New look into poverty in Malaysia – Lee Hwok Aun

Malaysia’s relentless reduction of poverty is a major chapter in its success story. The record is striking: the proportion of households classified as poor fell from 49.3% in 1970 to 12.4% in 1992, reaching a mere 1.7% in 2012.

By now, Malaysia has almost totally eradicated poverty, according to these official estimates.

We should be mindful, however, that these numbers have specific context and limitations.

They are referenced to an absolute poverty line income (PLI) – a level of household income considered sufficient for meeting basic needs, from food to clothing and shelter, as well as education, health, transportation and recreational expenses.

The poverty rate, which counts the poor as a percentage of the population, hinges on the PLI.  Malaysia’s latest PLI of RM830 (as of 2012) per month for a family of four corresponds with a certain poverty rate – a low figure, since not many households earn that little.

If the PLI is RM1500, we get a higher poverty rate, because more households fall below that threshold.

Unsurprisingly, our poverty measurements are often greeted with incredulity. Is RM830 really adequate for a family of four to obtain their daily necessities (the line is higher for Sabah and Sarawak)?

Shifting consumption patterns and technology alter the composition of basic necessities, especially for urban residents, which now comprise 70% of Malaysia’s population. Is the existing poverty line truly identifying the poor and helping Malaysia keep track of its progress?

One obvious response would be to review the PLI. This will take some effort, but it is technically not difficult. The greater impediment, it seems, is more political: if recalculations raise the PLI, and consequently increase the poverty rate, this could disrupt the near poverty eradication so central to the Malaysian success story.

Well, that’s not entirely true. If we revise poverty estimations backwards in time, Malaysia will assuredly still trace out a declining poverty trend – though perhaps it will not be as impressively steep and probably hover at higher levels.

This absolutely can be done. Notably, Thailand comprehensively revised its poverty measurement, for the present and past, resulting in higher poverty rates across a few decades.

Its exercise in 2013 revised the poverty rate from 8.1% to 19.1% for 2009, and from 14.8% to 35.3% for 1996. Thus, it still produced an historical record of falling poverty.

The absolute poverty rate remains a powerfully simple, easily understood, and relevant measure, and it should be continually applied and refined.

However, the method has two further limitations that underscore the need to apply additional lenses and to expand the scope of how we identify and try to resolve poverty.

First, Malaysia’s development challenges increasingly revolve around exclusion and inequality, which are inadequately captured from the perspective of absolute poverty. Households at the lowest social strata are characterised less by being unable to buy food and shelter, more by being left behind in terms of wage and salary levels.

In other words, relative poverty grows in importance as a focus of analysis and policy making.

This type of shift toward greater emphasis on relative poverty has taken place in most high-income countries. The reference point is not a pre-determined poverty line income but current median household income – the household squarely in the middle, with half of the population earning more income and half earning less.

Households are considered relatively poor if their income is less than 50% (or other proportion, like 60%) of median household income. For instance, if median income is $3,000, households below $1,500 are considered relatively poor.

This measurement adds insight to the state of lower classes, by showing the extent they are being left behind. At the same time, we also find out about the middle classes, a key feature of more inclusive development.

A growing middle class corresponds with clustering of households near median income, and hence a smaller proportion below the relative poverty line. The Malaysian Human Development Report calculated a relative poverty rate of 20% in 2012. This compares with an average of 11% among the OECD advanced economies.

A second limitation of our official poverty statistics is that they are income-centric, and do not sufficiently capture living conditions and human capabilities. Having more income is good but, in line with the notion of human development mainstreamed by the economist and philosopher Amartya Sen, ultimately what matters is whether lives are more liberated, empowered and fulfilled.

Lower-income poverty tends to correspond with better educational attainment, health status and living conditions, and more freedom for people to make choices and exercise their capabilities. However, these outcomes are not automatic, not guaranteed. Whether they actually materialise must be investigated.

Broadening the scope from income to human capability sheds more light on the Malaysian story. Sarawak’s case is instructive. The government computes the following official income poverty rates for 2012: 8.1% in Sabah, 2.4% in Sarawak, 1.7% in Malaysia as a whole.

These figures give the impression that Sarawak’s progress in poverty eradication is virtually the same as the peninsula, and that Sabah remains the lone frontier of destitution.

Are socioeconomic conditions in Sarawak on a par with the peninsula and that much ahead of Sabah? We need to look beyond income. Indeed, as the MHDR compared education, health, wages and living conditions across these regions, we found that both Sabah and Sarawak are substantially lagging.

Emphatically, Sarawak is not far ahead of Sabah, in some aspects, notably education and wages at the bottom end, Sarawak trails Sabah. We gain a fuller picture of the socioeconomic disparities by observing a broader range of data.

Undeniably, it is inadequate to compute, target and monitor absolute income poverty alone, as we have been doing. Such assessments should continue, with efforts at improvement. But Malaysia will do very well to add new lenses of relative poverty and human capability to our analysis and policy making. – June 11, 2015.

* Dr Lee Hwok Aun is a senior lecturer in the Faculty of Economics and Administration, Universiti Malaya.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.