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Transformation and the middle class

Posted on December 2, 2013, Monday

The way forward is increasing incomes and cutting living costs

I had a conversation with a friend in which he said, “Idris, you are missing the point with what you are saying about how transformation will benefit the middle class when the middle class concerns are rising cost of living, quality public education and high cost of properties.”

That robust and somewhat heated conversation inspired this article and I hope to explain how the middle class actually benefits from the Economic Transformation Programme (ETP).

Let me begin by saying there two perspectives to see how the middle class are benefiting from the ETP.

First, the income perspective. We need to create a lot of high income jobs. By creating 3.3 million high paying jobs between 2010 – 2020 under the ETP, the main beneficiaries are the middle class as most of those who will take up these jobs are the people who make up the bulk of the middle class. In addition, under the strategic reform initiatives, the Government is creating the conditions to allow businesses to flourish.

Small and medium enterprises, which are made up of people from the middle class will benefit too. The government has announced various funds and initiatives for SMEs running into billions of ringgit over the years. Furthermore, SME Corp has been created to provide the assistance needed to help them in terms of improving capability, access to market and funding.

Second, the expenditure or cost of living perspective. Malaysia is one of the countries in the world that has one of the highest levels of government subsidy. The middle class are not excluded from these. Billions of ringgits are spent by the government every year in subsidies on petrol, diesel, LPG, gas, electricity, water, flour, education, health, public transport, and public infrastructure. The government spends these billions of ringgit to ease the cost of living on the rakyat. Indeed, the middle class has been benefiting amongst others. In addition, the government set up PRIMA to build affordable houses. Under the NKRA on cost of living initiative, other Government assistance include Kedai Rakyat 1 Malaysia, Klinik Rakyat 1 Malaysia etc.

Allow me to deliberate further by highlighting some pertinent facts relating to the above perspectives vis a vis the middle class.

Who are the middle class? If we arbitrarily set a definition of household income of RM5,000 a month, about a third of Malaysians are in the middle class, according to Economic Planning Unit figures. Drop it to RM4,000, and the proportion rises to almost 45%. If we take account of different living costs, between rural and urban areas for instance, nearly half of Malaysians may well be in the middle class range.

The Government is certainly not ignoring the Malaysian middle class as there have been initiatives and policies set in their favour. Apart from tax cuts as announced by the Prime Minister in Budget 2014, there are efforts to curb speculation in property, which has pushed prices up to unaffordable levels, through increases in the real property gains tax. There are also schemes to develop affordable housing.

While these are concrete measures to help the middle class, the real impact as mentioned earlier will come in two ways -increase in incomes and efforts to cut living costs, both of which are goals of the government and the ETP.

The true north of the transformation process is to achieve a per capita income of US$15,000 by 2020 to move into developed country status with inclusiveness of all sectors and communities, and environmental, resource and fiscal sustainability.

In order to achieve the RM15,000 per capita income, we aim to attract RM1.4 trillion in investments by 2020 which is expected to create 3.3 million new jobs of which 60% are envisaged to be in the high value sectors under the 12 key economic areas under the transformation programme. The target job/employment creation is 330,000 per year in order to reach the 3.3 million jobs by 2020. Last year alone, the additional job/employment creation was 434,248, surpassing the annual target.

As incomes increase across the board, middle class salaries will increase as well, perhaps even more so than those at the top, as our measures to include everyone in the development process works. While incomes will likely increase, the disparity in incomes should decrease.

As we create more high value jobs in the economy, we must increase capabilities, key of which is quality education at affordable prices, training and professionalism.

In terms of the improving education for our children, the government has in place concerted programmes to improve schools, the quality of teachers and even principals. These initiatives are ongoing but it does not just stop here, transformation of the education system is a huge effort that requires many stakeholders to be on the same page.

We have also introduced policies such as minimum wage, extending the minimum retirement wage and measures to increase the participation of women in the Malaysian workforce – areas which I have written about at length in previous columns.

But it does not simply stop there. You simply cannot increase real incomes without increasing productivity, which is the amount one produces.

To take it down to a personal level, if you do more at work, you increase productivity. And when you produce more, your employer benefits more and he is then in a position to reward you more. We want employers to pay a fair wage back to you for work done and will continue to work towards creating an environment in which this can occur.

It is the middle class which will provide the managerial and other expertise so necessary to push industry and services up the income ladder. It will be they who will be driving our transformation to a high-income country. And they only stand to benefit from it.

The other part in ensuring that the middle class is taken care lies in keeping living costs down. If disposable income does not increase enough as couples start families to keep ahead of increasing demands of households, living standards will drop and this does not work to our favour as we pursue a developed nation status in par with our high income aspirations.

And whilst the government has the very large responsibility of ensuring that the cost of living does not rise drastically and affect quality of life, this needs to be balanced with ensuring that we do not run into financial trouble. We simply cannot operate like a welfare state.

The government has a very large subsidy bill running into the tens of billions of ringgit a year, depending on how you measure it, to try and contain this for the benefit of the public. But this system is inefficient as it helps everyone across the board, rich or poor, foreigners and locals alike.

This is why the government is moving towards a targeted approach through direct assistance to those who are most wanting. As incomes increase, even these will no longer be necessary and the excess funds can be channelled to provide more and more public amenities as in developed countries.

Apart from these, liberalisation and anti-competitive measures play twin roles of keeping the economy open to global competition so that no one makes profits under tariff walls and keeping prices down to world market levels.

Thus far, the middle class has largely been focused on administrative, managerial and professional resources which require a good educational base. I consider it unfortunate for instance that many entrepreneurs are university dropouts.

With all their education and experience, the middle class is well placed to become accomplished entrepreneurs with the right balance of risk and conservatism. I believe this will become a new growth area for middle-class participation in future.

For those in middle class who aspire to be rich, there is no faster way than entrepreneurship – and for some, it has made them fabulously rich – but rest assured too that it would not be the easiest way to wealth.

Yes, it is not for everybody, but to end with a cliché, which nevertheless remains true today as it was a thousand years ago: Nothing ventured, nothing gained.

(Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit, and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my <mailto:idrisjala@pemandu.gov.my>)

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