Wednesday, March 19, 2014

Malaysia: High Income Nation but Low Income Rakyat

By Anas Alam Faizli


** Anas Alam Faizli is an oil and gas professional. He is pursuing a post-graduate doctorate, co-Founder of BLINDSPOT and BANTAH TPPA and tweets at @aafaizli

(This article by Anas is quite an education. My comments are in blue)

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 nations between the rich and poor. What happened?

NEP: The Noble Intention, Initially

The NEP that was introduced in 1970 was the grand plan that had 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 targets 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 in favour of the Bumiputeras, get them on track 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 equity ownership 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 capita 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 terms 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 Dollar 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 US$15,000 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. Malaysian (wage earners??)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? (My comments : This is funny)

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 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 spiralled 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 persistent 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.    (My comment : This is a very important observation. To the Prime Minister and the PMO boys please write this fact down. "You shall write them as a sign on your hand and they shall be written as frontals on your forehead. You shall write them on the doorposts of your house and on your gates." Deuteronomy 6:8-9)

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 a 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 as 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 resolutely, 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.

"There should exist among the citizens neither extreme poverty nor, again, excessive wealth, for both are productive of great evil." (Plato)

End of article.

My comments : Thank you Faizli. You are an educated person and you understand our country well. 

Faizli points out that presently wages and salaries make up 26% of our GDP. In most advanced countries the number is 50% or slightly more. Hence it is the mark of an advanced economy where a skilled and value adding workforce commands higher wages and salaries. This is the 'high income' economy that the PM has been talking about.

However Faizli points out that while we have announced US$15,000 per capita GDP as our benchmark for a high income nation there seems to be a rather large contradiction. By 2020 our ETP targets to have wages and salaries contributing only 20% of GDP !! That is going in the wrong direction.

Faizli ends this observation with a witty : "What are we smoking and what are our priorities, really?" 

Correction Faizli : What have THEY been smoking and what are THEIR priorities, really?

I have said time and again that these Boston Consulting Groups, McKinseys, Ethos and what not do not know what they are saying or doing. Just like the Education Blueprint shambles and the embarassing pullback of the PBS students evaluation system at school.

The other point to note from Faizli (which I have repeated time and again) is that we must focus on our 18 year old school leavers. Faizli points out that 77% of our 12.4 million workforce (or 9.5 million people) only have an SPM level of education. 

And I can assure you folks, of these 9.5 million SPM qualified workers, a vast majority will NOT have 10As, 9As and so on. The vast majority will have cangkuls (7s) and kantois (failing grades).  Less than 2% of our population make it to tertiary education. So it is this 77% that we must uplift through proper education and training who can then go out and earn a higher income. We have to produce much, much higher skilled 18 year old school leavers.

In my view to become a high income nation you will need two critical elements. The first is higher value added skills. In today's world it is not enough to know how to read and write. Specific skill sets are becoming critical. And these skill sets must be acquired at an early age preferably in school.

Secondly there must be higher value added jobs available in the economy to absorb all the skilled and educated workers.  

In countries like India and Pakistan they have numerous highly educated people who earn a pittance because there are not enough high value added jobs that can absorb these skilled and educated workers. Educating people is one thing. It is more important to create high technology industries and high value added job opportunities which can pay people high salaries.  

In Pakistan doctors take the bus to work. In India their engineers look for jobs overseas. There are not enough value added job opportunities in India.

Finally (where I depart a little from Faizli's analysis) we must relook all these facts and figures along racial and religious lines. What is the racial and religious breakdown of economic outcomes in Malaysia? All races sit for the same SPM but how come even among those holding an SPM some races progress more than others? Please do not deny this. We still have the jurang perbezaan kaum. In fact it is getting wider.

Take the Gini Coefficient of 0.43 in Malaysia. 

Can we do a Gini Coefficient comparing low income within Chinese only against high income Chinese? Will it still be 0.43?
What about comparing low income Malays against high income Chinese?
Or low income Malays against high income Chinese? 
Finally lower income within Chinese against high income Malays.

I dont know if there even is such segregated data available to do this type of analysis.

Our kids all go to the same schools, read the same books, sit for the same SPM, enter he same universities. Yet when they come out in life their economic outcomes are different - differentiated by race.

Lets see how the numbers add up and how we analyse them. In this Blog OutSyed The Box I have said again and again that in Malaysia everything is race, race and more race. 

Because obviously (though some young economists have tried to dispute this) there are other non economic factors involved which does influence the outcome of one's economic status. These are cultural, social and traditional values which I am convinced are critical issues which we must understand AND RECTIFY

Economics suffers a huge drawback here because economists focus on pure economic factors like the factors of production, resource allocation, market economy versus wealth distribution, prices, price mechanisms etc.

What about the psychology of the people? For example the psychology behind mass hysteria at factories, the inability to appreciate time due to cultural and religious reasons, the use of time for non-production activities like prayer by one group versus another group which does not pray as much, lethargy caused by fasting through daylight hours versus other groups who do not fast? All these will affect their economic outcomes. We have to factor these things in as well. 

More than half our population believes in bomohism. They really feel that bomohism can effect future outcomes. 

Many also really feel that prayer can impact economic value. People pray to have their sins forgiven but praying for higher productivity at the factory? Praying for better plantation yield? Is that possible?

I think factory output is a direct result of efficient application of labour and technology. Similarly plantation output is dependent on the same - planting, pruning, weeding, fertilising, irrigating, harvesting, post harvest efficiency etc. 

(Compare these real facts : some farmers work hard on their rice plots in Sekinchan all day, taking care of the plants, watering them, weeding the plots, chasing away the rats etc. Their paddy fields are among the most productive in the world, yielding record breaking 11 - 13 tonnes per hectare. In another place, rice farmers dont work as hard but they do pray a lot for many things, for good harvests etc. Their rice yield is only 5 - 6 tonnes per hectare. This is evidence enough that one group's prayer does not affect yield better than another group which does not pray and/or does not pray to the same god.) 

More than half our population is taught huge doses of irrational religious beliefs in school. Unquestionable, irrational, illogical, scientifically unexplainable beliefs must be absorbed and forced to be accepted up to examination level. They are made into compulsory examination subjects.

With years of this type of indoctrination, the mind dies a natural death. Hence it is made more easy for semi-literate bomohs to make these people put coconuts on their heads. 

If a significantly large number of our population is made up of such gullible masses can we become a high income nation? Please think again. 

My firm belief is that those sections of our populace who are constantly fed and brought up on irrational beliefs, illogical religious ideas, unscientific gibberish, unquestioning attitudes together with a weak social and cultural value system will be left far behind.

To become a higher income society we must embrace inclusiveness in everything we do - especially when we think and talk. Everything starts inside the mind, the brain. That is where we must start.

We must break down the walls, the shackles and the impediments that exist inside our minds. I am speaking of the large portion of that 77%. Plus some of the remaining 23% as well. You may or may not agree with what I say but this is the truth.  And we do not have time. We are always short of time.

OutSyedTheBox

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