Poverty, Malaysia’s million-dollar problem

Ahead of Budget 2021, and amid Covid-19’s destructive effects on lives and livelihoods, the disproportionate hardships suffered by the poorest in Malaysia are unearthing more questions than answers.

The key question is: why do we still have poverty despite the country’s growth?

Some experts argue that a nation which focuses on helping its poor will experience growth as a result. Others say that emptying government coffers for cash payments to the poor means future generations will have to pay for such financial crutches.

Yet another view is that more cash for the poor would mean that the country will avoid future socio-economic instability, and the rich should be taxed more to pay for it.

The country is still growing but the growth rate is declining. In the 1980s Malaysia grew at an average rate of 9%, falling to 8% in the 90s, and now around 7%.

Economist Barjoyai Bardai tells MalaysiaNow, “You cannot grow at a high rate and have equitable distribution at the same time. Poverty is inevitable if you are aiming for high growth. That is true even in developed, high-income countries: high growth means the less advantaged will be left behind.”

Barjoyai, a professor at Universiti Tun Abdul Razak, says it is an illusion that increased taxation helps to redistribute income more equitably.

“Taxes are firstly to raise revenue,” he explains. “And taxes should be based on what taxpayers can afford, which means richer people should pay more tax. But trying to redistribute income and wealth through that method is not a workable proposition.”

“Poverty is inevitable if you are aiming for high growth.”

He says the problem lies in tax collection, not wealth distribution.

Malaysia’s progressive tax system is designed so that the wealthy should pay more than the poor but the reality, according to Barjoyai, is that mechanisms and loopholes in the system allow high-income individuals and organisations to pay less tax than they should.

Barjoyai explains that some high-earning organisations also enjoy a monopoly that shifts the tax burden to consumers, most of whom are lower income earners.

There is also the danger that higher taxation of wealthy individuals and organisations will drive capital abroad, as Sunway University’s senior economics fellow Yeah Kim Leng tells MalaysiaNow.

“Countries compete for wealth, and so governments are reluctant to impose too high a tax on the rich, as that may result in increased migration of capital across borders,” he says. “Plus, low taxes are more attractive to international investors.”

He adds that for an upper-middle income nation such as Malaysia, poverty is simply due to the issue of income inequality and wealth disparity.

“It should be the role of the government to uplift both the incomes and the economic opportunities of disadvantaged groups. The causes of those disadvantages for the urban poor include low wage levels, few income-generating opportunities, and poor education.”

He adds that low levels of skills-training mean the poor are only able to work at low-skilled jobs, often in competition with cheap foreign labour.

“The challenge here is to move lower-income groups to higher-skilled jobs with higher wages,” he says. “It doesn’t help that in labour-intensive industries, job creation is focused on low and medium-skilled jobs.

“As the country’s industries fail to move up the value chain, we will continue to see a large section of the workforce stuck in low-paying semi-skilled jobs because depressed wages combined with a rising cost of living, simply perpetuates poverty.”

He proposes as a solution, the creation of more well-paying jobs and more skills training and education for low-income groups.