Is their financial pain a mere perception and nothing more than
the usual middle-class gripe or is it a reality? And what can we do to resolve
this?
We dug up some numbers and analysed them in an attempt to seek
some answers.
Our extrapolation of data from the Employees Provident Fund
shows that the income levels of Malaysians have generally kept pace with
economic growth, and have outpaced inflation.
Between 1990 and 2012, Malaysian wages, as extrapolated from the
EPF data, increased from RM7,039 to RM31,426 per person (see Chart 1). Income
growth during this period averaged about 7% per year. On a macro basis, looking
at the labour costs’ share of Malaysia’s GDP, the ratio has also been
relatively constant throughout the years.
What is interesting, though, is that the growth in the average
Malaysian worker’s income — in local currency — has actually accelerated in the
past decade, even faster than in the US.
Average income levels, in ringgit terms, have grown between 1.6%
and 13.8% annually, doubling between 2000 and 2012. Combined with a ringgit
that has appreciated after being unshackled from its peg, Malaysian workers
have actually gained in terms of purchasing power over the past decade.
If wages are rising, why is there then discontent among the
middle class?
One reason is because there are actually two types of “middle
class” in Malaysia. One is the “urban” middle class, which is unhappy.
The other is the “rural or semi-urban” middle class, which is
relatively contented. Their incomes have also risen, but their cost base is
very much lower.
The disconnect in expectations between the two middle classes
was evident in the recently concluded general election, when a majority of the
urban people voted for Pakatan Rakyat while those in the semi-urban and rural
areas supported Barisan Nasional.
How did this disconnect come about?
A major problem lies in the weak ringgit, which results in
different purchasing power for the two “middle classes”.
The ringgit crashed during the 1997/98 Asian financial crisis,
and was subsequently pegged at RM3.80 to the US dollar from 1998 to 2005, from
around RM2.50 before the crisis (see Chart 2).
We estimate it took eight years — from 1997 to 2005 — before
income levels reached 1997 levels again in US dollar terms. It is only in the
past seven years that Malaysian income in US dollar terms has started growing
again but it is still low.
In US dollar terms, Malaysian salaries are 22% of the level in
the US, 16% of Australia and 24% of Singapore. It is true that the cost of
living in these countries is much higher, and one should not compare apples
with oranges. But if we compare purchasing power based on McDonald’s Big Mac
index, which is widely used, we are still very much worse off.
Let us look at the statistics.
In the US, average salaries are US$3,643 per month and a Big Mac
costs US$4.37. A worker there gets to buy 27 Big Macs a day.
In Australia, the average monthly salary is US$5,169 and a Big
Mac costs US$4.89, which means a worker there gets to buy 35 Big Macs a day.
In Singapore, a worker gets to buy 23 Big Macs a day based on
his monthly wage of US$3,417 with a Big Mac priced at US$4.85.
In Malaysia, the average salary is US$830 and Big Macs are
priced at US$2.62. The Malaysian worker gets to buy only 10 Big Macs a day — less
than half of his peer in Singapore and the US, and one-third of his peer in
Australia (see Charts 3 and 4).
The comparison using Starbucks is even more telling, as a cup of
Starbucks coffee is priced roughly the same throughout the world — in US dollar
terms. Using the Starbucks comparison, our purchasing power is 26% of a worker
in the US, 20% of Australia and 31% of Singapore (see Chart 5).
One could argue that not all of a person’s expenses are US
dollar-denominated or consist of imported products. But in an increasingly
internationalised and commercialised world, sadly they are.
The reality is that the urban middle class has a lifestyle and
consumption pattern that is largely US dollar-based or dependent on
international prices — from dining, groceries and shopping to education and
travel. This class is feeling the squeeze due to the weak ringgit.
In contrast, the rural or semi-urban middle class is not feeling
the pinch yet, thanks to a different consumption lifestyle. They substitute
Ramly burgers for Big Macs for half the price, and drink kopi-O at the “Mamak”
restaurant instead of Starbucks for a fifth of the price. This class is largely
contented, and also largely pro-establishment.
Indeed, if we were to create a “Ramly index”, the purchasing
power of this class of consumers would be roughly the same as those who consume
Big Macs in the US, Australia or Singapore. They will get to buy roughly 21
“Ramly” burgers a day (see Chart 6).
Ringgit kept weak to help industries
The weak ringgit is clearly a major problem for the urban middle
class as local salaries can’t keep up with an increasingly US
dollar-denominated and international cost base.
Why did the currency weaken?
The main reason was actually our own industrialisation policy,
which was started by former prime minister Tun Dr Mahathir Mohamad.
Mahathir took office in 1981 and introduced a well-intended
policy to transform the economy into a newly industrialised country. The policy
centred on attracting foreign direct investment (FDI), especially from Japan
and East Asia with the “Look East Policy”, and the creation of a corporate
elite class, especially among bumiputeras.
The strategy saw many successes. FDI poured in strongly, and
Malaysia was viewed as a roaring Asian Tiger in the 1990s. A largely
agriculture-based economy was transformed into an industrialised one. Our large
middle class today is a successful creation of that policy.
However, there were also unintended consequences of that policy
on the ringgit.
To make Malaysia more export competitive, the ringgit had to be
kept low. With export sales denominated in US dollars and costs in ringgit, a
lower ringgit helped to make products cheaper in US dollar terms and, at the
same time, boosted the profits of Malaysian corporates and industries.
This was further assisted by a policy that kept interest rates
low and reduced the funding costs for big businesses to grow through debt.
In fact, real interest rates were very low and negative in some
years, even though Malaysia’s Consumer Price Index understates real inflation
for urban dwellers. The ringgit has also been on a depreciating trend since
1981, even before the big decline during the 1997/98 Asian financial crisis
(see Charts 2 and 7).
The weakening ringgit was also a consequence of the fact that
many of these new industries were not globally competitive. In other words, we
had import costs from a weak ringgit but no export gains for some of our huge
industrial projects.
The strategies and consequences above helped create the
corporate elite of all races.
The effects of this policy are now mostly felt by the urban
middle class who suffer from low US dollar purchasing power and negative real
interest rates on their savings.
Eventually, though, the rural and semi-urban middle class will
begin to feel this as their lifestyle changes. Going forward, this is a
potential political risk for Barisan Nasional.
The solution: Promote a stronger ringgit
Mahathir’s economic policies worked well in the past to
industrialise Malaysia and created the middle class. It was indeed necessary in
the 1980s with high levels of unemployment and fluctuating commodity prices.
Today, however, all our cheap labour consist of foreigners. FDI
is falling. The old low-cost manufacturing hub model no longer works, and
indeed it now creates major social costs and problems.
A new strategic policy is needed to bring the country to the
next stage.
It is time to have a policy of positive real interest rates and
to promote a gradual appreciation of the ringgit.
Corporates and industries must be forced to become more
efficient and make products that are more globally competitive, and capital
must be more efficiently utilised. We can learn from countries that have
successfully moved out of the middle-income trap.
This report and the accompanying charts are published in The Edge, Oct 14-20 issue.
