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Poverty

Has Malaysia Virtually Eliminated Poverty?

Officially there is almost no poverty left in Malaysia. Yet since coming to visit the country this month, I have read and heard a few people question this claim. So I thought I should look at the issue more closely. (I have been based at the University of Malaya, as the visiting Royal Ungku Aziz Professor; many thanks to this great University for their hospitality. This blog post is based on a presentation I gave at the University.)

The data available from Malaysia’s Department of Statistics (DOSM) suggest that the country has made huge progress against poverty. The official poverty rate has fallen from nearly 50% in 1970 to just 0.4% in 2016 (the latest year available).

However, when one probes further there are reasons to question the claim that Malaysia has virtually eliminated poverty. The official poverty counts are based on a line that has had a fixed real value over time. Currently the line is MYR 920 per household per month, or a little over MYR 7 per person per day, at average household size.

How does that compare with other countries? For that purpose we need to use Purchasing Power Parity (PPP) exchange rates from the International Comparison Program (ICP). The last ICP was for 2011, when the official line was MYR 800. At average household size this is equivalent to MYR 6.41 per person per day. When converted using the PPP for consumption from the 2011 ICP that comes out at almost exactly $4 per day. (Note that the PPP rate is well below the exchange rate given that many goods and services are cheaper in Malaysia than in the US. Unlike market exchange rates, PPP rates are based on the actual prices paid by people.)

Malaysia’s official line is well above the World Bank’s international poverty line of $1.90 a day. But it should be well above that line! The $1.90 line is deliberately low, being anchored to poverty lines found in the poorest countries. If one looks instead at countries with a roughly similar average income as Malaysia, one would expect the poverty line to be about $12 a day—three times the current line in Malaysia. That would indicate a national poverty rate of about 20%, not 0.4%! The following graph shows how Malaysia’s poverty line compares to the poverty lines found in other (non-OECD) countries. Malaysia’s current official line is clearly well below what one would expect for a country with its current average standard of living.

malaysia_s official poverty line is lower than expected

I am not the only one to ask whether the current official line is defensible. For example, in one comment in the Star, in 2018, a Malaysian politician (the Deputy Minister of International Trade and Investment), Dr Ong Kian Ming, wrote that “As wages climbed and we became a middle-income nation, we didn’t increase the standard for what is considered decent living above the poverty line.” Dr Ong has a good point in my view. $4 a day may well have been a sensible line for Malaysia in 1970. But that is no longer clear; real income per household in Malaysia has increased over five fold since 1970! In terms of the World Bank’s income classifications for countries, Malaysia has gone from “low-income” to “upper middle income.”

To see how much all this might matter, I have calculated illustrative alternative lines that rise with average income over time in a seemingly sensible way. The slope as mean income rises is 1:3; so for each MYR 10 increase in the mean, my line rises by MYR 3.33. But I also gave the line a lower bound; I set this at the official “hard-core” poverty line, which I reckon to be about $2.50.

This gives what I call “weakly relative lines.” The “weakly” refers to the fact that the poverty line is not directly proportional to the mean (so that is has an elasticity less than unity). Making the line directly proportional to the mean (“strongly relative”) has the very odd property that if all incomes (including that of the poor) rise by the same percentage then poverty does not change. (They also have the strange property that the poverty rate can fall in a recession. For example, if one uses strongly relative lines for Malaysia I have found that the poverty rate fell during the Global Financial Crisis of 2008-10. That is clearly wrong.) Weakly relative lines are much more sensible.

The following graph compares my new series of poverty measures for Malaysia with those for $4 a day. We see a very similar pattern over time, and a marked longer-term decline in poverty incidence. But there is still a lot of poverty left. Progress, yes, but there is no room for complacency about poverty in Malaysia!

absolute and (weakly) relative poverty in

By the way, when I said above, “from the data available” I was hinting at another fact about Malaysia. Unlike many countries today, Malaysia does not have full open access to its household survey data on incomes and expenditures—the data used to measure poverty and inequality. I have had to work from (less than ideal) published tabulations, helped by the World Bank’s PovcalNet data site. I understand that researchers can apply to DOSM for selected variables for sub-samples of the survey data. But the full household-level data are not available. And only the full data can reveal the many dimensions of living standards and their correlates–the joint distribution of the household data.

Access to public data also needs to improve if Malaysia is to maintain high standards of research on poverty, inequality and socio-economic policy going forward.

 

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