without any improvement around 0.43 to 0.44 across the span of the past 20 years for Malaysia.

Earning RM10,000 a month on a household basis will already put you as the top 4 percent of Malaysian households, and essentially in the same group as even tycoons like Ananda Krishnan. 73 percent of households earn less than RM5,000, with an average of 2 income earners or workers per household. This alone shows how much disparity there is. Furthermore, it renders our $15,000 High Income Nation target achievable in form, yet void in spirit and substance.

How did this high and persisting inequality happen? The failure of that very “trickledown effect” that we hoped for is a major contributor. The continuous enrichment of the select few continuously fosters this gap in a long and perpetual cycle. The inequality in our education system also contributed to the large 77 percent of Malaysian workers being only SPM qualified and below thereby commanding low salary levels.

For the sake of profits, businesses are unwilling to invest in productivity and training of locals. We appease the business community by giving way to large influx of foreign workers, especially in factories, in place of relatively more expensive locals. The myth that locals are choosy and unwilling to work in factories is then proliferated, despite locals being able to work in factories if compensated adequately. This is proven in the oil and gas industry; hard laboring welders and fitters are all local Malaysians, despite having to work under scorching heat, as the compensation is rewarding.

So What is Really the Malaysian Dream?

We do not have one! But if we plan to have one, we cannot leave the average salary man behind, the man that forms more than 80% of the Malaysian population. We need a dream that is inclusive and holistic and addresses quality livelihood for Malaysians at large, and not just a select few.

Income inequality is a very serious impediment to our hopes for a truly developed nation. It would be a great irony if the majority of Malaysians do not truly experience that high-income status, once we reach that $US15,000 mark.

How are we to declare ourselves high income when the effects of inequality such as crime, unemployment, health and social problems as well depleting social goods will be so apparent? Even if we do make that high-income bar, problems that emerge out of inequality raise serious questions about the sustainability of that high-income status.

For as long as we do not come together, commit to say no to inequality in resolute, and help alleviate the bottom 60 percent potential economic producers, this problem will not solve itself and will come back to haunt us.

Moving forward our policies should be designed and constructed based on this understanding. We would have not proposed a regressive GST to increase our source of revenue if we understood this fact.

We would have instead tried to increase revenue from other sources that will not hurt the majority of our people like the inheritance tax, progressive taxation and capital gains tax.

But that argument, is for another day.

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