The wealth gap and Malaysia's cash handouts

By Shannon Teoh, Malaysia Correspondent, The Straits Times, 8 May 2015

EVERYONE wants to be the bearer of good news. Few have been more eager than Malaysian Prime Minister Najib Razak's government which, over the past six years, launched various "transformation programmes", all aimed at improving the lives of the close to 30 million Malaysians.

Last week, its Performance Management and Delivery Unit (Pemandu) - set up to manage these reform plans - proudly announced that less than 1 per cent of Malaysians were poor, thanks to the unit's "tremendous success" in poverty eradication.

The poverty rate was at 3.8 per cent when Pemandu was established in 2009, and a whopping 49.3 per cent when Malaysia first started collecting this data in 1970. Poverty is defined as household income below RM763 (S$284) per month.

The news that Malaysia has a poverty rate of below 1 per cent was met with some scepticism, given that more developed economies have struggled to wipe out poverty. In Australia, for example, 13.9 per cent of the people are considered poor.

In Malaysia, since 2012, Datuk Seri Najib has been handing out cash as an "unprecedented measure... to reduce the impact of the increasing cost of living on the low-income group", as he put it.

The measure (which began a year before a general election was due in 2013) started with RM500 for each household earning RM3,000 or less per month, and the amount has grown despite the success in "poverty eradication". This year, over seven million will receive the 1Malaysia People's Aid (BR1M) totalling more than RM5 billion. A sum of RM950 will be handed to households with monthly incomes of RM3,000 or less, RM750 to families earning up to RM4,000, and RM350 to unmarried individuals aged above 21 who earn RM2,000 or less.

Crucially, this exercise has involved more than half of all households each year. What is the rationale for handing out subsidies to households earning up to RM4,000, more than five times the poverty-line figure? Is Mr Najib handing out aid to not just low-income earners but also to the middle class, as BR1M appears to reach two-thirds of all households, according to the Department of Statistics' figures?

"Who deserves help? Is it the guy who earns RM6,000, RM4,000 or RM,2000? That's not an economic question, that's more a political question," government-linked think-tank Khazanah Research Institute's managing director Charon Mokhzani told The Straits Times recently.

Giving out BR1M to even the middle class only lends weight to accusations of vote-buying - hurled by the likes of influential former premier Mahathir Mohamad, who is currently waging a vicious battle to remove Mr Najib as prime minister - which the government has vehemently denied.

To be fair, it can be tough to feed the 4.3 mouths per household on just RM4,000 (that's less than S$1,500) per month. The Edge business daily said in 2013 that a family of four would need about RM2,600 for basic household expenditure, not including a car loan - necessary in Malaysia where reliable public transport is elusive - and housing rental or mortgage.

The very poor receive cash aid from the welfare department and Education Ministry. But not only is the government sending out mixed messages over poverty - saying the poverty rate is below 1 per cent but giving cash aid to those earning five times the poverty-line sum - it also appears not too concerned about income inequality, doing little to tackle it.

Mr Najib has repeatedly boasted that both GDP and per capita income have surpassed projections, with the latter figure growing 48 per cent in US dollar terms during his leadership to US$10,426 (although the 2014 figure came before the ringgit's recent collapse against the greenback).

This ostensibly means Malaysians have become richer as the nation marches towards developed status. But studies show that Malaysia's Gini coefficient of 0.43 - a measure of income equality - lags behind Singapore, Thailand, Indonesia and even Vietnam. The widely held perception is of a growing wealth gap as young Malaysians struggle to purchase their first homes while developers market ever more million-ringgit houses and demand for luxury cars grows insatiably.

Despite Malaysia's already "capital-friendly" economy - with labour income share of GDP at 42 per cent, compared with Singapore and South Korea's 44 per cent and 54 per cent respectively - corporate tax has been further reduced to 24 per cent this year from 25 per cent. This is below the 26 per cent top income-tax rate for individuals.

In addition, the government last month introduced the broad-based goods and services tax that does nothing to close the income gap. Such a consumption tax is generally applied to a populace that is generally wealthy as the levy hits all consumers, as opposed to progressive income tax, which charges a higher rate the more one earns. However, only an estimated 1.7 million pay income tax out of a workforce of about 12 million, suggesting that most Malaysians cannot afford to pay tax.

According to Khazanah Research, Malaysia's poorest are struggling to cope with surging food prices, let alone taxation. It said food prices have risen by 22 per cent since 2011 despite global prices having fallen by 14 per cent since then. This reflects problems in the supply chain, according to Datuk Charon.

Resolving such inefficiencies should fall under the purview of the government - and this is a government that actively intervenes in the economy.

But it doesn't fix matters like these, which would require difficult reforms. Handing out cash is far easier, especially when it then allows the government to claim to have eradicated poverty. Instead, Mr Najib has promised that BR1M payouts will hit RM1,200 before the next election, due in 2018. If he wins it, will he continue to paper over the cracks in the economy with clever statistics and free money, or start fixing them? The only thing that's certain is that it is going to be incredibly difficult to take the cash handouts away from more than half the country.