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Ideas: Tough policy choices needed for Malaysia to achieve Shared Prosperity Vision 2030

Written by Adli Amirullah & Ali Salman

Published in The Edge Malaysia on 21st of January 2020

The federal government budget for 2020 is themed “Driving Growth and Equitable Outcomes Towards Shared Prosperity”. This follows the launch of the Shared Prosperity Vision (SPV) 2030 in October 2019 by the Prime Minister. During the launch, he mentioned that the “SPV 2030 is an effort to make Malaysia a country which is developing sustainably with fair economic distribution  as well as equitable growth at all levels of incomes, ethnics, regions and supply chains by 2030”.

Although the SPV is a multi-dimensional document, we believe the heart of the matter is the inequality debate in Malaysia, which has three dimensions: inter-racial, intra-racial, and inter-regional. There is hardly any emphasis on intra-racial inequality in the SPV.

This statement by the Prime Minister does allude to it: “The main reasons stunting the development and distribution of the country’s economy (pie) are corruption and abuse of power…”

Shared Prosperity is not a new concept. The World Bank in its report titled “Poverty and Shared Prosperity: Piecing Together the Poverty Puzzle” (2018), also emphasised on the same and defined it in terms of both absolute poverty and inequality. The report stated:

“we also need to recognize that societies have not stopped thinking or caring about poverty even if it has become much less apparent in its extreme forms. There is a need to expand our understanding of poverty as a complex, multifaceted problem and identify pockets of people who are impoverished but who have remained unnoticed.”

Despite the notion of sharing prosperity among the Malaysians, our country still faces enormous challenges to overcome inequality. The introduction of the New Economic Policy (NEP) in 1970 has somewhat successfully reduced the relative income between the T20 and B40 group from 9.67 times in 1970 to 5.64 times in 2016, as reported by the Khazanah Research Institute. However, the same report pointed out that the absolute income gap between the T20 and B40 households have risen from RM3,253 in 1970 to RM13,230 in 2016. This may have to do with a general rise in the standard of living. It means either the T20 household income level has grown faster or the B40 household income level has grown slower, or it may be both.

Besides the significant increment of the absolute income gap, Malaysia is also facing the problem of gaps in wealth ownership. According to UNDP, the top 40 richest Malaysians’ wealth ownership has gone up from 15.7% of GDP in 2006 to 22.4% of GDP in 2012. To put this into perspective, we can look at the distribution of Amanah Saham Bumiputera (ASB)’s fund in 2017. As reported by ASB, 76% of ASB unitholders own less than 3% of ASB units whereas only 10% of ASB unitholders own more than 80% of ASB units. This example by itself is a good indicator to show how skewed it is the wealth distribution in Malaysia.

Moreover, wages in Malaysia have not kept up with productivity, particularly in low paid sectors. As reported by the Bank Negara Malaysia (BNM), Malaysia’s ratio of wages to productivity in sub-sectors such as mining, manufacturing, construction, services, retail, IT, finance, and utilities is way below than those at the developed nations such as in the UK, US, Germany, and Singapore. This is obviously reflected in significant gaps in the per capita incomes of these countries.

The big question now is, can Malaysia achieve Shared Prosperity Vision in 10 years? The answer is multi-dimensional. Part of the answer lies in increasing government fiscal reserves without resorting to an increase in the tax rates. Another part of the answer also lies in encouraging the private sector to increase the wages. To some extent, this can happen through increasing automation.

Since the reversal of GST to SST, fiscal sustainability has been a considerable discussion in the public policy sphere. Without a reliable value-added tax, the Malaysian government might face difficulties in attending the B40 needs in the long run. As for now, the Pakatan Harapan government has improved fiscal discipline but their reliance on the dividend from petroleum has increased. It is not sustainable.

Reintroduction of value-added tax like GST must be done in a way that it addresses the concerns that led to its abolition, including that the burden of the tax falls disproportionately on the middle class. To address this, we at IDEAS proposed the introduction of different GST rates for different purchases, including a higher “luxury” rate for purchases associated with higher-income households. For instance, if someone affords to buy a ten-grand handbag, he or she should be subjected to higher rates of value-added tax to encourage a fairer tax system where only the rich will pay more of the tax instead of the middle class.

To further enhance our fiscal sustainability, the government may consider implementing a progressive Capital Gains Tax (CGT) on profits made from the disposal of assets, including company shares. A progressive CGT will not only reallocate resources, but it also can be a tool to be utilised during the fluctuation of the business cycle. For example, when the economy is overheating, CGT will help to reign in speculative investments and when the economy is stagnating, CGT will encourage investors to leave their money in the capital market to support more sustainable development.

Shared Prosperity Vision 2030 per se has a noble economic objective i.e. fairer distribution of income. It is possible to achieve this by making tough policy choices but it should not come at the cost of growth, private sector mobilization and a competitive economy.

2020-02-03T11:03:06+08:00 21st January 2020|Opinion|Comments Off on Ideas: Tough policy choices needed for Malaysia to achieve Shared Prosperity Vision 2030