ON the surface, the government says the economy grew by more than 5% in the first quarter of this year and this is cause for celebration.

On the surface, the gap between the richest and poorest families in the country is narrowing so Malaysians are far better off now than 10 years ago.

But the reality, said economist and author Dr Muhammed Abdul Khalid, is that these trends are not helping most Malaysians cope with the rising cost of living.

The reality is that while the economy grows, wage inequality or the gap between the wages of the richest Malaysians and average workers remains wide, said Muhammed.

Asset inequality such as the difference between the number of people who owned property and financial instruments was also wide, said Muhammed, the author of the 2014 local English best seller, “The Colour of Inequality”.

The inequality in wages and assets are due to labour and fiscal policies that mainly benefit owners of capital over the average worker, he said.

“So even though there is all this good news about the economy, there is still the perception among the average Malaysia worker, that they are not feeling any benefits,” he told The Malaysian Insight.

According to the government’s economic planning unit (EPU), household income inequality as measured by the Gini co-efficient, dropped from 0.44 in 2007 to 0.40 in 2014.

A figure closer to 0 means less inequality and closer to 1 more inequality.

But Muhammed said this trend masks a gap in wages. The above figure only measures total income in a household, which can include wages and handouts such as from the People’s Aid Scheme (BR1M).

In contrast, the inequality in Employee Provident Fund (EPF) savings between those earning high salaries and the average wage earner rose to 0.658 in 2014 from 0.652 in 2009, he said.

Since the contribution and dividend rates are constant for all levels of salaries, the inequality in EPF savings is being driven by wage inequality.

When it comes to assets such as Amanah Saham Bumiputera (ASB) unit trust, the inequality between different owners is starker.

“The Gini coefficient for ASB holdings in 2014 is 0.836, much higher compared with 0.658 for EPF, and 0.401 for household income.”

In 2014, the ASB annual report showed that the bottom 72% of ASB unit holders had an average savings of RM536 in their accounts. In contrast, the top 0.2% of unit holders recorded an average whopping RM745,038 in their accounts.

“In the longer term, assets are far more important than income as they can be transferred between a parent and child thus ensuring that the latter gains a tool to move up the social ladder.

Muhammed said deep structural reforms are needed to address these gaps and they include changes to labour, fiscal and education policies.

For instance, currently, personal income is taxed but there is no tax on capital gains such as earnings from selling property or shares, he said.

“We apply taxes to income and consumption such as the GST (goods and services tax) where everyone is taxed. But we don’t tax earnings equally between the poor, the average worker and the rich.”

And when the economy turns sour, the government starts cutting subsidies and social services that generally benefit the poor.

“But this is counter-productive to stimulating economic growth as it’s the poor who generally spend more of their income, thus driving up private consumption which is an engine of growth. In contrast the rich tend to save their money.” – August 9, 2017.