Malaysia Economic Monitor, December 2014: Towards a Middle-Class Society

Key Findings

Malaysia is projected to grow more slowly in 2015.

  • Growth projections: 5.7% in 2014; 4.7% in 2015. 
  • Slowdown in China and uneven global recovery will dampen export growth.
  • Fiscal consolidation is on track and current account to stay in surplus, but risks to both if oil prices fall further.

Malaysia has reduced poverty and vulnerability; inequality is still a challenge.

  • Absolute poverty has nearly been eradicated.
  • Vulnerability is limited and declining.
  • However, inequality is still high compared to OECD countries (Gini = 0.42 in 2014).
  • Some gaps between ethnic groups remain, but inequality within groups explains most (96 percent) of overall income inequality.

Growing the middle class will promote shared prosperity in Malaysia.

  • The challenge is for Malaysia to transition from a middle-income nation to a middle-class society.
  • The middle class is an engine of economic growth and promotes social cohesion.

The ‘aspirational group’ that’s neither poor or vulnerable, but has yet to join the middle class now makes up the majority (51%) of Malaysian society.

  • It is largely urban and is comprised of smaller families. 
  • Their material asset ownership is similar to that of the middle-class.
  • They lack post-secondary education: only 16%, compared to 55% of the middle/upper-class.
  • Raising the aspirational group to the middle class will require helping them get jobs that earn “middle-class wages” and build up savings.

Post-secondary education is the pathway for the aspirational class to join the middle class:

  • Closing the existing large gaps in educational achievement at the post-secondary level will improve opportunities for higher-paying jobs.
  • Education subsidies are not enough. 
  • Long-term factors, such as parents’ education level, account for most of educational achievement gaps.
  • The government can further increase the pre-primary enrolment rate and raise the quality of the lowest performing schools.
  • For those who are already in the work force, making skills development programs more demand-led by employers will help with the skills mismatch.

Equity could be further enhanced by modernizing Government transfers, financed by more progressive taxes:

  • Government programs have lifted 50,000 households from poverty, but fewer, better targeted and more generous program would have an even greater impact without additional resources.
  • 73% of the aspirational group have some form of financial assets (88% of middle-/high-income households) but average values are low and inadequate to support a middle-class life into retirement.
  • The Government could consider making matching contributions to retirement account of some of the aspirational group to boost their balances.
  • These could be financed through more progressive personal income taxes, namely considering higher rates for top earners and enlarging the number of tax payers.