The State of Households

THE STATE
OF
HOUSEHOLDS
Presentation to Young Corporate Malaysians
15 April 2015

Preliminary findings and research direction on:
State of Malaysian
households
• Household incomes
• Inequality, subsidy
reform and the use
of cash transfers
• Household
expenditure and
food prices
• Housing
• Household debt
The Malaysian
workforce
• Composition of the
workforce
• Migrant labour
• Education
attainment of the
workforce and skills
training
Trade and
investment policies
• Policies to achieve
higher wages and
less inequality
• The advantages of
RCEP
3

It’s all about the households
• Nominal GDP has grown 17.5 times from
RM53.3b in 1980 to RM984.5b in 2013.
• Nominal GDP per person has grown 7.6
times from RM3,841 per year in 1980 to
RM32,984 in 2013.
• Between 2009 and 2012, Malaysia’s real
median household income grew by 19%; in
contrast , in the US and the UK real median
household income dropped by 4%.
Nominal GDP per person for Middle Income Countries (USD),
2012
Malaysian Nominal GDP and GDP per Person,
1980-2013
5
All sources for the charts and tables can be found in the "State of Households" book

GDP is not household income
• High GDP, GDP per person and GDP per household do not necessarily translate into high
household incomes.
• Average household income also often does not present a true picture of the income of most
households as it can be distorted by the incomes of the very well-off. It disguises the fact that
the median (the halfway mark) is actually much lower.
6
Median and Average Monthly Household Income and GDP per
Household per Month in 2012 (RM)
In 2012, GDP/person was RM31,887 yet:
• Average household income was
RM5,000 per month
• Median: RM3,626
• 23% of households earned <RM2k
• 55% earned <RM4k
• 74% earned <RM6k

Deprived households
• The federal government has done its part in providing schools, hospitals and electricity.
• For example, in Kelantan, only 50% of its rural households and 68% of its urban households have
pipe water. The majority (57%) of its households have no flush toilets but use ‘tandas curah’.
Percentage of Households that have Electricity, Schools and Public Health in 2012
7
Percentage of Rural and Urban Households that have Pipe Water and Tandas Curah in 2012

There is an ethnic, urban-rural and gender divide
8
Average Household Incomes by Ethnicity, Strata and Gender in 2012 (RM)

Unequal household incomes
Percentage Distribution of Households in Each Income Category in 2012: Malaysia and by ethnicity of the household head
9
Bumiputera Chinese
Indian Others
• At the individual level, the latest data from DoS shows
that in 2013, the median monthly salaries and wages was
RM1,700
• This is consistent with data from EPF showing that 62%
of active EPF members earned less than RM2,000 per
month and 96% earned less than RM6,000

Unequal spending
Percentage Monthly Spend on Goods & Services by Expenditure Category in 2010 (RM)
11

Unequal food
Monthly Spend of Households in Rice, Meat and Fish &
Seafood by Expenditure Category in 2010 (RM)
Monthly Spend of Households on Different Food Groups (in
order of amount spent) by Expenditure Category in 2010 (RM)
12
Oil & Fats
Sugar, jam, honey & confectionary
Coffee, tea, cocoa &
non-alcoholic beverages
Fruits
Meat
Other food products
Milk, cheese & eggs
Vegetables
Bread & other
cereals
Rice
Fish & seafood

An affordable house should cost 3x annual income
• Malaysian property developers’ profit margins are high at 21% - almost 2x those of the US (12%),
1.2x those of the UK (17%) and higher than Thailand (14%), althought Singapore has higher
margins (25%)
• We are working on the appropriate policy response. The answers will lie in:
– reforms of the construction supply chain, land market price setting and land regulations;
– innovation in building technology and finance; and
– The provision of affordable housing by the government and private sector
Housing Prices as a Multiple of
Annual Median Income
Housing Affordability of Malaysians, 2012
Country Multiple
Malaysia 5.5x
Singapore 5.1x
Hong Kong 14.9x
Ireland 2.8x
13

Low income
consumerism
A very high proportion of
households own cars, motorcycles,
fridges, and washing machines.
Almost every household owns a TV
(98%) and a mobile phone (95%).
57% subscribe for pay TV (Astro)
yet only 39% have an internet
subscription.
Most cannot be buying all these
with cash, since their incomes are
low. They can only be doing it on
credit.
14
Ownership of Vehicles by Percentage of Households by State in 2012
Ownership of Electrical Appliances by Percentage of Households by State in 2012
Ownership of TV, Astro, Mobile, Internet and VCD/DVD by Percentage of Households
By State in 2012

The scourge of ‘ansuran mudah’
15
True APR Calculations for Consumer Durables
Published APR
True APR Calculations for Cars

Wealth inequality
• It is wealth inequalities that really count.
• We have many wealthy people:
– Malaysians were the top foreign
home buyers by transactions in
Singapore in 2012.
– Malaysians were the 4th largest
buyers (4%) of new-built London
property in 2012.
– Around 7k houses costing more than
RM1m are sold in Malaysia each year.
– Malaysians purchase many luxury
cars.
– We have 38,000 USD millionaires in
Malaysia or 0.1% of the population in
2012, according to Credit Suisse.
16
No. of Luxury Cars Sold in 2013 by Official Distributors

Wealth inequality –ASB and EPF data
• The bottom 71.4% of ASB unit holders in
2013 have an average of RM554 in their
accounts.
• The average for the top 0.2% is RM725,122.
• The total savings of the top 17,061 EPF
members are greater than that of the entire
bottom 44%, (2,854,419 members).
– For the top, this a fraction of their total
wealth. For the bottom, it is close to
their entire life savings.
• Active EPF members in the 51-55 age group,
who are on the brink of retirement and have
a career’s worth of savings, have on average
RM147,057 each.
• The richest 5,446 members however have on
average RM 1.56m in savings. If these
members are excluded, then the average
savings for the remaining EPF members
would be RM127,460.
17

But we have made progress
• Income inequality has been on a downward trend. Our Gini coefficient worsened from 0.51 in
1970 to 0.56 in 1976. Since then however it has been improving and was 0.421 in 2014.
• From 1984 to 2012, the share of total income of the bottom 40% and the middle 40% of
households have increased, whereas that of the top 20% has decreased.
Income Share by Income Group, 1984 and 2012
18
Growth of Real Household Income and Real GDP
per person 1995 - 2012
Average Monthly
Household income

Perception and reality
• The vast majority, the bottom
74%(4.36m) of households
who earn less than RM6,000 a
month live in a world where
food prices really matter and
savings are measured in
thousands of ringgit.
• This compares to the top 9.7%
of households who earn more
than RM10,000 a month. They
can afford to shop in high-end
malls and go on foreign
holidays.
19
No. of Households per Household Income Category in 2012
(thousands)
No. of Households per Household Income Category in 2012
(thousands)

Market and net inequality
20
Redistribution: The Top 25% and the Bottom 75%

BR1M and other cash transfers
• Singapore: Comcare Transition Scheme: Monthly cash, educational, medical assistance and/or
utility vouchers to households earning below SGD1,700. For households in the bottom 20%, the
Singapore government tops up 90 cents for every SGD1 a household earns. Workfare Income
Supplement Scheme: Quarterly cash payment of up to SGD3,500 annually to supplement wages
and retirement savings of older low-wage workers earning below SGD1,900.
• BR1M Covers all households earning less than RM4,000 a month and singles over 21 who earn
less than RM2,000 per month. In 2014, 4.6 million households and 2.3 million single individuals
received BR1M payments. As of 2012 however, only 4.2m households had an income of less than
RM4,000 per month, according to data from DoS. It would appear that improvements can be
made in targeting the delivery of this assistance.
22
BR1M payments and total costs

Corporate welfare
• A household that only has a motorcycle and ceiling fans enjoys far less subsidy than a multiple car
and air-conditioned household in Damansara Heights.
• As motor-vehicles gets more expensive, from a motor-cycle to a German saloon, the subsidy the
owner gets per 1,000 kilometres increases dramatically.
Vehicles by Specifications and Total Fuel Subsidy
23

Low pay high profits
Growth of Wages and Productivity
25All sources for the charts and tables can be found in the "State of Households" book
Note: According to DoS, productivity is defined as average sales value per employee.
Share of Wages/Salaries on GDP

Our workforce
Median Wages and Employment by Occupation
3.19 M
26
The workforce is relatively low educated - jobs with the highest pay (managers and
professionals) absorb the least number of jobs compared to low paying jobs such as service and
sales.

We need migrant workers
• From 1990 to 2010, migrant labour has
grown from 380k to 2.1m of the total
workforce. A majority of them are unskilled.
• Theory predicts that migrant labour has a
substitution effect (it displaces native
workers) and a scale effect (with more
migrant workers output expands, thus
creating jobs for natives). The scale effect
has overwhelmed the substitution effect.
• “…many sectors of the Malaysian economy
are based on foreign workers supervised by
secondary-school educated Malaysian
workers.”
Effect of Migrant Workers Hired on Native Jobs and Wages
27

How educated are our workers?
Educational Attainment in the Workforce, 1982 – 2012
In 2012, out of the 24% who fall under the tertiary category, only 10.4% were degree holders.
28
Median Salary/Wages by Education

1 in 6 children do not get to Form 4
• The large majority do not go on to post-secondary education.
• We must keep our children in school, at least to Form 3 – Yayasan Amir
Trust Schools show it can be done.
• Expand our TVET as an alternative to university
– Have a Malaysian version of the German apprenticeship system.
• Implement the Education Blueprint, but faster.
29
Out of every 100 children in a cohort
of 6 year olds...
Secondary schools and TVET
numbers and enrolment

Avicious cycle?
• We are still fundamentally a low-cost
economy.
– Employers hire low to semi skilled
workers; those who have a secondary
school education.
– Workers match this. Most too only
have a secondary school education.
• This leads to a vicious cycle. Why move up
the value chain if most of the available
work-force only has a general secondary
school education? Why stay in school if you
can get a job after Form 5?
• We must:
– Keep children in school
– Improve TVET
– Make our graduates more
employable
• We must promote industries that create
high paying jobs and not promote
industries that only create low-paying
ones (particularly those reliant on migrant
unskilled labour) – even if they appear to
add to exports or GDP.
30

Promoting the right investments
• We have to be discerning in what investment we promote. Our policies should only promote
industries that, amongst others:
– Are value added
– Employ skilled high-paid domestic labour
– Have deep linkages to the rest of the economy and create high value jobs in the rest of the
economy
– Provide technology transfer and skills training
– Do not degrade the environment
– Make the best use of our scarce natural resources
• Our investment approval process should have rigorous and detailed check-lists to ensure this. We
must also follow-up and ensure that the investors keep to the commitments made pre-approval.
• We are developing these checklists as part of our continuing research into this area.
32

It’s the value-added
• iPhone components come from 9 companies located in China, Korea, Japan, Germany, and the US.
It is misleading to count an iPhone as being solely a Chinese export to the US.
• The trade in value-added (TiVA) analysis is a new methodology to calculate and analyse the value-
added of trade activities in a country.
– Using the TiVA analysis, it is estimated that China only contributes to 3.6% to the total cost
of iPhone exports from China to the US.
• The new methodology is granular. It provides a more accurate understanding of bilateral trade
imbalances, the employment content of trade, and a country’s true competitiveness position,
among others.
• Our trade policy must be based on TiVA; not on increasing the headline trade numbers.
33

RCEP
• The RCEP market is geographically more relevant for Malaysia – important in terms of managing
the transaction costs for businesses and investors.
• China and Korea will have to commit to greater tariff liberalisation for goods – providing greater
market access for Malaysian products.
• The RCEP will encourage more FDI for Malaysia from China and Japan thus reversing the shrinking
trend in the FDI stock from these countries.
• The RCEP is expected to complement ASEAN’s efforts in becoming a single production base, thus
ensuring that Malaysia is in the investment radar of investors.
34

The right trade investment policy creates high-paying
jobs
• The Anglo-American view is that government has no business in business. Government should
only be concerned with ‘peace, easy taxes and a tolerable administration of justice’ and let free
markets do the work.
• Industrial policy can be successful and desirable.
– It can be ‘leadership’ as when Korea created Posco, now a leading steel company.
– Or it can be ‘followership – ‘nudging’ private companies to extend their capabilities and FDIs
to use domestic suppliers.
• Trade policy should support national economic policies such as creating high-paying jobs
35

Conclusions and
recommendations

Way forward
• We must put households at the centre of our economic policy. Driving economic growth is
important. But so is ensuring the growth in the income of the majority of households – the
bottom 74%; and not just growth in corporate profits and the incomes of the wealthy. We are
heartened that the Prime Minister in his 2015 Federal Budget speech said that the “people
economy” is the “bedrock in prioritising the interests of the rakyat” (“paksi dan pegangan dalam
mendahulukan kepentingan rakyat”). Our policy recommendations complement this.
• Fuel subsidies should gradually be replaced with targeted cash transfers. The Khazanah Research
Institute will be publishing a more detailed policy recommendation on this.
• We need to provide truly affordable housing. The Khazanah Research Institute will be publishing a
series of reports and policy recommendations on how to achieve this.
• We need to prioritise the development of the northern states. Water and sanitation must be
improved. The corridor initiatives must look at raising household incomes.
37

Way forward (2)
• We must immediately make it compulsory to prominently advertise the true APR and teach basic
financial literacy in schools. The various agencies and ministries responsible for consumer finance
must act in a coordinated way to protect the interests of consumers.
• We must vigilantly enforce competition law. We cannot afford monopolists (middlemen or permit
holders) in the food supply chain. The Khazanah Research Institute will be publishing research and
policy recommendations on this and on food security.
• We must accelerate the implementation of the Education Blueprint, ensure that children stay in
school, and expand and improve TVET.
• We should concentrate on RCEP, the FTA which is the most beneficial.
• Our trade and investment policy must be geared to promoting industries that are high value-add
and create high-paying jobs, not just headline export and investment numbers. The Khazanah
Research Institute will be publishing research and policy recommendations on trade and
investment policy.
38

Population of Malaysia by State in 2010 (m)
About households
Composition of households headed by a Malaysian by:
location of
household
gender of
household head
ethnicity of
household head
persons per
household
40

P. Pinang
59.6
Perak
49.7
Pahang
40.6
Melaka
28.3
N.
Sembilan
34.3
Kedah
31.6
Kelantan
17.4
Perlis 4.3
Rich and poor states
Nominal GDP per person in 2012 (USD)
41
Nominal GDP per person by State in 2013 (RM)

The price of food
• Our chicken prices are generally lower than in other ASEAN countries. But they are steadily
increasing. We are also at the mercy of world food prices, which rose 5.15% in the first quarter of
the year.
42
Chicken Prices 2012 – 2014 YTD

Unemployed graduates
Employment Status of 2012 Graduates
43
Despite the high demand for graduates (as demonstrated by the
higher salaries they get), a substantial proportion of graduates are
unemployed.

Youth and serious crimes in Malaysia
The following depiction describes the profile of a young
male from the Klang Valley involved in serious crimes:
He would be one of a few siblings in a family that lives in a
working-class neighbourhood, especially low-cost, high-rise
public housing projects. Both his parents would be working,
clocking in long hours. In primary school, he would be an
average student, but he would stay in school and even be
involved in extracurricular activities.
In secondary school however, he would find that studies are
difficult to cope with, or simply uninteresting. Committing
truancy would be easy, as fake medical certificates are easy
to obtain and the school does not call his parents to report
his constant absenteeism. His parents would advise him
repeatedly to stay in school and study hard, but there would
be other things on his mind: joining friends to play video
games or picking up smoking and gambling.
Eventually, drugs would enter the picture, at first
recreationally and then, to give him the ability to numb
the fear of committing armed robbery. His friends would
demonstrate to him how it is done and snatch a
handbag or necklace from someone on the street. Then,
he is asked to join in on a trial “mission.”
If he gets a job, he will find the pay is too low to accord
him the lifestyle he wants. So, armed robbery and theft
would become his source of income. His parents would
advise him to stop or in some cases, even tolerate his
behaviour as long as it means he does not run away from
home.
The day comes that he is caught and sentenced to
prison. When asked why he did not stay in school, he
would say “tak minat”, “suka main dekat luar” or simply,
“apa yang diajar memang tak boleh masuk.”
Age: 21-30 | Gender: Largely male | Ethnic: 63% Malay, 26% Indian, 6% Chinese, 5% Others | Type of crime: Robbery,
snatch theft, rape | Education level: Approximately 80% have at least some form of secondary education (not necessarily
up to Form Five or with a SPM certificate), while 10% have at most a UPSR certificate | Parents: Low income, majority both
working | Residence: Low cost housing
Profile of a youth criminal:
44

Cash transfers – examples
• Singapore:
– Comcare Transition Scheme: Monthly cash, educational, medical assistance and/or utility
vouchers to households earning below SGD1,700. For households in the bottom 20%, the
Singapore government tops up 90 cents for every SGD1 a household earns.
– Workfare Income Supplement Scheme: Quarterly cash payment of up to SGD3,500 annually
to supplement wages and retirement savings of older low-wage workers earning below
SGD1,900.
• Malaysia:
Skim Bantuan Kebajikan (under the Social Welfare Department (JKM)
– Targets the elderly, OKU, single mothers, children and disaster victims. Payments range from
RM150-RM500 per month.
The Ministry of Education
– Kumpulan Wang Amanah Pelajar Miskin (KWAPM) for primary school and secondary.
Payments range from RM200 to RM900 per year.
45

Low pay high profits
• We reward shareholders better than
workers – and that is after including
CEO salaries as workers’ salaries. There
is no iron-clad rule on what is the right
share between labour and capital. Our
businessmen are better than others in
getting a bigger share.
• Even when our productivity increases,
wages do not increase in tandem.
• It is symptomatic of the lack of
bargaining power of low skilled labour
and over-reliance on low cost as
competitive advantage.
46
Benefits, % of EBIDTA Across Countries

The State of Households

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