By Ranjit Singh

MALAYSIA’S current per capita income of US$10,460 makes it possible that it will become a high-income nation in three to four years’ time when the threshold income hits US$12,235, according to the World Bank’s lead economist in Malaysia, Richard Record.

Record, who has been in Malaysia for the past two and a half years, is a Briton and leads the World Bank’s economics team here.  Based in Kuala Lumpur, he manages the bank’s engagement on economic policy issues in Malaysia, including publication of the flagship Malaysia Economic Monitor and the report on Malaysia’s Digital Economy – A New Driver of Development.

He previously worked across a number of countries in East Asia and Africa, managing programmes on macroeconomics, trade and private sector development, including assignments based in Lilongwe, Vientiane and Hanoi. He holds Bachelor’s, Master’s and doctoral degrees in economics respectively from the London School of Economics, the School of Oriental and African Studies and the University of Manchester.

Unlike many Malaysians in the middle-income group, Record is more sanguine about both the country’s past performance and its future prospects. But that is not to say he is not concerned about some things here, especially the public perception that prices are rising even though the official figures indicate that inflation is really quite low. Part of the reason could be that incomes are low.

In an exclusive interview with FocusM, Record says the figures are average numbers and what will be more meaningful is the distribution of income when Malaysia graduates to become a high-income nation.

“The World Bank has benchmarked Malaysia to countries such as Estonia, Lithuania and the Czech Republic which had migrated to high-income nation status and according to the parameter of per capita income of US$12,235, Malaysia would be a high-income nation in three to four years’ time.

“Gaining the status is fine but what would be more meaningful is the distribution of wealth when Malaysia reaches the threshold,” he says.

In a recent report by the World Bank on the Malaysian economy entitled Making Ends Meet, the highlight is the divergence between the high cost of living and benign inflation rates. Record attributes this phenomenon to perception and the fact that food and housing prices had risen substantially and these items make up for a large proportion of spending for the poor.

“The cost of living was also higher in urban areas compared to the rural areas. Income growth had also been sluggish and many households suffered from a high level of indebtedness,” adds Record.

The report also found that while incomes for all age groups have tended to grow at a faster rate than inflation, the growth in employment earnings in the case of younger workers has consistently lagged those of their older counterparts. Employment earnings for those who have only completed secondary education are not only substantially lower than those with higher education, but their real wage growth over time has also been persistently low.

The World Bank in its report also said that borrowing provides temporary relief for households to compensate for inadequate income, particularly in the short-term. While debt provides opportunities for shifting consumption, over the long run, it also limits available discretionary income for households.

Lower-income households and population sub-groups have a heavy debt load and face high debt service ratios. More than 40% of borrowers with monthly household incomes of less than RM3,000 spend more than 40% of their income on debt repayment. Among lower-income borrowers, debt is mostly for motor vehicles and personal financing, thus supporting consumption as opposed to longer-term investments to build wealth.

Below are Record’s views on a range of topics:

Are the government’s measures to address cost of living issues inadequate?

According to the World Bank, many of the measures targeted at addressing the cost of living have been relatively ad hoc, fragmented and short-term in nature. Some of the policies that the government has implemented are subsidies, administrative price controls, construction of affordable housing, concessional mortgage financing, and credit counselling.

“As factors affecting households’ living standards are wide-ranging and tend to overlap to some degree, a more structured approach to address higher living costs and improving well-being can be organised into short-term measures as well as medium- and long-term structural reforms,” says the World Bank.

Short-term measures need to focus on alleviating hardship among lower-income households through deepening of social safety nets, while over the long run, increased coordination across agencies and implementation of structural reforms to foster greater market competition and accelerate productivity could help lift real incomes for all.

According to Record, there are three strategies that the World Bank underlined to address cost of living issues. “In the short term, the government should tackle the lack of income growth by providing more social security safety nets to the poor. Measures such as the Bantuan Sara Hidup (BSH) and targeted subsidies are steps in the right direction.

“Another measure is for the near term and that is to increase the participation of women in the workforce which currently stands at 55%. Larger female participation would provide an additional boost to household income.

“In the longer term, Malaysia must increase the productivity levels of its workforce to ensure that its workers move up the wage ladder,” says Record.

He adds that in the long run, the most effective way to raise productivity levels was through improvements in the education system. When the World Bank conducted studies on the levels of mathematics and science among Malaysian students, it found that they did well among regional countries but lagged behind the students of high-income nations.

Poverty line should be RM2,550 per month per household, not RM980

The issue of poverty in Malaysia was given a new twist when the UN’s Special Rapporteur on extreme poverty and human rights, Philip Alston, said in his report in August last year that Malaysia had grossly under-reported its incidence of poverty.

He claimed that Malaysia uses an unduly low poverty line income that does not reflect the cost of living and excludes vulnerable segments of the population from its official figures.

According to Alston, Malaysia’s official poverty rate dropped from 49% in 1970 to just 0.4% in 2016. However, the national poverty line income of RM980 per household per month would see an urban family of four surviving on RM8 per person per day.

He also said that for a country on the cusp of attaining high-income status, independent analyses have suggested a more realistic poverty rate of 16-20%. He added that about 9% of households survive on less than RM2,000 per month.

Record tells FocusM that Malaysia needs to re-examine its poverty line income of RM980.

“We have conducted some studies and it has been discovered that the Poverty Line Income (PLI) should be raised to RM2,550.”

How is the Malaysian economy doing?

According to the World Bank, the Malaysian economy has undergone a structural transformation from an agriculture-based economy in the 1970s and 1980s to a manufacturing-centred economy presently.

As an open economy and a trading nation, Malaysia is heavily dependent on the global economy. Global growth has remained subdued, with trade and manufacturing activity showing continued signs of weakness. The global growth rate is estimated to have slowed to 2.4% in 2Q and 3Q 2019 (1Q19: 2.5%), with weaker growth observed in several major economies, including the United States, China and Japan.

Global investment and trade activities have remained subdued in the context of weak global demand and continued trade policy uncertainty. In response to weakening activity and generally low inflation, central banks in advanced economies have loosened monetary policy, contributing to notable declines in global bond yields. Recent survey indicators suggest that the global economy remains weak but is showing incipient signs of stabilisation.

The Malaysian economy expanded by 4.4% in 3Q19, moderating from 4.9% in 2Q19. Economic growth was mostly supported by private consumption and net exports due to import compression, contributing a combined 5.1 percentage points to GDP growth in 3Q19. The contraction in overall investment, however, continued to weigh on growth during the quarter. Private consumption remained the largest contributor to output growth.

Private consumption expanded at a lower but still robust rate of 7% in 3Q19 (2Q19: 7.8%), and contributed 4.1 percentage points to output growth. Household consumption spending continued to be supported by moderate inflation and continued private sector employment and wage growth. Public consumption gained some momentum in 3Q19, expanding by 1%, up from 0.3% in 2Q19.

Record also says the government has limited fiscal tools to handle any major shocks in the global economy.

“The government’s revenue is only 15.2% of the GDP and it must look at ways to increase this contribution. For most high-income nations, the percentage of contribution is above 20%,” he says.

Record adds that the announcement by Finance Minister Lim Guan Eng during the tabling of Budget 2020 last October that personal income tax on taxpayers in the highest bracket would be increased was a move in the right direction to strengthen government coffers.

On whether there was any chance of the Goods and Services Tax (GST) abolished in September 2018 being brought back as the tax collected from the replacement Sales and Service Tax (SST) is less, Record opines that it is not possible as “that ship has sailed”.

“For political reasons, I don’t think the present government will revert to the GST as removing it was part of its election manifesto,” he says, adding that the current SST could be structured to resemble the GST.

Malaysia is clearly on the path to becoming a high-income nation but Record says it needs to chart out a plan to ensure that growth continues after that.

“The World Bank’s studies show that the average GDP growth for Malaysia once it attains high-income nation status would be in the region of 2% to 3%. It needs to find means to chart higher levels of growth,” says Record.

The digital economy could provide a panacea to the economy once it achieves high-income status. Record notes that under the current government, broadband services had been improved with lower charges.

“When I came to Malaysia two and a half years ago, broadband speed was poor, but I note that the speed has increased at lower cost,” says Record.

For 2020, the World Bank has projected a GDP growth of 4.5% which is in the range of the government’s expectation of 4.3-4.8%. The growth will be supported by strong private consumption and a slight uptick in exports as the global economy improves.

It also expects public expenditure to increase with the rollout of more infrastructure projects. – Feb 6, 2020