Borrowing just to survive

By Kamarul Anwar | November 16, 2015 11:34 AM MYT

KUALA LUMPUR (Nov 16): The Ministry of Finance said in the Economic Report 2015/16 that household debt rose to 88.1% of nominal gross domestic product (GDP) in August from 86.8% at the end of last year, though it noted at the time that it grew at a more moderate rate than years prior, and assured that total household financial assets are still more than double the debts.

Time and again, Bank Negara Malaysia (BNM) highlighted that it had capped the household debt service ratio, or the percentage of loan obligations to take-home pay, to 30%.

However, Khazanah Research Institute (KRI) (pictured) director of research Dr Muhammed Abdul Khalid said this will not deter the low-income group from getting deeper into debt, as they can still turn to informal channels to borrow for consumption, like getting an “ansuran mudah” (easy payment) scheme to buy durable goods.

According to KRI’s State of Household Report, borrowings by this method to buy things like television sets, refrigerators or washing machines is expensive as the total interest paid over prices is as high as 162%. “This is very high, and it’s not captured by the data.”

“BNM said [the household debt level] is not much to worry about because aggregate-level household assets are more than loans. I suspect it is true for the higher income, not the lower income,” said Muhammed, who was also formerly head of economics at the Securities Commission Malaysia, in a recent interview with The Edge Financial Daily.

Economic Planning Unit data showed the top 20% households in the rural and urban parts of Peninsular Malaysia made up nearly half of the income share last year, at an average of 44.3%.

In an article published by KRI, entitled “Antara Dua Darjat”, it was shown that investment growth between Amanah Saham Bumiputera’s (ASB) top and bottom investors went in different directions. While total deposits grew by 13% from 2012 to 2014, the average deposit of the bottom 6.16 million investors — which made up 72% of ASB investors — fell by 12.3%.

As their deposits were miniscule, these investors’ average dividend was just RM45 in 2014 — or RM3.75 a month. “That’s only enough to get a breakfast of roti canai and teh tarik once a month,” said the article.

While the government debt level gets heavy scrutiny, there is comparatively less attention on Malaysia’s household debt, Muhammed said. Why is that, when Malaysia’s economy is heavily anchored on domestic demand, he questioned. Private consumption this year made up 52.71% of GDP this year, according to the Economic Report.

“The public debt limit of 55% of GDP is a self-imposed one. What happens when you break it? Nothing, although there will be some cost. Now, we are borrowing about RM630 billion, so an additional one basis point is just RM630 million — that is the extra cost. But household debt is much higher [at RM940.4 billion as at end-2014],” said Muhammed.

The Department of Statistics showed that the median monthly salary and wage in 2013 were just RM1,500. Last year, it was RM1,575.

“Meanwhile, Selangor’s median wage was RM2,000 last year, from RM1,980 in 2013. This means in the richest state, people get only RM20 extra per month. But count how much the increase is when divided by 30 days. And toll hikes for, say, [the] MEX highway, went up by RM1; [the] SILK highway by 80 sen. So, of course they feel [the pinch] when prices go up,” said Muhammed.

He disagreed with the perception that Malaysia’s consumer price index (CPI) is skewed due to inclusion of controlled items, as only few items in the entire 512 goods in the CPI basket are price-controlled items, and even then, they are only controlled during festive seasons. The CPI went up by 10% between September 2010 and September 2014. “We tend to get confused about [the] CPI; it captures the rate of change of prices, not the level of prices,” he added.

“But if you look at other big-ticket items, high-rise properties went up by 54%, terrace house 61%. Even [everyday goods] like ginger was up by 57%, kailan by 20% and sawi by 10% during the same period. People remember this. And people remember that toll prices [have] gone up as well,” he said, before adding that houses are not included in the CPI. Only rents are.

For low-income earners, Muhammed said it is normal for them to borrow for consumption. With many items’ prices increasing, this could just delay the low-earning people’s purchases of homes.

BNM’s Financial Stability and Payment Systems Report 2014 showed that total household loans were primarily mortgages (45.7%), while personal financing made up 15.7%. However, households which earned RM3,000 or less had a debt-to-income ratio of seven times, even though their total loan share was only 26.7%.

Apart from easy-payment schemes, Muhammed said low-income earners could turn to personal acquaintances or worse — loan sharks — to obtain credit. Forget the fact that ah longs charge exorbitant rates, Muhammed said these numbers are not included in official data. “So, we won’t know how much debt came from these informal sources,” he said.

Muhammed said these loans were usually for consumables or not backed by assets. The younger ones borrow to study, while the older ones for medication.

Former CIMB Investment Bank Bhd regional head of economic research Lee Heng Guie, meanwhile, said many in their 40s tend to borrow from loan sharks for their businesses’ short-term financing.

“Sometimes, these people need quick cash to help with their cash flow. Going to banks requires a lot of requirements and a longer process. So, these small business owners just go to the ah longs and use their possessions as collateral,” he said.

Both Lee and Muhammed agree that Malaysia’s household indebtedness will not be reduced anytime soon. “It will take a dramatic fall in loan growth or a sharp GDP rise to reduce the ratio,” said Lee.

Muhammed suggested that easy- payment schemes be disallowed from advertising low daily repayments and instead display the actual annual percentage rate (APR).

“Then, when people want to buy, say, those consumer durables that I mentioned earlier, they would know they are paying [a] total APR of more than 40%. So, they would then think twice. This can easily be done. It wouldn’t require cabinet decisions or to be tabled in Parliament. Ministers can just go and make an announcement that it’s banned beginning tomorrow.”

This article first appeared in The Edge Financial Daily, on Nov 16, 2015. 

http://www.theedgeproperty.com.my/content/borrowing-just-survive

What must we do about inequality

Since the introduction of the New Economic Policy (NEP) in 1970, Malaysia has been a global leader in recognising the need for inclusivity in economic and social policy, as well as in the implementation of policies to achieve greater horizontal (or group) equality.

The NEP has two objectives: to reduce and eventually eliminate poverty, and to accelerate the process of restructuring Malaysian society to correct imbalance so as to reduce and eventually eliminate the identification of race with economic function.

In both objectives, Malaysia has been outstandingly successful. This performance deserves recognition and respect. Malaysia’s success on the three fronts – growth, poverty reduction, and improvements in horizontal equality – over a prolonged period is one of the best in the world.

Global leader. Outstandingly successful. Deserves recognition and respect. Best in the world.

These potent words run in contrast to public perception and discourse, which seem to inhabit a different world – the policy has failed, poverty remains high, and income inequality is widely said to be increasing, or persisting at high levels. 

But those sentences in the first paragraph are not ours. They belong to Francis Stewart, the Professor Emeritus of Development Economics from University of Oxford, who wrote them as foreword for the Malaysia Human Development Report 2013.

It is of interest to note at this point the results of empirical analysis undertaken by the UNDP NHDR Malaysia 2013 team regarding the impact of NEP on growth, poverty and inequality.

Malaysia’s achievements are a matter of record. While almost half of the population was in poverty in 1970, the poverty rate has since dropped dramatically to 16.5% in 1990, and 1.7% in 2012.

The reduction in poverty was evident across all groups. The notion that the policy failed or benefited small groups of people is factually incorrect. The success in poverty eradication is acknowledged by World Bank where it stated that "the initial implementation of the NEP helped increase educational and employment opportunities for poor households, supporting poverty reduction during the period"[1].

The success of poverty eradication has been due to an increase in household income for the population. From 1970-2012, the average household income grew by 7.3% annually. A comparison by income class shows that the bottom 40% of income earners enjoyed the highest income growth, at 7.9%, higher than the 6.9% registered for the top 20% and the 7.5% for middle income households. Inequality, therefore, dropped.

The Gini coefficient, a standard measurement of income inequality, also decreased by 16% during the same period.

It is without doubt that Malaysia has achieved a level of social equality barely imagined nearly half a decade ago. It is rather an impressive achievement considering that the total cost for poverty eradication and restructuring of policy is relatively small, about 5% of total expenditure of the Malaysian government from 1970 to 2012.

However, the NEP’s success brings new challenges, and the work remains unfinished.

One, income inequality remains at a level that is almost the same as the past two decades despite a continuous increase in economic growth.

Two, income and poverty among Bumiputera communities remain high, and pockets of marginalisation prevail in both rural and urban areas.

Three, new inequalities have emerged, especially in asset ownership. Asset inequality, especially in financial assets, shows wider gaps compared with income inequality.

Four, there remains exclusion in the labour market, both in public and private sector. There is evidence that ethnicity, and to some extend gender, exerts influence over employment, which pose questions towards inclusiveness in the work place. 

Five, the size of the middle class in Malaysia remains small, and barely budged in the past two decades. By conventional income-based definition, the middle class in Malaysia currently stands at 22% compared with 20% in 1989.

Moving forward, it is plausible that economic inequality could widen in Malaysia in the near future given current challenges in the labour market, changes in education policy, and consolidation of fiscal policy to reduce the federal deficit.

What then must we do? While there is no silver bullet and since defeatism will only guarantee defeat, there are several policy reforms that can be adopted to promote inclusive development in Malaysia.

These include fiscal policies to increase spending on health and education, access to affordable housing and quality education, targeted transfers to low income households, and implement fair and progressive taxation.

Labour market reforms can be simultaneously undertaken to boost the labour share of total income and ensuring equality of opportunities and fairness of employment practices, and, at the same time, reduce the size of foreign labour.

There is also room for financial reforms in ensuring our financial system is more inclusive. Finally, and equally vital, is the social policy reform.

A few measures can be undertaken, such as implementing unemployment insurance, focus on asset ownership especially housing, and strengthening of social safety net provisions including enhanced old age pensions.

Importantly, however, there is an urgent need to broaden our development paradigm beyond economic growth or stock market performances.

We must view development as representing a transformation of our society. GDP growth or a rising level of stock market are necessary, but not sufficient to achieve development and freedom from poverty, exclusion, and a more equitable and just society.

Ignorance is unfortunately not bliss, as failure to ensure inclusiveness could be fatal, be it in economic, social, or in political domains, as history has repeatedly shown.

Persistence of inequality over a prolonged period of time or across generations could not only lower economic growth and simultaneously diminish channels of upward mobility but would also possibly incite anger and raise questions with regards to the notion of fairness.

More generally, societies may experience a widening mistrust of institutions, including the government itself and a sense of despondency towards the status quo and the prospects of positive change. 

The report from UNDP evidently issues a clarion call for inclusive development to be increasingly incorporated into policy and academic discourses in Malaysia. – June 11, 2015.

* Dr Muhammed Abdul Khalid a director of research at Khazanah Research Institute and Tan Sri Dr Kamal Salih is adjunct professor of Economics and Development Studies at Universiti Malaya.

Link - See more at: http://www.themalaysianinsider.com/sideviews/article/what-must-we-do-about-inequality-muhammed-abdul-khalid-and-kamal-salih#_ftnref1

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[1] World Bank 2013. Malaysia Economic Monitor: Harnessing Natural Resources. p47.

Bumi Unit Trust Holders — A Tale Of 2 Classes

Majority of Bumiputeras, or specifically the bottom 72% of ASB unit holders, only recorded average savings of RM536 in their ASB accounts last year, a measly amount that is not even near RM1,000.

Not only is the number miniscule, it is also decreasing, by 12% since 2012, which is in reverse of the rising trend in overall savings of total ASB unit holders.

Low wages linked to fewer, weaker unions

The goods and services tax (GST) which kicked in on April 1 has turned the spotlight once again on the country’s low-wage rut, with economists pointing at the weakening bargaining power of workers, influx of migrant labour and national economic policies as the main causes.

A long-standing problem, experts have said low wages were the result of Malaysia's industrialisation policy, which has long focused on the manufacturing sector.

But it also correlates with a steady fall in union membership, in part caused by dependence on foreign labour.

In fact, an economist at a recent forum on the welfare of Malaysians, said better bargaining rights for workers, such as through unions, could ensure better wages and benefits.

Are You Paid Enough For Your Work?

How much do Malaysians earn? Take a guess.

BFM Breakfast Grille - INEQUALITY - UNCOMFORTABLE FACTS AND FRAMEWORKS

"“Some of the statements in the book would also make uncomfortable reading both for those in power and in the political opposition,” says one reviewer. Now a bestseller, Muhammad’s book takes on many common perceptions about the question of inequality and related policies like the New Economic Policy. But the real strength and contribution of the book is in the new research as well as an insistence to think more deeply about inequality beyond income."

Public Seminar in Kedah : All are welcome

Book Review - The Establishment Post

The Colour of Inequality: Ethnicity, Class, Income and Wealth in Malaysia could not have come at a better time.

The book, launched in November last year, covers the themes of ethnicity, class, income and wealth in Malaysia, from the days of the Malay states.

It was published just as Malaysia enters the last leg of a socio-economic development agenda that began in 1970 and will end with Malaysia becoming a high-income nation in 2020.

The statistics-drenched book by Muhammed Abdul Khalid is just the sort of thing needed to make policymakers, technocrats and stakeholders from industries, involved in the crafting of the 11th Malaysian Plan, ask questions on upward mobility, asset ownership and wealth creation and why there are still huge disparities.

To Save is Prudent, but to Improve Education is Wise

Slightly more than four decades ago, two academics from University Kebangsaan Malaysia published a paper on the savings rate in Peninsular Malaysia. Drawing from Department of Statistics (DOS) 1957 Household Budget Survey - the last survey undertaken by the colonial government, they found out that on average, Malaysian households saved about $19.47 per month, which translated to a savings rate of nearly 10% of monthly income. Interestingly, they also found out that urban households saved more - 11% of income compared to rural households (8%), and Malay households had a higher propensity to save compared to other groups - on average, Malay households saved 13% of their monthly income compared to 8% in the case of Chinese households.

Wealth distribution means 'giving a man a fish'. Soon he becomes a vegetable.

From the blog Outsyed The Box , link here

"But there is a larger problem. This is exactly the same reason the Arab countries are breaking down. The people are poor. Or relatively poorer (much poorer) than others. In this case it is Malays (poor) versus non Malays (richer)."

New 'Dr. M' On Inequality And Getting Lost In The Waves

“We’ve achieved unparallelled success with the NEP (New Economic Policy), but there are new challenges that need to be addressed,” he said

Reply to a libertarian

 "...without the NEP, Malaysia could have grown faster and that the NEP caused Malaysia to grow only as fast as experienced"  

Betul ke?

ASB, KJ and UMNO Youth

"It is common knowledge that our economic status is still at a lower level compared to other races – that’s a reality. Until today, the income of the Malays is lower than other races. Many say; Malays have Amanah Saham! But according to the latest research by Dr. Muhammed Abdul Khalid in his book Colours of Inequality, it’s ironic that our average investment in ASB is only RM 600 when the limit is RM 200,000"

NEP : The Scarlet Letter

“Critics argue that the NEP is a failure, citing that it impedes investments, retards growth and benefits only a small number of well-connected bumiputras. Their arguments are not supported by data.

Boosting wealth generation of Bumiputeras : A Jalil Hamid

ECONOMIST Dr Muhammed Abdul Khalid argued in his book, The Colour of Inequality: Ethnicity, Class, Income and Wealth in Malaysia, that age cohorts, educational level and occupation helped contribute to the wealth disparity between Malays and Chinese.

Data that he produced showed that Bumiputeras had the least wealth compared with other ethnic groups. For example, in 2009, the average Chinese household had 1.38 times and 1.25 times as much income as Bumiputeras and Indians, respectively, but in terms of wealth, the gap widens: 1.9 times and 1.5 times, respectively.

How can we close the gap?

Zero household savings is staggering, and true

We refer to statements by the Governor of Bank Negara (BNM), Tan Sri Dr Zeti Akhtar Aziz, reported on various print media on November 28, 2014, on portions of the Malaysia Human Development Report (MHDR).

She disputes our finding that over 90% of Malaysians have no savings, claiming that the analysis is "partial" and "misleading".

We thank Tan Sri Dr Zeti Akhtar Aziz for engaging with the MHDR, and for providing this opening to reaffirm our findings. Allow us to clarify the points raised by Tan Sri Zeti.

DEB bukan dasar yang menyekat pelaburan

"Dasar ini dibentuk supaya ekonomi berkembang dan pengagihan berlaku secara adil dan saksama. Banyak kajian ilmiah yang menunjukkan bahawa semua kaum mendapat manfaat daripada pelaksanaan DEB. Ini termasuk kajian mutakhir Dr Muhammed Abdul Khalid yang diterbitkan di dalam bukunya 'The Color of Inequality' yang membuktikan DEB memberi manfaat kepada semua kaum dari segi pembasmian kemiskinan, peningkatan pendapatan, peluang pekerjaan dan pemilikan ekuiti"

Malaysia Needs An Equitable Economic Model

Malaysia Needs An Equitable Economic Model - Muhyiddin

KUALA LUMPUR, Nov 25 (Bernama) -- Malaysia needs an economic model which can ensure economic growth that is accompanied by fair distribution of wealth, said Umno Deputy President Tan Sri Muhyiddin Yassin.

He said the inequality that existed in the society currently was frightening with the economy of the Malays still at a critical level, apart from various challenges facing them in continuing with their economic agenda.

"We (the Malays) are competing in an economy which is more open. We are facing an ideology of equitability which opposes implementation of all the Malay agenda.

"Under the various instruments of international free trade agreement, our country is pressured to no longer practice the policy of protecting the interests of bumiputera.

"Purportedly, a policy like this hampers economic development and retards the market, despite this policy having been used by the developed countries for more than half a century before they achieved the developed status," he added.

He said this in his speech at the simultaneous opening of the Wanita, Youth and Puteri Umno assemblies at the Putra World Trade Centre here on Tuesday night.

Malaysia, he said, was also going against the flow of global capitalism and free market ideology that were increasingly widening the gap of inequality and requiring an approach, policy and strategy that were more effective in narrowing the gap between the races and classes.

Elaborating on the economic gap, Muhyiddin said based on the data by the median monthly household income of bumiputera was only RM3,282 which was still low compared with the Chinese at RM4,643 and the Indian (RM3,676).

He said out of the 40 per cent households with the lowest income, 75.5 per cent of them were bumiputera.

The bumiputera continued to be treated unfairly in the private sector, he added.

"A study carried out by Dr Lee Hwok Aun and Dr Muhammed Abdul Khalid in 2012 found that for every Malay graduate called for an interview in the private sector, an average of 5.3 Chinese graduates were interviewed, although they all had the same qualification.

"The official data also shows a high unemployment rate among the bumiputera workforce, which is 70.3 per cent, including unemployed graduates of 66.9 per cent," he added.

Muhyiddin said based on a study by economic experts, the bumiputera workers received a salary of 20 to 40 per cent lower than the non-bumiputera in the private sector.

Apart from the economic gap among the races, he said, the country was also experiencing a huge gap between the rich and the poor, and among the ethnic groups in the peninsula, Sabah and Sarawak, the urban and the rural community and between company chief executive officers, senior management and workers.

All these, if allowed to continue will adversely affect the country's economic performance, he added.

Hence, he said, the need for the bumiputera agenda to be made a national agenda, and policies and strategies to bridge the economic gap to be made the main thrust of the 11th Malaysia Plan.

"The bumiputera agenda as a national agenda cannot be implemented in a small scale or in isolation from the main frame of the country's economy. It has to be carried out in an inclusive and comprehensive manner, and transcends all economic sectors," he added.

He also recommended that a new National Economic policy to be drafted to drive the equitability initiative.

Muhyiddin said focus and priority should also be given to training programmes aimed at enhancing the skills of bumiputera workers, apart from improving the subsidy mechanism, addressing discrimination in the employment sector, to fine-tune legislation, regulation and enforcement against foreign workers.

He said policies on workers' salaries should be introduced, besides having a more structured taxation mechanism, increasing incentives to enable families to increase their income and providing an conducive ecosystem for the rural students and the urban poor.

-- BERNAMA

http://www.bernama.com/bernama/v7/bu/newsmarkets.php?id=1088369

True colours through the lens of facts and figures

"That’s the beauty of this book – it is not political rhetoric chasing some selfish agenda. The Colour of Inequality sticks to the facts and available data. The author listed the failures in leadership, policy (crafting and implementation), education, racist stereotypes, business culture alongside what worked and the results of a 57-year long social experiment that is Malaysia."

Malaysia needs second generation policies

As conditions change, Malaysia needs second generation policies that prioritise inclusive growth to achieve vision 2020