In February 1991, Prime Minister Tun Dr Mahathir Mohamad announced Wawasan 2020, envisaging a developed, industrialised, civilised Malaysian nation (bangsa) by this year. It was a remarkably visionary commitment, comparable to Tun Razak announcing the Rukunegara and the New Economic Policy promoting national unity by eradicating poverty and restructuring society to eliminate the identification of race with economic function.

“Welfare in Malaysia Across Three Decades”, the latest report from Khazanah Research Institute (KRI), offers a remarkable survey of the last three decades, mainly using the Department of Statistics’ (DOS) household income and expenditure surveys from 1989 to 2019. The study — by Christopher Choong, Adam Firouz and Hawati Hamid — encourages critical reflection on what happened to household well-being over the period.

Slowing income growth

Average (mean) real household income more than tripled from RM2,580 in 1989 to RM7,901 in 2019, as median incomes rose from RM1,801 to RM5,873, although all such numbers need to take better account of the huge presence of undocumented foreign labour.

Broad progress was achieved in the face of many challenges and some setbacks, including external developments beyond Malaysia’s control, such as the bursting of the 2001 dotcom bubble, the 2008/09 global financial crisis (GFC) and the collapse in the price of commodities including crude oil after 2014.

Malaysian household income growth slowed dramatically after the 1997/98 Asian financial crisis (AFC). Mean and median household incomes grew fastest before the AFC, with growth dropping by half in the following decade. Although global output slowed after the GFC, growth in Malaysia picked up slightly for half a decade, thanks to some counter-cyclical measures, before slowing again after 2014.

Total household income was equivalent to 46% of gross domestic product in 2019, rising from 36% in 1989; however, it is debatable why the share increased so much over the three decades. Innovatively using DOS social accounting matrix data, the report argues that 86% of total household income in 2015 was from employees’ remuneration (72%) and profits (13%), with the balance from social benefits (9%) and borrowing (5%).

The analysis also suggests that structural transformation due to greater investments in modern technology should increase higher value-added work options and household incomes, which could result in fairer income distribution — especially when policies effectively encourage such investment and employment shifts.

Uneven progress

Meanwhile, there has been continued income convergence across ethnic groups. Inter-ethnic income disparities continued to decline over the three decades as bumiputera per capita incomes grew faster despite an income share that was lower than its population share. Their household incomes increased more quickly than for other major Malaysian ethnic groups — at an average of 6% per annum during 2009-2019.

However, the range of bumiputera economic activities remained more limited and less diversified than for non-bumiputeras. Bumiputeras were underrepresented in modern activities that could increase their incomes. Higher-income bumiputeras dominate the public sector, for example government services, education, health and even petroleum mining. Low-income urban bumiputeras are largely in traditional manufacturing and services, while their rural counterparts dominate primary production.

The KRI study underscores continued spatial inequality as slower growth compounded problems, hindering inter-state convergence. Poorer states have seen faster income growth rates from the turn of the century despite modest wage growth mainly because they have much-lower incomes to begin with.

Average and median incomes increased in all states and territories over the three decades. Yet, the wage income share declined in most states in the last half decade, suggesting income convergence due to more self-employment, and converting earlier (indirect) price subsidies into politically more popular direct cash transfers.

Declining inequality

Household income inequality before the AFC declined, with slower growth from the turn of the century. The report suggests that inequality reduction over the last two decades was largely due to convergence towards slower growth, rather than because of rising incomes.

Hence, not everyone is better off, although the Gini coefficient measure of income inequality continued to decline. Focusing on both tails of the income distribution, the report suggests growing income concentration at the top although their reported incomes probably understate their actual incomes.

Labour remuneration’s share of national income has risen, partly due to greater reliance on unacknowledged foreign labour, rather than because of higher wages from modern industry or services. With close to full employment before the pandemic, despite not considering four to five million undocumented foreign workers, overall income inequality declined slightly as wages rose slowly in the tight labour market.

Despite a couple of changes in the last decade and a half effectively raising the official poverty line, poverty incidence declined from 16% in 1989 to 6% in 2019. Thus, however measured, official poverty rates have declined, although other indicators of well-being suggest a more chequered record in the last two decades.

Also, while no longer officially deemed poor, many households live precariously, with incomes only slightly above the absolute poverty line, and hence are very vulnerable to falling back into severe deprivation, which is likely to have happened with the Covid-19 pandemic and its policy impacts.

The report makes the case for extending and deepening social protection in the country. The need to enhance participation and capabilities, while safeguarding livelihoods, has become clearer with the pandemic, but much more analytical and policy thinking as well as commitment of fiscal resources are clearly needed.

Changing spending patterns

Income gains have enabled increased household spending and, presumably, well-being. While mean and median household expenditure initially declined as shares of household income, this was reversed in the new century, with spending increasing faster than incomes, especially during 2009-2014, suggesting more household borrowing.

Besides rising prices, more household spending also involved changing spending patterns, with expenditure on communications, recreation, culture and food away from home rising most. While spending on digital communications has long been considered discretionary, almost a luxury, much of this may have become increasingly necessary.

Meanwhile, spending on housing and transport also increased, leaving modest balances for savings, especially for those worst off. Low household income balances have meant limited savings, equivalent to only 1.2% of household spending in 2015. The bottom decile (10%) of households had an average of RM200 left in 2019, even before deducting other obligatory payments such as social security contributions, taxes, inter-household transfers and zakat. In some areas, half the households had negative income balances.

Decency, pragmatism needed

Launching the report, KRI founder chairman Tan Sri Nor Mohamed Yakcop pleaded for a “sense of decency” and pragmatism as the nation, and the world, faces the black swan existential threat posed by Covid-19. He had successfully defied market pundits while serving as navigator to Mahathir’s helmsmanship during the AFC.

This kind of bold, but realistic and sensible challenge to conventional wisdom was endorsed by Nobel economics laureates such as Joseph Stiglitz and Paul Krugman. This precedent is especially relevant now in the face of credit ratings agencies and other “market pressures” on not to borrow for government spending.

If Western central banks had listened to such naysayers, they would not have dared to adopt the unconventional monetary policies condemned by Friedmanite monetarists to this day. Instead of runaway inflation, the last decade has seen low inflation.

At the annual meetings of the International Monetary Fund and World Bank this month, the top economists at both Washington-based Bretton Woods institutions have urged governments, especially in developing countries, to undertake much more fiscal spending. This is to ensure adequate relief and rapid recovery instead of obsessing over accumulated government debt especially in the time of Covid-19.

Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.