Question

Why Malaysians need a well-comprehensive social safety nets program?

Achieving high growth while ignoring the welfare of the lower income group is an unwarranted act. Like the rest of the world, Malaysia suffers from the increasing gap between the rich and the poor despite the low incidence of absolute poverty today compared to in 1970s. Urban poverty is rising too together with the relative poverty due to income inequalities within and among the ethnic groups and the different social sectors. The report by Economic Planning Unit (EPU) states that although the overall poverty scenario is not very extreme with only 0.6% people are absolutely poor, high poverty incidence is still prevalent in the poorest states of the Peninsular and East Malaysia. For example, Sabah demonstrates the highest incidence of absolute poverty (3.9%) and followed by Kedah and Sarawak illustrating to us that the incidence of relative poverty is still significantly high across the country until today.

Malaysian households are divided into three main groups of household; a B40 household (total household income of less than RM3, 000 a month), a M40 household (between RM3,000 and RM6,275 a month), and finally, T20 refers to those households that earn at least RM13,148 a month. A 2016 report by Economic Planning Unit (EPU) explains that the country’s incidence of absolute poverty has declined over the years - from 49.3% in 1970 to 3.8% in 2009 and the rate went further down from 1.2 in 2004 to 0.7 in 2009 and the latest census in 2014, was about 0.60%. During that time also the household income of the bottom 40% population (B40) increased from RM535 in 1992 to RM865 in 1999 and it went significantly high to RM 2,537 in 2014. For the middle 40% (M40), average monthly income increased from RM1, 392 in 1992 to RM5,662 in 2014, while for the top 20 percent (T20), the average monthly household income increased significantly high from RM4, 022 in 1992 to RM14,305 in 2014 (EPU, 2016b).

The above statistics reflect the huge gap in income distribution with 72.2% of the bottom 40% of the Malaysian population (B40) are Bumiputera Muslim (72.2%) with majority of them are residing in Sabah and Sarawak. Selangor is known as the most flourishing as well as economically developed state in Malaysia and the incidence of absolute poverty is almost absent in this state but yet about 30% of its people are poor based on the new poverty line of RM1500 household income per month (Panirchellvum & Fai, 2014; Shazwan-Kamal, 2014). Malaysia might have successfully eradicated absolute poverty but the prevalence of poverty (poor and relative poor) is still high in this country. Hence, the socioeconomic policies and safety net programs as proposed in the new Budget 2019 are necessary and must be adequately implemented to ensure that every Malaysian earns sufficient income to meet his/her daily basic needs. 70% of the B40 are Bumiputera Muslims and the average income of Malay households is the lowest in this country as indicated in Table 1 below. The table clearly shows that Malay households have been the majority recipients of all the benefits.  

Table 1 below shows the average monthly income by race reported by EPU in 2016.,

Table 1: Average Monthly Income by Race

Income by race                        2004                2007               2009               2012                2014

Bumiputra                               2,711               3,156               3,624               4,457               5,548

Chinese                                   4,437               4,853             5,011               6,366               7,666

Indians                                    3,456               3,799               3,999               5,233               6,246

Others                                     2,312               3,561               3,640               3,843               6,011

Urban                                      3,956               4,356               4,705               5,742               6,833

Rural                                       1,875               2,283               2,545               3,080               3,831

Source:(EPU, 2016b) Social safety nets: the Good and the Bad.

Economists discuss the indirect effects of these programs. Firstly, providing safety-nets to people give people the ability to take more risks. The safety nets program mitigates the fall in people’s income and subsequent spending due to loss in income. With a safety net people continue to get some money and help from the government to buy basic goods, search for new jobs and/or start small businesses. Having not to worry about the health-care and basic living necessities for their loved ones, the employed workers are more willing to take risk of resigning and searching for better jobs or being a self-employed. With the cash transfers and vouchers, the unemployed employees and their families continue to consume and help keeping the whole economy afloat. In contrary, the newly unemployed workers who lose jobs due to companies’ downsizing and closing their operations would have to start spending a lot less in the absence of social safety nets affecting other companies’ sale revenues. Safety nets do to some extent prevent the possible closure of any businesses in the coming months to snowball into a big economic crisis.

Arguments against safety nets focuses mainly on the disincentive effect of government-funded social programs on work, investment and savings. They argue that the recipients of the benefits become complacent, lazy and overly-dependent on government’s subsidies. Rather than save or invest to earn more, most of the extra income will be consumed given their high marginal propensity to consumption relative to higher-income group. However, this is actually good during a slow growth period. The presence of safety nets help to soften the negative perception and economic impact of lower development expenditure in Budget 2019 then in 2017 and 2018. In addition, global uncertainties continue to remain subdue in 2019 with the on-going trade war between the USA and China.

A paper written by World Bank reminds us that safety nets are short-term measures and cannot serve as poverty reduction tools nor provide effective social welfare protection. It has to be complemented with macroeconomic reforms and policies to generate sustainable growth in the long-run. A holistic approach on economic growth is the right path. In today’s world, everyone is hoping for an economic system that is capable to combine the efficiency of free market economy with government providing its citizens the social rights to education, health and decent standard of living. This is what the new government hopes to achieve with the proposed budget. The biggest task is ensuring proper implementation of the subsidies, avoiding any leakages in the system and motivating all Malaysians to work harder and not to be left behind. Taking the opportunities given for new startups, money being well-spent and no wastage of resources anymore.

Questions:

1. To what extent, the previous Budget 2019 has helped the B40 group and reduce the gap between the rich and the poor in this country.

2. Give your comments on the recent Budget 2020 that clearly outlines the government’s initiatives on elevating the rakyat’s employability and financial well-being through various programmes.

1. 1. Does it meet the people’s expectation — in terms of cost of living, including welfare and economic support — the new government prioritise social and economic sectors?
   2. Do you support the fuel subsidy scheme introduced in the budget 2020 and the higher minimum wage legislation?
2. 3. Does the budget encourage the private sector investment local and abroad? Bringing in more value-added investments.
   4. Does the budget create more competition, encourage greater meritocracy and higher productivity?

Answer 1

Ans:

The previous Budget 2019 has helped the B40 group and reduce the gap between the rich and the poor in this country in the following ways:

The Budget 2019 provided safety –nets to people which helped the people in taking more risks since they are now more capable to take risk of resigning and searching for better jobs or being a self employed.

Now the unemployed employees and their families can continue to consume with the help of cash vouchers and transfers provided in the Budget 2019 .

Safety nets program not only help in mitigating fall in people’s income and subsequent spending due to loss in income but also prevent the possible closure of any businesses in the coming months.

Ans (b)

Yes , I support the fuel subsidy scheme introduced in the budget 2020 due to the following reasons:

1.It will reduce the leakages and cross border of subsidized fuel.

2.The fuel subsidy will come into force when  market price, determined by the Automatic Pricing Mechanism is above per litre.

Yes , I support the higher minimum wage legislation introduced in the budget 2020 due to the following reasons:

1.It would totally eliminate  the lower minimum wage currently paid to tipped workers.

2.It would also eliminate subminimum wages paid to workers with disabilities.

Ans (c)

Yes , the budget encourage the private sector investment due to the following reasons as under:

1. The Budget has decided to invest in financing self reliance which will involve private sector investments.

2. The Budget  anticipates to buy innovative financial tools in support of Administration priorities with the new Development Finance Corporation , building on the USAID Development Credit Authority. This would use private sector investment in support of U.S. foreign policy and development goals.

3. The Budget has decided to facilitate private investment in power-generation and create new opportunities for economic partnerships.

Ans (d)

Yes , the budget create more competition, encourage greater meritocracy and higher productivity due to the following reasons as under:

1. It provide access to finance to women entreprenuers thus encouraging women to participate in economy by removing all sorts of barriers for her thus leading to higher productive economy.

2. The budget also supports trade faciliation, promotes transparency and accountability further taking measures for removing corruption thus promoting fair competition in the market economy.