State of households presentation at young corporate malaysia 15 april 2015

THE STATE OF HOUSEHOLDS

Presentation to Young Corporate Malaysians15 April 2015

Introduction

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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

The state of households

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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

All sources for the charts and tables can be found in the "State of Households" book

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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.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

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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

Percentage of Rural and Urban Households that have Pipe Water and Tandas Curah in 2012


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


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Unequal household incomesPercentage Distribution of Households in Each Income Category in 2012: Malaysia and by ethnicity of the household head

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

Household expenditure

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Unequal spendingPercentage Monthly Spend on Goods & Services by Expenditure Category in 2010 (RM)


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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)

Oil & FatsSugar, jam, honey & confectionaryCoffee, tea, cocoa & non-alcoholic beverages

Fruits

Meat

Other food products

Milk, cheese & eggs

Vegetables

Bread & other cereals

Rice

Fish & seafood


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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 MultipleMalaysia 5.5x

Singapore 5.1x

Hong Kong 14.9x

Ireland 2.8x


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Low income consumerismA 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.

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


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The scourge of ‘ansuran mudah’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.

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No. of Luxury Cars Sold in 2013 by Official Distributors


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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.


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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


Growth of Real Household Income and Real GDP per person 1995 - 2012

Average Monthly Household income

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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.

No. of Households per Household Income Category in 2012 (thousands)

No. of Households per Household Income Category in 2012 (thousands)


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Market and net inequalityRedistribution: The Top 25% and the

Bottom 75%


Subsidies and cash transfers

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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.


BR1M payments and total costs

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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


Malaysian workers

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Low pay high profits

Growth of Wages and Productivity

All sources for the charts and tables can be found in the "State of Households" bookNote: According to DoS, productivity is defined as average sales value per employee.

Share of Wages/Salaries on GDP

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Our workforce

Median Wages and Employment by Occupation

3.19 M

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.


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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


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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.


Median Salary/Wages by Education

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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.

Out of every 100 children in a cohort of 6 year olds...

Secondary schools and TVET numbers and enrolment


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A vicious 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.


Trade and investment policy

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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.


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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.


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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.


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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


Conclusions and recommendations

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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.


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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.


Extra slides

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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

headpersons per household


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P. Pinang59.6

Perak49.7

Pahang40.6

Melaka28.3

N.Sembilan34.3

Kedah 31.6

Kelantan17.4

Perlis 4.3

Rich and poor states

Nominal GDP per person in 2012 (USD) Nominal GDP per person by State in 2013 (RM)

SingaporeSeoul

Kuala LumpurKorea

Bangkok [2011]Jakarta

MalaysiaTerengganu

ThailandIndonesiaKelantanSri Lanka

26,82953,516

13,29711,48710,387

24,24022,590

7,435

2,876

5,3903,5913,481


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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.


Chicken Prices 2012 – 2014 YTD

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Unemployed graduates

Employment Status of 2012 Graduates

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:


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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.


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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.

Benefits, % of EBIDTA Across Countries


Government & Nonprofit

State of households presentation at young corporate malaysia 15 april 2015