Two weeks ago, both this column (“Special Report: Better to be equal and poor or unequal and richer?”, Feb 10, 2025) and the World Bank (“Reducing inequality and enhancing mobility in Malaysia”, launched on Feb 5, 2025) wrote about economic growth and economic inequalities. We can all agree that not all economic inequalities of outcomes are bad. Indeed, inequalities arising from meritocracy (where there is equality of opportunity — or as we call it, without economic injustice) are essential and beneficial for societies and nations. We argued that the world could better focus on economic growth and economic justice — where striving for both is not contradictory. This would be better than the constant swings in trying to achieve the two extreme goals of growth and equality, where the world is relentlessly forced to choose, or finding the illusive middle ground. This is evidenced historically in the continuous pendulum swings between Keynesian interventionism, “spend baby spend” fiscal policies with high taxes and left-wing progressive inclusivity and Milton Friedman’s free-market liberal, supply-side, small government, low taxes and monetarism.
This article is an attempt to expand on our previous article, by also incorporating the data, results and analysis from the World Bank report, which was prepared in close collaboration with the Ministry of Economy of Malaysia and the Department of Statistics Malaysia (DoSM). The report was launched by the Minister of Economy. In other words, the data is from DoSM and the views, opinions and results presented are supported by the government, likely after consultation.
The reason why we felt strongly about writing this article is because while we agree with the diagnosis of the World Bank report (the identification of the problems and challenges confronting the nation), we believe the World Bank, and perhaps the government of Malaysia, is wrong on the policy recommendations (the solutions). Perhaps there is some reluctance to narrate “honest, truthful pains”. And this is important because the policy options, as articulated, will lead to a worse outcome. Yes, we are not so arrogant as to believe we are absolutely right. After all, the World Bank, DoSM and Ministry of Economy are highly credible institutions, with very qualified people possessing vast experience. But we will articulate our reasons and provide the evidence, and you can be the judge. At the very least, we think our views should serve as a wake-up call for the standard economic prescriptions that were presented. We also happen to believe that in economics, there are no eternal or definitive truths. And the way we see the problems and the solutions are also formed by our beliefs and values, besides our interests.
Need to double productivity to achieve high-income-nation status
The role of every government is to create economic growth and opportunities so that the people can enjoy a higher standard of living — where cost of living rises slower than wage growth, where there are many good jobs and business opportunities, and welfare and social safety nets; address poverty and social inequality; promote economic justice in terms of economic opportunities; maintain law and order; defend national sovereignty; provide public services; uphold rights and freedom and justice; manage emergencies and foster national unity. For the purpose of generalisation, we often use the term “high-income nation” to reflect the economic goals above.
The World Bank and the Malaysian government had previously presented a report titled “Aiming High: Navigating the Next Stage of Malaysia’s Development” (March 16, 2021) that examined the country’s journey towards achieving high-income-nation status.
See also: Time to cut government spending to reduce tax and boost investments, productivity and wages
Chart 1 is taken from the latest World Bank report. The goal of high-income country (HIC) requires Malaysia’s GDP per capita to grow at 5% annually from now to 2050. To achieve this, worker productivity must grow at twice the rate of the past three decades. At current productivity levels and labour force participation, the World Bank estimates that per capita gross domestic product (GDP) growth for the next 25 years is only 2.25% annually. In short, we will fail in our economic drive to improve the livelihoods of Malaysians to that of a high-income nation by 2050, unless we can double up on our labour productivity from now.
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Over the last two years, in this column, we have written many articles on this subject, including the fact that our economic policies have failed in the past due to politics, that falling relative competitiveness (reflected in the secular decline of the ringgit) is due to poor government policies, and the fact that low wages, low costs, low competition, sustained through extensive state subsidies, was an intentional policy decision.
The government, the World Bank and this column have articulated many policy measures necessary to enhance productivity, including removing barriers to competition and rent-seeking; better utilisation of labour — including women; as well as various reforms, including on institutions and corruption. There is no reason to doubt the government’s sincerity, the delays are due to political pragmatism. So, we will not delve into this. Here, we want to only focus on improving labour productivity — and as stated above by the World Bank, if we cannot double up on our labour productivity as a nation, then we would have failed in our publicly articulated economic agenda.
We reproduce a table here (Table 1) that was published in one of our previous articles (“Secular decline in ringgit’s value due mainly to falling relative competitiveness — a result of decades-long poor government policies”, March 4, 2024). Over the last decade, our productivity gain was only 2.3% annually, the lowest among our neighbours. It is lower than the real wage growth. Meaning, despite the low wages in Malaysia, workers are certainly not underpaid. We have provided the reasons why our workers are not as productive in past articles and will not repeat them here.
The most interesting item in the World Bank report is their analysis that inequality of opportunity accounted for 65% of total income inequality in 2022. As we mentioned in our article two weeks ago, inequality of opportunity is economic injustice, arising from pre-determined circumstances in life, from systemic barriers, discrimination, corruption and lack of access to education and resources. The same report says lack of educational access accounted for 25% of total income inequality (inequality of outcome) or almost 40% of economic injustice (inequality of opportunity). And it goes on to say that this economic inequality of opportunity had in fact risen from 61% in 2004. So, all the efforts to assist the poor and low income (B40) to better their opportunities, be it education or health or other forms of welfare assistance, over the last 20 years have failed. This is a huge and significant conclusion, but unfortunately, the report did not provide any data or their methodology. For now, let’s assume this conclusion is based on science and data, and verifiable.
We know we have jumped a few steps in the causation of economic inequalities of opportunities on productivity, wages and economic growth — but we assume you understand. There are many books to explain and provide evidence on this.
The World Bank’s recommended solution to its conclusion is that the country needs to spend more on social protection, health and education. This was further justified on the basis that Malaysia has not spent sufficiently, that what was spent is lower than in benchmark countries.
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Since the recommendation is that the country needs to spend more, we need to raise more money — don’t we love to spend more if we do not have to earn it? This is the fallacy of Keynesianism and Modern Monetary Theory (read The Deficit Myth by Stephanie Kelton). The World Bank suggests that more money can be found by reallocating expenses (including fuel subsidies), raising taxes, especially on the upper-income brackets and broadening the tax base, and imposing consumption tax. This is despite the fact that the T20 already contributed a massive 85% of personal income taxes collected in 2022, according to the Inland Revenue Board (LHDN), while the M40 accounted for 13% and the remaining 2% came from miscellaneous categories.
In fact, Chart 2 shows that Malaysia’s government revenue and public spending as a percentage of GDP are comparative to other countries. Of course, the composition of the revenue and expenses must necessarily vary between countries due to differences in their economic structures. For instance, because Malaysia is a net exporter of oil and gas, taxes contributed by Petronas will be relatively higher, which also means the percentage of personal income taxes must be comparatively lower. The point is, we are not under-collecting in terms of tax revenue nor are we underspending on public services, contrary to the World Bank’s conclusion.
Let us now present our evidence and arguments for why we disagree with the recommendations of the World Bank.
It’s not the amount of money spent but the efficacy of the spending
Has Malaysia underspent on education? Spending on education by the federal government as a percentage of GDP fell from 6% in 2000 to 4.5% in 2020. Malaysians with at least upper-secondary education accounted for 62.6% of the population in 2019, compared with 74.5% in Singapore and 76.4% in South Korea. But this is not the entire story.
The government has, over the years, outsourced education and healthcare for the middle-class and above to the private sector. Because of the perceived declining quality of the public schools, middle-class families who can afford it have increasingly sent their children to private and Chinese-medium schools. The same is true of post-secondary education. Just take a survey on the mushrooming of private colleges and schools. The World Bank and DoSM should collate this data and if added to what the federal government spends on education, we would be surprised that as a nation, we invest less on education than benchmark countries. Based on our data, the nation’s total spending on education (public and private) is not out of sync with other countries (see Chart 3).
A logical question surely is the quality of our education and whether the nation is getting poor outcome of the money spent. In various parts of the World Bank report, there seems a cursory allusion to this, but perhaps it is an area that is too sensitive. We refer to our own article of “Economic policies dictated by politics in Malaysia — why they fail”, Jan 22, 2024 and reprint the tables (Table 2 and 3).
Our observation of the declining quality of our public education is supported by two observations in the World Bank report, the reason for which the authors could not explain. We reproduce a chart (Chart 4) from the Executive Summary, “Reducing Inequality and Enhancing Mobility in Malaysia”, Figure ES.23 on Page 26.
More than 30% of Malaysians, and close to 50% of young people under 35 years old, are employed in jobs that require less education than they have. To quote from the report, “The skills many students acquire in tertiary education are those not needed by higher value-added firms”. To which we add, perhaps the quality of their education or the discipline pursued does not match the needs of the private sector?
The other interesting observation in the World Bank report is contained in Page 4 of the Executive Summary, which is quoted here. “Improvements in educational attainment helped close the earnings gap between bumiputera and other workers over the last two decades. Endowment gaps, primarily in education, explained 77% of earnings difference between bumiputera and non-bumiputera in 2004-2012 but just 58% in 2014-2022. The contribution to earnings difference between the two groups that cannot be explained by differences in worker endowments actually rose between the two periods, accounting for 42% of the total earnings gap in 2014-2022. More research is needed to understand why bumiputera workers earn less than non-bumiputera workers with similar levels of education and therefore what complementary policies may be needed. This may reflect, for example, (unmeasured) differences in educational quality, or field of study chosen, or soft skills acquired, among others.” What we think — that more bumiputera students are educated in local universities while many non-bumiputera students are educated overseas would generate such an observed outcome if the quality of local education is poor and declining. And a simple way to test this hypothesis would be simply to get two different data sets, both containing bumiputera and non-bumiputera graduates, with one containing only local graduates and the other only foreign graduates.
Finally, this may also explain the very first contentious conclusion, that inequality of opportunity in Malaysia accounted for 65% of total income inequality in 2022, and surprisingly, this inequality rose from 61% in 2004, despite all the government efforts and costs to assist the lower income group and provide more opportunities, especially in education. And yet, educational inequalities accounted for 40% of this inequality of opportunities. We understand the World Bank results are based on a dataset of 10,000 observations. Assuming that this data is biased, collected predominantly from those educated locally, who are predominantly bumiputera, the observed conclusion will be consistent with a declining quality of local education.
So, if the right diagnosis is poor quality of local education, why not simply focus on improving this? Why throw good money after bad? Monitor and test the students regularly. More importantly, test the teachers on subject matter, to assist them. And use technology, digital learning — where a few excellent teachers can reach out to thousands, with trained assistants physically present in classrooms. Use English for STEM (science, technology, engineering and mathematics). And adopt many other good ideas that have been articulated by educational professionals.
We end this section with Table 4, which shows the amount being spent on public and private education and the number of students. Note that the figures are for different years due to the severely limited publicly available information. Nevertheless, it does suggest that government spending on tertiary education is likely higher per student than what is spent privately, yet public education is generating poor outcomes.
The middle class is already suffering from high ‘taxes’ (for education and healthcare)
Let’s now move to taxation. It is a myth that Malaysians pay too little in taxes. The top 60% pays 98% of the total personal tax collected by the country. And worse, because the government outsourced quality education and healthcare to the private sector, the middle class in Malaysia also pays for education and healthcare for themselves and their children — whereas in other countries, it is the government that pays, and quality education and healthcare are free for the people. When the cost of this private education for their children and private healthcare for themselves and their family are added to the taxes paid each year, it is obvious that the personal tax rate in Malaysia for the middle class is high.
The evidence that the middle class is being squeezed and bruised by taxation, rising cost of private education and healthcare, high cost of living with little to no subsidies or financial assistance, is evidenced in the declining gross national savings over time (see Chart 5).
This is also evident in the many studies done by the government and its agencies showing low disposable incomes, lack of savings for retirement and emergencies. We are also reminded of a study by Khazanah Research Institute that says only the top 30% of Malaysian households exhibit spending patterns associated with the middle class, such as discretionary spending on non-essential goods and services. In contrast, the middle 50% often navigate trade-offs between essential needs and aspirational spending. In other words, we have a poor middle class, nowhere enjoying the lifestyle of the middle-class citizens in other nations.
We know that low national savings must result in low domestic investments. And low investments must result in low relative productivity. And so, we come full cycle. The very essence of the World Bank report was to raise the livelihoods of Malaysians, to that of a high-income nation by means of doubling our productivity. Their solution is to spend even more on public education, funded by raising more taxes. Our contention is that this recommendation is both counter-intuitive and terribly wrong. The evidence we presented shows that we are getting poor outcome of the money spent. It is a question of improving quality, not throwing more good money after bad. And the middle class are already “taxed” and suffering.
The middle class plays a crucial role in maintaining societal stability, economic growth and the health of democracy. They provide the bulk of consumer spending power, resources for entrepreneurship and innovation and a tax base for public services; are a moderating force in politics; demand for good governance; reduce social polarisation; seek cultural and ethical values; and are a buffer against economic and political shocks. Let the middle class prosper. It will achieve both economic growth and economic justice.
As we mentioned in our article two weeks ago, the world is shifting right, towards lower taxes, smaller governments, less intervention, more free-market competition, pro-growth and pro-jobs. And small nations pay a high economic cost going against the tide (in terms of currency depreciation, capital flows, investments and job creation). Our recommendation is the opposite of the World Bank’s. Cut taxes, cut spending, improve efficiency and outcomes from government spending, let the disposable income for Malaysians go up, boost domestic savings and investments, and research and development — and we can then achieve higher productivity to become a high-income nation. We will elaborate more in the coming articles, including on our education and healthcare.
The Malaysian Portfolio fell 1.3% for the week ended Feb 19, mirroring weakness in the broader market. United Plantations (+0.9%) and Gamuda (+0.4%) were the two gaining stocks while Insas Bhd – Warrants C (-22.7%) was the biggest loser for the week. IOI Properties Group (-3.3%) and Kumpulan Kitacon (-3.2%) were the other notable losers. Last week’s losses pared total portfolio returns to 194.4% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 13.6% over the same period, by a long, long way.
The Absolute Returns Portfolio performed better, up 2%. The gains lifted total returns since inception to 35.2%. The top performers were Grab Holdings (+6.8%), Talen Energy (+5%) and OCBC (+3.7%). The only stock that ended in the red was Palantir Technologies (-4.5%), whose shares saw sharp losses on the back of news that the US is planning on slashing military spending by 8% annually for the next five years. Government agencies accounted for 55% of the company’s revenue in 2024.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
