KRI PRESS |
Oct 13, 2020
Income of Malaysian households over three decades
13th October 2020, Kuala Lumpur — Average real household income in Malaysia more than tripled from RM2,580 in 1989 to RM7,901 in 2019, while median income rose from RM1,801 to RM5,873, according to Khazanah Research Institute’s (KRI) latest publication, Welfare in Malaysia Across Three Decades.
Household income, as a share of Gross Domestic Product (GDP), increased to 45.7% in 2019 from 35.9% in 1989. These income gains enabled greater household spending and welfare. Consumption patterns have changed, with higher spending on items traditionally described as discretionary, such as in communication, recreation and culture, and food away from home, suggesting a higher standard of living.
The absolute poverty rate fell during the three decades from 16.5% in 1989 to 5.6% in 2019 despite the recent upward revision of the poverty line. Meanwhile, the long-term trend in income inequality, as measured by the Gini coefficient, also moderated from 0.442 in 1989 to 0.407 in 2019. Bumiputera income growth has been faster than for other ethnic groups, leading to smaller ethnic gaps. Furthermore, economic growth increased average and median incomes in all states and territories during the three decades.
This broad progress was achieved despite many challenges and some setbacks, including various external developments beyond Malaysia’s control, including the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC), which adversely affected both national and household income growth.
Inequality beyond the Gini coefficient
Assessing long-term improvements in household income and spending, the report shows household incomes grew fastest during 1989–1997, but the pace fell by half during 1999–2007. While growth recovered slightly during 2009–2019, the rate was lower than before the AFC in 1997–1998, reduced by slower growth during the 2016–2019 period. This illustrates that in recent years, household income growth has slowed in tandem with our slowing economic growth.
In 2019, the income share of the bottom 20% of households (B20) was 5.9%, while income concentration at the top was high, with the top 10% of households (T10) commanding 30.7% of total income. This suggests that we need to work towards a more equitable society with less concentration of income at the top and a fairer share of income for those at the bottom.
The report notes some convergence in average household incomes between ethnic groups and states over the last three decades. But gaps remain, as the convergence was driven by increased cash transfers and self-employment income, rather than wage growth. Furthermore, Bumiputera economic activities remained less diversified and narrower than for non-Bumiputera.
Pushing for structural transformation
KRI’s findings underscore the critical and urgent need to transform the Malaysian economy to elevate the collective welfare and incomes of households. This should be done by creating more high paying jobs in higher value-added activities.
To achieve growth with progressive redistribution would require addressing differences among industries and reducing wage differentials between and within industries, besides more rapidly generating decent employment in higher value-adding activities.
Other key takeaways from the report include:
Absolute poverty has declined, but many households remain precariously vulnerable. In 2019, the absolute poverty rate of 5.6% (405 thousand households) indicates that most households are meeting basic needs. However, there has been little progress in reducing relative poverty, with an incidence of 16.9% of households (1.2 million households). This means that 11.3% (835 thousand households) had incomes not far above the absolute poverty line income, while remaining far below the average living standard. These households are vulnerable to falling back into absolute poverty in case of catastrophic events, such as the current pandemic or job loss. Economic empowerment initiatives must be scaled up to assist these households in generating higher incomes. In addition, welfare spending needs to be increased and social protection system be broadened to include more vulnerable households.
More spending, changing consumption patterns. The increase in household income has been accompanied by higher spending. Alongside higher prices, more spending has gone to eating out and communication-related goods and services. While such spending has long been seen as discretionary, such items have increasingly become necessary, sometimes putting further pressure on cost of living.
Residual household income (the excess of income over consumption expenditure) varies widely between income groups. The top 10% households had residual income of RM12,653 per month on average in gross term in 2019. On the other hand, the bottom 10% had only RM200 per month on average. These amounts in gross term is before deducting obligatory payments such as social security contributions and inter-household transfers. After accounting for such payments, the situation could be worse, with some households having negative net monthly residual income.
Household income, as a share of Gross Domestic Product (GDP), increased to 45.7% in 2019 from 35.9% in 1989. These income gains enabled greater household spending and welfare. Consumption patterns have changed, with higher spending on items traditionally described as discretionary, such as in communication, recreation and culture, and food away from home, suggesting a higher standard of living.
The absolute poverty rate fell during the three decades from 16.5% in 1989 to 5.6% in 2019 despite the recent upward revision of the poverty line. Meanwhile, the long-term trend in income inequality, as measured by the Gini coefficient, also moderated from 0.442 in 1989 to 0.407 in 2019. Bumiputera income growth has been faster than for other ethnic groups, leading to smaller ethnic gaps. Furthermore, economic growth increased average and median incomes in all states and territories during the three decades.
This broad progress was achieved despite many challenges and some setbacks, including various external developments beyond Malaysia’s control, including the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC), which adversely affected both national and household income growth.
Inequality beyond the Gini coefficient
Assessing long-term improvements in household income and spending, the report shows household incomes grew fastest during 1989–1997, but the pace fell by half during 1999–2007. While growth recovered slightly during 2009–2019, the rate was lower than before the AFC in 1997–1998, reduced by slower growth during the 2016–2019 period. This illustrates that in recent years, household income growth has slowed in tandem with our slowing economic growth.
In 2019, the income share of the bottom 20% of households (B20) was 5.9%, while income concentration at the top was high, with the top 10% of households (T10) commanding 30.7% of total income. This suggests that we need to work towards a more equitable society with less concentration of income at the top and a fairer share of income for those at the bottom.
The report notes some convergence in average household incomes between ethnic groups and states over the last three decades. But gaps remain, as the convergence was driven by increased cash transfers and self-employment income, rather than wage growth. Furthermore, Bumiputera economic activities remained less diversified and narrower than for non-Bumiputera.
Pushing for structural transformation
KRI’s findings underscore the critical and urgent need to transform the Malaysian economy to elevate the collective welfare and incomes of households. This should be done by creating more high paying jobs in higher value-added activities.
To achieve growth with progressive redistribution would require addressing differences among industries and reducing wage differentials between and within industries, besides more rapidly generating decent employment in higher value-adding activities.
Other key takeaways from the report include:
Absolute poverty has declined, but many households remain precariously vulnerable. In 2019, the absolute poverty rate of 5.6% (405 thousand households) indicates that most households are meeting basic needs. However, there has been little progress in reducing relative poverty, with an incidence of 16.9% of households (1.2 million households). This means that 11.3% (835 thousand households) had incomes not far above the absolute poverty line income, while remaining far below the average living standard. These households are vulnerable to falling back into absolute poverty in case of catastrophic events, such as the current pandemic or job loss. Economic empowerment initiatives must be scaled up to assist these households in generating higher incomes. In addition, welfare spending needs to be increased and social protection system be broadened to include more vulnerable households.
More spending, changing consumption patterns. The increase in household income has been accompanied by higher spending. Alongside higher prices, more spending has gone to eating out and communication-related goods and services. While such spending has long been seen as discretionary, such items have increasingly become necessary, sometimes putting further pressure on cost of living.
Residual household income (the excess of income over consumption expenditure) varies widely between income groups. The top 10% households had residual income of RM12,653 per month on average in gross term in 2019. On the other hand, the bottom 10% had only RM200 per month on average. These amounts in gross term is before deducting obligatory payments such as social security contributions and inter-household transfers. After accounting for such payments, the situation could be worse, with some households having negative net monthly residual income.
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