Beneath the Face of Inequality in Malaysia

Article published in Torino World Affairs Institute (TWAI)’s RISE Journal

Figures in official statistics often peruse general measures to provide a brief overview of a specific matter. For instance, during the Budget 2018 announcement, Prime Minister Najib Razak declared that the Gini coefficient, as a gauge of income distribution across the population, had reduced from 0.441 in 2009 to 0.399 in 2016, the lowest it has been in Malaysia’s history. Nonetheless, it is important to note that this indicator refers to household income and may not necessarily translate to more equal economic distribution. This demonstrates how headlines tend to highlight income inequality but does not justifiably explore other factors which influence overall inequality.

Currently, there seems to be a gap between public perception on the ground which largely asserts that inequality has gradually risen and officially published data which illustrate a declining trend in household income inequality. With the narrow coverage of the latter indicator, alternative data sources would offer deeper and more relevant insight. The discourse regarding income and wealth inequality does not receive sufficient attention and would contribute significantly to redistributive policy discussions. With that said, exploring inequality with a multidimensional approach and an analysis of institutional inequalities within the asset and labour markets would establish a clearer picture.

Amongst the limiting factors of the income inequality measure is the reliance on gross data drawn from the Household Income and Basic Amenities Survey from the Department of Statistics Malaysia (DOSM), which is further segregated into generally broad income brackets of the Bottom 40%, Middle 40% and Top 20%. Moreover, there is little to no differentiation between earned income and returns on capital investment or other sources. Thus, prominent sources of income feature predominantly in public discourse whereas equally important factors such as wealth inequality remains in the periphery of society’s perception. It is increasingly recognised that wealth inequality is a crucial factor in the persistence of wealth disparity across generations.

Wealth as an indicator of socioeconomic distribution provides better insights to the disparity in capital accumulation and concentration towards the top strata. For instance, measures of asset purchases such as property and automobile sales, government pensions and Employees Provident Fund (EPF) savings are better indicators of financial wealth disparity. The EPF is a compulsory retirement scheme which requires a standard monthly contribution from every worker in Malaysia who is not subscribed to the government pension, thus comprising approximately 90% of the general salaried labour force. Tellingly, these indicators exhibit a trend showing that wealth inequality has gradually and consistently risen with an increasing flow and concentration of capital towards the top strata.

Based on data from the EPF Annual Reports 2004-2016, an analysis of EPF account holders based on the savings bracket reveals that the Gini coefficient was 0.643 back in 2004 and stands at 0.658 as of 2015. Hence there is a large informational gap when the Gini coefficient of income is the primary indicator of societal equity that is endorsed by the government and media. Beneath the surface, wealth inequality far exceeds income inequality as illustrated by statistics which reveal how the disparity in retirement savings has barely changed over a decade and has actually risen. The capital accumulated in EPF accounts are referenced upon wage levels and are representative of formal employment, being a solid earnings indicator.

This leads to an assessment of real salary growth through the EPF accounts of contributors segregated according to age groups. A World Bank study revealed striking results indicating that young workers experienced slower salary growth rates in recent years, which translates to a worsening disparity in savings wealth across the population. Hence although Malaysia prides itself for improving and making income distribution for equitable, the underlying flow of income to the wealthy and the sticky upward movement of wages has seen the nation’s capital channelled to the richest portions of society in the form of steady wealth accumulation.

Aside from compulsory savings, assets in the form of property ownership are instrumental within the perception of inequality in real terms because of the social importance associated with housing. Based on data compiled by the National Property Information Centre (NAPIC), the aforementioned World Bank study also estimated the disparity in real estate purchases by assessing the number of units sold, its commercial value and the sale price brackets. Although the analysis does not differentiate for multiple ownership or purchases for investment or speculative purposes, inequality in property ownership shows a considerable rise from 2001 to 2012, with the Gini coefficient increasing from 0.44 to 0.53. Given that fewer members of the elite own a larger number of assets across the higher price range, the data is rather conservative as compared to reality on the ground.

Naturally, redistributive policies are a key component in national strategies geared towards reducing inequalities and encouraging sustainable development. Although the government of Malaysia has launched targeted initiatives aimed at poorer segments of the population, they have been in the form of monetary assistance such as medical and food subsidies as well as annual cash transfers of Bantuan Rakyat 1 Malaysia (BR1M), all of which do not facilitate any substantial shift in wealth over the long-term. A glaring indicator is the median personal income of Malaysia which stands at USD $5,209 per annum according to the Department of Statistics Malaysia (DOSM), significantly less than half the value of Malaysia’s high-income target of US $12,236. Therefore, the topic of income inequality requires further dissection to establish a clearer picture for the formulation of better-targeted policies.

These indicators demonstrate how the problem of inequality is far more complex than tracking the Gini coefficient of gross household income and disbursing targeted subsidies that are populist. Redistributive policies can be better utilised as powerful instruments to facilitate better equality in economic outcomes and opportunities through improving the spread of income-generating assets across individuals and businesses. These factors of wealth can be in the form of land, financial assets, access to education, industrial capital and human capital. While unpopular among the elite class, introducing taxes on asset-related entities would make a dent in the widening gulf of wealth distribution such as the inheritance tax, capital gains tax and financial transactions tax. However, recognising and acknowledging the trend of worsening capital inequality which is constantly obscured by the more salient indicator of income inequality is the primary and most urgent concern.

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