Election-year handouts help,but Malaysia needs long-term strategy

Five hundred ringgit for a senior citizen or a household that earns less than 3,000 ringgit (29,000 baht) a month is big money. They can do with the assistance and about 5.2 million households in Malaysia recently received the gift for the second time in two years.

It costs the government 2.6 billion ringgit (25.1 billion baht) every time it gives out RM500 each to its poorest citizens. Of course, with elections due before midyear, it’s no surprise that the government is being generous with taxpayers’ money.

As well, the government has imposed a minimum wage for the private sector at RM900 (8,685 baht) per month in Peninsular Malaysia and RM800 (7,720 baht) in East Malaysia.

The minimum wage, a first for Malaysia, is seen as a game changer to transform the labour market as higher pay will help lift the standard of living of lower income people. They had been falling further behind every year as the cost of living has been on the rise.

Malaysia’s government has also made sure that people are employed longer, increasing the retirement age for the private sector from age 55 to 60, effective from July 1 this year.

Many other initiatives are intended to put more money into the pockets of the people and, it is hoped, narrow the inequality gap to some extent.

Malaysia is widely seen and often cited as a successful case of a multicultural society that has equalised socio-economic opportunities for diverse ethnic groups.

Rapid economic growth, structural change and industrialisation have caused the country to be cited as a leading example of “growth with equity”, said one report.

But until recently there had been little change in levels of inequality due to the difference in the growth rates of incomes in rural and urban areas, return on assets against wages, inflows of migrant workers, and impediments to the process of internal migration, said another report.

Although there has been a huge improvement in the rural-urban gap, gap between the rich and the poor remains wide across all ethnic groups in absolute terms.

However, while the rich get richer with the help of favourable tax rules, and the poor receive state help to improve their lot, the middle class continues to bear an outsized burden. Whenever talk turns to closing the wealth gap, the middle class tends to be ignored.

A few years ago the government announced its economic transformation plan to create several economic corridors to create jobs and new economic activity. One aim was to ensure more avenues for upward mobility and help Malaysia reach developed-country status by 2020.

But the World Bank estimates that 80% of Malaysia’s national wealth is in the hands of 15% of its people. The income gap between the haves and have-nots is at least 20 times, said another report.

The Gini Index is one of the most widely used indicators of income distribution, with 0 being perfect equality and 100 perfect inequality. The figure for Malaysia in 2012 was 46.21, surprisingly higher than the figure of 40 in Thailand, where the rich-poor gap appears more obvious to many.

Though Malaysia’s figure is still better than those of many other countries, the disparity remains worrisome. With 80% of the wealth is in the hands of the super-rich, it may suggest that the richer are getting richer and the gap with the middle income group is just widening.

In fact, the government probably should be looking at narrowing the gap between the rich and the middle income groups, since lower-income people already receive other forms of assistance, such as the recent RM500 monthly allowance.

A recent study noted that in Malaysia, all sources of earnings are not treated equally. Net asset income (e.g. financial capital and property gains) get more favourable treatment than salaried income. In other words, capitalists are favoured over the working class.

The top marginal tax rate of 26% is applied to hard-earned wages and salaries, while for the small group of wealthy Malaysian whose incomes are earned from capital gains derived from the stock market and financial transactions, the tax rate applied is zero. In comparison, the United States imposes a top rate of 15% on capital gains.

While Malaysia has achieved a lot, the study suggests that closer attention to Malaysian experience reveals many subtleties that must be taken into account when developing and applying policy.

About the author

Writer: Jen Rita