Study shows Malaysia's income gap has doubled in two decades

Despite a reduction in official income inequality, the absolute earnings gap between Malaysia's top 20 per cent and their countrymen has nearly doubled, putting more Malaysians in relative poverty.

A new study by Khazanah Research Institute (KRI) released yesterday argues that policymakers need to think beyond the Gini coefficient - which represents the relative difference in earnings - and to address the absolute earnings gap.

The research arm of sovereign wealth fund Khazanah pointed out that in 2016, households with income below RM2,000 (S$662) a month spent 94.8 per cent of their income on consumption, while families earning above RM15,000 monthly spent only 45 per cent of it on consumption.

"Worryingly, for households earning below RM2,000, the income remaining after accounting for inflation is only RM76 in 2016, reducing from RM124 in 2014," the report said, adding that this left them vulnerable to financial shocks.

"In the past two decades, the actual differences in household income, adjusted to inflation, have almost doubled between the top 20 per cent households (T20) versus the middle and bottom 40 per cent (M40 and B40) households, respectively," it added.

While the government says it has eradicated hardcore poverty, relative poverty - defined as earning less than 60 per cent of the median income - has risen by over 50 per cent to three million households since 1995. This means 43 per cent of the country's 6.9 million households are relatively poor.

Mr Allen Ng, lead author of the KRI report titled State Of Households 2018: Different Realities, said investing in human capital will be key in overcoming the income gap as data gathered showed education and skills were the most important determinant of income. He noted that only 14.7 per cent of the workforce had graduate degrees.

"If you are a leader or policymaker, invest in our people, our children," he said yesterday. "Cash transfers, subsidies are just band-aids."

Malaysia's Gini has fallen from 0.513 in 1970 to 0.399 in 2016. A Gini of zero means everyone is earning the same amount.

But between 1995 and 2016, the T20 saw their average monthly household income rise from about RM9,000 to RM16,000, while income for the M40 grew only from around RM3,000 to RM6,000, and that for the B40 rose from about RM1,000 to RM2,000.

So, the income gap has widened, from RM6,000 to RM10,000 between the T20 and M40, and from RM8,000 to RM14,000 between the T20 and B40.

There is also an urban-rural gap across the 13 states. A family earning RM7,000 a month would be in the T20 in five states, but would be among the B40 in Kuala Lumpur.

"If you don't root policies in the right context... it will miss the target. We tend to think everybody lives in the same reality, and have one benchmark," said KRI research director Suraya Ismail. These differences need to be reflected in policymaking, she said, for example in setting income levels for people to qualify for social housing.

A version of this article appeared in the print edition of The Straits Times on October 16, 2018, with the headline 'Study shows Malaysia's income gap has doubled in two decades'. Print Edition | Subscribe