Poverty in Malaysia

Malaysia - Poverty and wealth

Malaysia experienced extraordinary economic growth during the last 3 decades, which brought prosperity and higher standards of living to the majority of the people. One of the most important achievements in Malaysia has been the elimination of extreme poverty and hunger. The urban areas—especially the capital Kuala Lumpur, and major tourist destinations and industrial cities such as George Town, Malacca, and Petaling Jaya— enjoy a quality of living very similar to that in developed countries. The major cities have first-class shopping centers, condominiums with air-conditioning and swimming pools, expensive private schools, and elite clubs. The rural population, meanwhile, often lives in traditional wooden houses in kampungs (villages) with limited facilities.

The monthly gross household income nearly doubled from MR1,167 in 1990 to MR2,007 in 1995. There has emerged a fairly strong middle class. However, incomes are still distributed unevenly. For instance, the wealthiest 20 percent of Malaysians control 53.8 percent of the wealth, while the poorest 60 percent of the population controls just 21.3 percent of wealth. At the very bottom of the income range, the poorest 20 percent of the population controls only 4.5 percent of wealth. Disparities exist along both geographic and ethnic lines. In general, the Chinese population, which has traditionally lived in urban areas and been involved in small and medium-sized businesses or employed in various industries, has had higher incomes than the Malays, who often live in small towns and villages and were traditionally engaged in agriculture. Secondly, there are considerable differences in standards of living, incomes, and access to medical and other social benefits in different parts of the country. Peninsular Malaysia, where the majority of the population lives, has much higher standards of living compared to East Malaysia.

Since 1970, the Malaysian government has actively implemented social policies aimed at the elimination of poverty and social inequality, and the development of a social welfare system . The communal unrest of 1969 prompted the Malaysian government to introduce the New Economic Policy (NEP). This 20-year program established state support of poor communities and access to education and social benefits for Malays and indigenous people (the Bumiputera ). This latter aspect included the establishment of privileged access to public services, the granting of land rights, preference in education and training, and job quotas in the public sector. In the 1980s, Malaysia's leadership envisioned the formation of the Malay Baru (New Malays), a better-educated, politically and socially active people able to live in harmony with other communities. In the early 1990s the government relaxed some privileges and reduced some quotas for Bumiputera, making the social welfare system more inclusive and accessible to a wider range of people than it had been before.

The recent economic turbulence of 1997 and 1998 brought higher unemployment, higher prices, and lower incomes. This particularly affected the most vulnerable social groups of society, not only in rural areas, but also in major urban centers. Nevertheless, there were no large groups of people migrating from the country, and Malaysia's quality of life remained much better than in neighboring Indonesia, the Philippines, or Thailand. Around 6.8 percent of the population lived below the poverty line in 1997, most of them in East Malaysia (for comparison, in the neighboring Philippines 32 percent of the population lived below the poverty line in 1997). The economic recovery of 1999 and 2000 reversed the decline in incomes and standards of living.

Poverty in Malaysia

Anti-poverty moves: Old wine, new bottles?

KUALA LUMPUR - With Malaysia's impressive track record in economic development over the past 30 years, and the constant push to modernize the country, it would seem that the problem of poverty would feature less prominently on politicians' agendas here. But this is not the case for the newly minted prime minister, Abdullah Ahmad Badawi. Soon after assuming office, he declared an ambitious plan to eradicate hardcore poverty within five years.

Malaysia's record in reducing poverty is impressive even on an international scale - so impressive that global agencies such as the World Bank and the United Nations have showered it with accolades. The government is currently documenting its success in a report to the UN on its efforts toward achieving the Millennium Development Goals - a UN blueprint, which among others things, aims to reduce poverty worldwide by half by 2015.

As a model country, Malaysia has much to share. After racial riots in 1969 triggered by dissatisfaction among the Bumiputra population (mainly Malays but also including indigenous people) who worried about losing their political influence to the economically strong Chinese, the government launched the ambitious New Economic Policy (NEP) in 1970, an affirmative action plan designed to give poor Malays a greater share of the country's future wealth. This "growth by equity" policy represented an active commitment to combat poverty, particularly among the Malays, who made up the majority of the poor, and to ensure economic growth that would benefit all.

Despite the controversy, the NEP was successful in reducing poverty and even exceeded its target goals. The series of government-installed regulations - quotas, scholarships and other privileges designed to help the Malays - successfully transferred wealth to this group. Their share of the national wealth jumped from 2.3 percent in 1970 to 20.6 percent in 1995. The NEP was replaced in the 1990s by the New Development Plan, which primarily continued the NEP policies.

These policies have paid off handsomely based on commonly quoted absolute figures. Due to stable economic growth and the government's poverty reduction policies, per capita gross domestic product (GDP) more than doubled from US$1,750 in 1975 to about $4,300 in 2003. The incidence of poverty has declined steadily over the years, plunging from 49.3 percent in 1970 to about 5 percent today.

But on closer examination, a less-than-ideal story emerges. Malaysia's poverty problem could be far more serious than the statistics show, and the prime minister's poverty eradication plan is proving timely, as the nature of the problem has changed over the years and new ways of tackling poverty now are needed.

"While both absolute and rural poverty have declined considerably due to past poverty eradication efforts, there are indications that relative and urban poverty is worsening, new forms of poverty are emerging and inequalities are increasing," said Sulochana Nair of the University of Malaya.

According to a study by the Organization of Economic Cooperation and Development (OECD), while poverty has always tended to be largely and disproportionately rural phenomenon, the disparity between incidences of urban and rural poverty increased in the 1990s compared with the 1970s and 1980s, underscoring the increasingly uneven economic development that impacts contemporary Malaysia.

The OECD noted that in spite of its very substantial improvement in the incidence of poverty, in terms of income distribution, Malaysia's record has been less impressive. While current levels of income inequality as measured by the Gini coefficient (named after Italian statistician Corrado Gini), have improved compared with conditions in 1970 and with those in the late 1950s and 1960s, they seem to have worsened, especially in the 1990s, and appear worst among Malays. Rural households earned approximately 55 percent of the income earned by urban households in 1999. Again, while this urban-rural disparity represents an improvement over the disparity in 1970, it is worse than circumstances in the late 1980s.

The World Bank shares that analysis, noting that income inequality usually decreases as poverty rates fall. It said Malaysia was one of the few countries in East Asia where inequality fell over the past few decades, but where, despite the long-term reduction in poverty rates, the trend has reversed itself since 1990. "Overall, Malaysia remains among the most unequal countries in East Asia," it said.

According to World Bank data, Malaysia's Gini coefficient - a measurement of income inequality where 0 (zero) indicates perfect equality and 1.0 represents perfect inequality - of 0.49 is higher than Thailand's (0.41), the Philippines' (0.46) and Indonesia's (0.32). It is also higher than both Laos (0.37) and Vietnam (0.36). Another study pointed out that in 1999 Malaysia also had the highest income disparity in the Asia-Pacific region, with an income disparity ratio of 11.7 percent between the richest 20 percent and poorest 20 percent of the population.

This serious inequality is attributed to the rural-urban divide, as well as regional and ethnic disparities. Between 1970 and 1990, the income disparity ratio between urban and rural households increased from 1.70 to 2.04. Poverty rates vary between different ethnic groups, and although there is evidence that these differences have narrowed over time, the majority of the poor are still Bumiputras, who also comprise the largest of the nation's three major ethnic groups, namely the Malays, the Chinese and the Indians. Income disparities between Bumiputra and non-Bumiputra household have been widening since the 1990s despite affirmative action policies aimed at narrowing the gap between these households, according to Nair, of the University of Malaya.

In 1997, 70.2 percent of households in the bottom 40 percent income group were Bumiputra, while 62.7 percent of households in the top 20 percent income bracket were non-Bumiputra.

Observers have noted that, given their weaknesses, existing strategies for poverty eradication are unlikely to resolve the poverty problem. Little has changed in the way poverty is conceived, measured and addressed since the NEP went into effect. Poverty in Malaysia was largely perceived as a rural problem with strategies, programs and development spending reflecting a strong rural, and Bumiputra, bias.

First, the method used to calculate the incidence of poverty in Malaysia belies the real extent of the problem, say analysts. The income threshold used for the poverty line, currently set at about $135 a month in peninsular Malaysia, is unrealistic since studies suggest that the average income for an urban family with five members or less is about $230 a month. Therefore, the poverty figures do not capture the real numbers because they do not take into account the differences in the cost of living between rural and urban areas and thus exclude large numbers of the poor in urban areas from anti-poverty policies and programs.

Second, new forms of poverty also have emerged as a result of rapid economic growth and the development process itself. According to Nair, of the University of Malaya, "the underdevelopment of the rural areas and the growing privatization of resources and commercialization of activities impoverish certain groups and marginalized weaker sections in society."

These societal changes are increasing poverty levels for single, female-headed households, migrant workers and unskilled workers, while persistent poverty continues to plague the Orang Asli (indigenous people in peninsular Malaysia) and other indigenous people in East Malaysia, as well as Indians. Urban poverty has become critical with rapid urbanization and rural-urban migration. The increasing number of foreigners in poverty in the post-Asian financial crisis period also has increased the incidence of poverty. Non-citizens as a proportion of poor households more than doubled, from 7 percent to 15 percent between 1990 and 1997.

The Asian financial crisis of the late 1990s also highlighted some weaknesses in the system and its inability to cope with economic uncertainties. Between 1997 and 1998, the incidence of poverty rose from 6.1 percent to 8.5 percent, though this rise was less severe than that of other countries in the region such as Indonesia and Thailand, thanks to Malaysia's capital controls and public expenditure programs. However, the lack of a social safety net has raised concerns about the need for some form of unemployment insurance for those most in need during economic crises.

Some critics say the government needs to look at a broader spectrum of issues and factors in order to measure the poverty rate, going beyond the standard conomic causes of poverty such as lack of housing, health care and education, areas in which costs are escalating. Social problems such as drug addiction and alcoholism often involve school dropouts from low-income families, they say.

For the government, tackling the poverty problem is like putting old wine in new bottles. Yet if recent official statements promising to revamp the system - from taking a more targeted approach to more realistically revising the poverty line - were to be taken seriously, the poor might see some light at the end of the tunnel.

Poverty in Malaysia

World Bank Supports Malaysian Education, Social, & Technology Projects

The World Bank today approved three loans to Malaysia totaling over US$400 million for social, education, and technology sector projects to help the government of Malaysia improve efforts in these areas.

"Malaysia has a very strong track record on developing its education and health sectors and has made important gains in the past. The World Bank is keen to support Malaysia to ensure that none of the gains are lost because of the crisis in the region," said World Bank Southeast Asia & Mongolia Country Director Ms. Ngozi Okonjo-Iweala. "We want to do all we can to ensure that the human development agenda that underpinned the country's long-term development plan Vision 2020 is supported and sustained."

Malaysia was one of the countries hardest hit by the Asian financial crisis. In June of 1998, the World Bank approved a fast-disbursing US$300 million single-tranche Economic Recovery and Social Sector Loan (ERSL) to protect vulnerable groups in society and support structural reforms in the banking and corporate sectors. However, as the crisis deepened, additional support became necessary. Therefore, in order to prevent the erosion of certain sector programs in Malaysia the World Bank is preparing a set of loans to assist the government.

Poverty in Malaysia Pre-crisis: During the last quarter of a century, poverty (using the poverty line of $2 international dollars per day at 1985 prices) decreased from slightly over half the population to about 5 percent of households in 1997. Hare core poverty, (households with incomes 50 percent below poverty line, concentrated in rural areas) was reduced from 7 percent in 1985 to about 1 percent in 1997. Impact of Crisis: Preliminary data shows that the social impact of the financial crisis was enough to reverse some of the recent gains made in poverty reduction. The poor are disproportionately impacted by rising prices, unemployment has increased, and health and education data indicates a substantial switch in demand for public sector services from private sector services.

The main objectives of the US$60 million Social Sector Support Project are to provide access to essential social services such as basic health and social assistance to the needy, and to strengthen the monitoring of poverty and of effectiveness assessments for programs.

The social development project is divided into several components:

• rural development;
• health clinics;
• social assistance for disadvantaged groups; and
• poverty monitoring and impact assessment.

This IBRD loan is at the Bank's standard interest rate for fixed rate US dollar single-currency loans, with a maturity of 15 years, including a three-year grace period.

The US$244 million Education Sector Support Project will assist the completion of the Seventh Malaysia Plan (1996-2000) in the education sector whose objectives are to: expand access to and equity in education; promote quality and excellence; and improve the efficiency of sectoral management.

This project will help the government of Malaysia maintain past education sector achievements by reinstating programs that were cut as a result of the crisis. The project provides funding to the Ministry of Education's core basic education programs, such as the construction of facilities, teacher training, and a pilot program for the extension of basic education. It will continue to assist the country in producing middle-level technical specialists with high skills and productivity, through support to the polytechnic system. Such skills are necessary for the medium-term recovery. It will also support institutional strengthening activities including improved sector management, staff development, and project management.

This IBRD loan is at the Bank's standard interest rate for fixed rate US dollar single-currency loans, with a maturity of 15 years, including a three-year grace period.

The US$100 million Year 2000 (Y2K) Technical Assistance Project will minimize disruptions in the country's social and economic infrastructure and to coordinate efforts in key sectors. This includes monitoring progress and contingency planning to deal with possible disruptions.

There are two components to the project:

• Government Sector Remediation. To assist the government of Malaysia, in a rapidly narrowing window of opportunity, to contain the disruption in the country's social and economic infrastructure that would be caused by the failure of critical central government systems to process dates after December 31, 1999. Agencies selected for financing will implement their remediation subprojects financed from this loan. Technical assistance will be provided by the Malaysian Administration Modernization Planning Unit in the Prime Minister's Department for Y2K diagnostics, technical and impact analysis, implementation planning, preparing terms of reference, supervision of consulting firms, preparing equipment specifications, and other activities
• National Y2K Task Force Activities. To strengthen the capabilities of the pre-existing National Y2K Task Force to carry out national monitoring, verification, legislative planning, national contingency planning, and knowledge sharing.

Poverty in Malaysia

Malaysia Measuring and Monitoring Poverty and Inequality

Foreword
In the last quarter of the twentieth century, Malaysia’s economic transformation was little short of spectacular. At the time of independence in 1957, Malaysia was a low-income, predominantly agricultural and rural economy. Around half of the country’s households were living below the national poverty line, with very little changed up to 1970, at which time 49 per cent of households were poor. In the following three and a half decades, rapid economic growth and structural change have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of the century, Malaysia’s poverty rate had fallen below 10 per cent, and in 2007 to less than 5 per cent. The nation has attained high human development.

Malaysia’s economic transformation owes much to its human and its natural resources. It also owes much to the sound economic, social, and commercial policies pursued, as well as political stability and national unity. Two broad features of the post-1970s have helped to reduce poverty: the country’s enviable economic growth record and the national commitment to a more equitable distribution of income.

At the beginning of the 1970s, the Malaysian economy relied largely on the production of primary products (natural rubber, tin, and palm oil) for world markets. Successive commercial policies gradually dismantled barriers to trade so that the country is today one of the world’s most globalized economies. Manufacturing, rather than agriculture, has been primarily responsible for the country’s export successes in recent decades. Exports of manufactured goods, particularly of electrical and electronic products, have been the key factor in sustained rapid economic growth.

Malaysia has also enjoyed macroeconomic stability. Liberal commercial policies and bold .nancial management have been important factors behind Malaysia’s strong and sustained growth record. Some economists have argued that economic growth, with its correlate of increased modern sector employment, is an essential pre-condition for poverty reduction: Malaysia provides an excellent illustration.

Malaysian governments have also aimed for a more equitable distribution of income and this is the second feature of the post 1970 period that has contributed to poverty reduction. Rural development programmes helped to raise the incomes of impoverished agricultural communities.

The New Economic Policy (NEP), formulated in 1970, sought to lessen the association of race with economic function. Policies were motivated by the idea that all communities should share in the country’s growing prosperity. Successive .ve-year plans have sought to achieve ‘growth with distribution’. This open commitment to economic prosperity for all has been an important ingredient in Malaysia impressive poverty record.

While the national poverty rate is extremely low by historical standards, there are still substantial spatial and community variations. Thus, for example, there remain relatively large numbers of poor households living in poverty in rural Sabah and Sarawak, as well as in the rural areas of Terengganu, Kelantan, and Kedah. The overwhelming majority of the country’s remaining poor are Bumiputera; especially prominent are the indigenous communities in Sabah and Sarawak.

Malaysia aims to improve on the poverty targets set through the Millennium Development Goals (MDGs). The Ninth Malaysia Plan, 2006–2010, repeated the commitment to achieve growth with distribution and set targets of reducing the overall poverty rate to 2.8 per cent and eradicating hard-core poverty by 2010. It also set ambitious targets to narrow income disparities and improve equity. In order to help achieve these targets, it is essential for policymakers to work with re.ned and disaggregated measures of poverty and inequality. This monograph describes and illustrates a range of useful approaches that can be used to measure and monitor poverty and income inequality.

We would like to thank members of the Project Team (listed on page xi of this monograph) from the Distribution Section of the Economic Planning Unit (EPU), the Department of Statistics (DOS) Malaysia, and UNDP for their excellent collaboration in putting this monograph together, under the able technical leadership of Mr David Demery of the University of Bristol with close support from Dr Chung Tsung Ping. We are con.dent that the publication will be of considerable value to all those interested in measuring and monitoring poverty and income inequality. We hope that it will also prove to be a useful tool for policymakers and practitioners in other developing countries and serve as a technical tool in South–South Cooperation for the achievement of the MDGs.