FullReport KRI SOH 2018

THE STATE OF HOUSEHOLDS 2018
Different Realities
THE STATE OF HOUSEHOLDS 2018
DIFFERENT REALITIES
©2018 Khazanah Research Institute October 2018
Perpustakaan Negara Malaysia

Cataloguing-in-Publication Data
THE STATE OF HOUSEHOLDS 2018: Different Realities. – 3rd Edition.

ISBN 978-967-16335-1-9
1. Cost and standard of living--Malaysia. 2. Home economics--Malaysia. 3. Malaysia--Economic conditions.
I. Institut Penyelidikan Khazanah.
339.4109595
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Published October 2018. Published by Khazanah Research Institute at Level 25, Mercu UEM, Jalan Stesen
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Cover photo by Hafiz Ismail

This report was prepared by the researchers of the Khazanah Research Institute
(KRI): Allen Ng, Adam Manaf Mohamed Firouz, Jarud Romadan Khalidi,
Musaddiq Adam Muhtar, Siti Aiysyah Tumin, Tan Kar Man, Tan Theng Theng
and Tan Zhai Gen.
It was approved by the editorial committee comprising of Datuk Hisham

Hamdan, Junaidi Mansor, Dr Suraya Ismail, Dr Lim Lin Lean, and Professor
Jomo Kwame Sundaram.
It was authorised for publication by Datuk Hisham Hamdan.
ACKNOWLEDGEMENTS
We are grateful for the comments from Dr Nungsari Ahmad Radhi, Tan Sri
Andrew Sheng, Dato’ Charon Mokhzani, Professor Ravi Kanbur and Nicholas
Khaw. We would also like to thank our colleagues at the Khazanah Research
Institute for their editorial contributions, namely Christopher Choong Weng
Wai, Hawati Abdul Hamid and Nazihah Muhamad Noor. We would also like
to thank our interns: Alia Muhammad Radzi, Alyssa Chua Lee-Yen, Ng Xiang
Yang, Teoh Jia-Chern and Muhammad Ariff Sharifuddin. Rina Azura Razali,
Atiqah Bazilah Azlan and Muhammad Syahmi Mohamed Sazali also provided
operational support for the publication.
In writing this book, we have benefitted tremendously from the contributions

of the people mentioned above. However, any fault lies entirely with
the authors.
Our website (www.KRInstitute.org) has interactive versions of all the charts
in this report, where the underlying data can also be downloaded. If you
are reading this on the PDF version, the charts link directly to our website.
CONTENTS
EXECUTIVE SUMMARY PART 2

Introduction 1 THE MALAYSIAN
Part One—State of Households: WORKFORCE:
Different Realities 1 A CHANGING LANDSCAPE 76
Part Two—The Malaysian 2.1 Women in the Workforce—

Workforce: A Changing A Work in Progress 77
Landscape 3 2.2 Foreign Workers and the
Part Three—Malaysia’s Economy—A Review 119
Development Journey: Past, References 134
Present and Future 4
Conclusion 6
PART 3
MALAYSIA’S DEVELOPMENT
PART 1 JOURNEY: PAST, PRESENT
THE STATE OF AND FUTURE 139
HOUSEHOLDS: 3.1 Development in the past:
DIFFERENT REALITIES 8 How has the economy
1.1 Introduction— changed? 140
Households in Malaysia 9 3.2 Malaysia in the middle:
1.2 Household Incomes 11 Where are we now? 152
1.3 Household Expenses 32 3.3 Challenges of the future:

Where do we go
1.4 Changing Trends in from here? 183
Inequality 48
References 193
1.5 Conclusion 67
References 72
The key to progress and prosperity lies
not in satisfaction with what we have
already achieved but in a firm
determination to make even greater
efforts in the future.
Tunku Abdul Rahman Putra Al-Haj

First Malaysia Plan, 1965
EXECUTIVE SUMMARY
Introduction
The overall economic story of Malaysia since Independence is one of significant
progress and achievement in which millions of Malaysians are now much better
off compared to the generations before them. The narrative of our development,
seen from this long-term perspective, is mostly determined and almost singular
– an ensemble performance of progress.
But as we shorten the time horizon of our perspective, move closer towards the
present and look deeper into the nuances of the diversity that exist – the
coherence of this narrative begins to splinter into a multiplicity of smaller
stories, reflecting the diverse economic realities of almost seven million Malaysian
households and the challenges they face. In the third instalment of the State of
Households, we explore these smaller stories of the present and tie them back
to the long arc of our economic development in the past and as we move into
the future.
The publication is divided into three parts;

• Part One—State of Households: Different Realities: an analysis of the state
of households anchored on the latest release of the Household Income and
Expenditure Survey 2016 by the Department of Statistics Malaysia (DOS);
• Part Two—The Malaysian Workforce: A Changing Landscape: the broader
changing landscape of the workforce, and
• Part Three—Malaysia’s Development Journey: Past, Present and Future: the
overall economic transformation of the country and how the welfare of all
households in Malaysia is ultimately and intrinsically tied to it.
Part One—State of Households: Different Realities

Not all households have the same experience. The assessment is in three key
sections:
a) Household incomes
b) Household expenses, based on income-levels
c) An overview assessment on the changing contour of household income
distribution and inequality since the 1970s.
Households in the vast majority of districts earn less than the national median
household income of RM5,228 in 2016. Highly urbanised and populated
1 KHAZANAH RESEARCH INSTITUTE

EXECUTIVE SUMMARY
districts have higher median household income. Indeed, the average household
income level in Greater Kuala Lumpur is almost twice as high as the rest of
the Malaysia.
A firm understanding of the reasons underpinning the diversity in household

incomes is essential. No more than 10% of the differences in household income
in different parts of the country could be explained by either demography or
degree of economic participation. By contrast, urban households earn on
average 80% more than rural households, and households with household
heads with higher education and high-skill levels have household incomes three
to four times more than those with no formal education or those in low-skilled
jobs.
In 2016, households with income below RM2,000 spent 94.8% of their

incomes in consumption items listed in the household expenditure survey.
Conversely, households above RM15,000 monthly income spent only 45% of
their incomes in 2016. Worryingly, for households earning below RM2,000, the
income remaining after accounting for inflation is only RM76 in 2016, reducing
from RM124 in 2014. This highlights that households earning below RM2,000
are potentially very vulnerable against economic shocks or emergencies. Between
2014 and 2016, households with income level below RM5,000 are cutting back
on actual consumption of food despite spending more money on it given high
food inflation. For richer households, the shifts are more lifestyle oriented –
from expenditure on food at home to food away from home, and on cultural
and entertainment services.
We end this part of the publication by providing a long-term perspective of the

changing trends in inequality and by touching briefly on how the standard
measure of inequality in Malaysia could be improved to better reflect our
economic reality. Overall, it is important to recognise that while conventional
measures of inequality have improved, there are reasons to believe why this
improvement in statistics has not trickled down to perceptions on the ground.
For example, even when measured income inequality has improved, the absolute
gaps in household income between the different income classes have continued
to increase—in the past two decades, the actual differences in household
income, adjusted to inflation, have almost doubled between the top 20%
households versus the middle and bottom 40% households, respectively.
KHAZANAH RESEARCH INSTITUTE 2

EXECUTIVE SUMMARY
Part Two—The Malaysian Workforce: A Changing Landscape

On women in the workforce, over the years, gender gap remains evident in
labour force participation, unemployment, pay and senior positions held by
men and women, although most of these disparities have improved since 2010.
Particularly, three key findings stand out from our analysis. Firstly, women
shoulder a disproportionate share of housework, hindering their participation in
the labour force. In 2017, 58.0%, or 2.6 million women stayed out of the
labour force for housework, compared to 3.2%, or 69,800 men.
Secondly, women outside the labour force are mostly educated and of prime-
working age (ages 25 to 54). Specifically, two million prime-age women are
outside the labour force, compared to 0.2 million men. Thirdly, one-third of
the increase in women’s labour force between 2010 and 2017 is due to the rise
in own account workers (i.e., self-employment). Given the more vulnerable
nature of self-employment, striking a balance between preserving economic
opportunities and ensuring economic security for women hence becomes the
challenge moving forward.
In summary, much needs to be done to empower women economically. We

found that raising women’s employment levels by 30% would not only raise
Malaysia’s GDP by around 7% to 12%, but also serve as a potential remedy
for an ageing population by alleviating the burden of labour force participants
providing to the rest of the population by around 30%, provided that the
gender gap is closed in the next 12 years.
Next is the issue of immigration and its broader economic impact. Between
2010 and 2017, the number of foreign workers increased from 1.7 million to
2.2 million, constituting 15.5% of total employed persons in Malaysia. Most
foreign workers are from Indonesia (although the proportion has greatly
reduced over the years), working in urban areas, concentrating in agriculture,
construction, and manufacturing sectors, and engaging in low-skilled and semi-
skilled jobs. More notably, two important developments can be observed
between 2010 and 2017. For Malaysians, our country has produced more
tertiary-educated workers than those of any other education level, yet most jobs
created are in the semi-skilled categories. This points to a possible significant
mismatch between native labour demand and supply. For foreign workers, low-
skilled occupations have witnessed the highest increase in foreign workers

EXECUTIVE SUMMARY
among all occupations, signalling that foreign workers have not been occupying
the same occupational space as native workers.
On the economic impact of foreign workers employment, most empirical studies

found no significant effects on labour market outcomes. We summarise the
three factors leading to the small impact of immigration. The first is the low
degree of substitutability between foreign workers and natives—which means
both groups do not compete directly in the labour market. The second is that
immigration leads to more economic activities, thereby expanding employment
opportunities broadly across the labour market. The third is task specialisation.
As foreign workers fill the bottom hierarchy of the labour market, natives
gradually take up more supervisory roles, which often result in better pay.
This section is also accompanied by a technical paper which presents the

econometric estimation of the effects of immigration on labour market outcomes,
labour productivity, and capital intensity in Malaysia. The findings are generally
consistent with existing studies on Malaysia. Nevertheless, it needs to be
appreciated that while the impact of foreign workers could be less of a concern
in the immediate term, it could be more pervasive over the longer term in
relation to the structure of our economic transformation. Reliance on foreign
workers, for example, is found to be associated with lower levels of technical
adoption in most economic sub-sectors and could in part lead to an economic
structure that relies more on low-cost labour which in turn, could impede upon
our economic transition towards becoming a high-income economy
Part Three—Malaysia’s Development Journey:

Past, Present and Future
In the final part, we highlight the fact that improvements in the state of
households in Malaysia over the decades has not occurred in isolation but is
intrinsically tied to the economic development and transformation of the nation.
Long-term national and household income trends can be tied to the structural
evolution of Malaysia’s economy, which started as a predominantly agricultural
economy in its early days, evolving into a rapidly industrialising nation that
began in the 1970s and peaked at the turn of the century, shifting towards a
deindustrialisation process from the 2000s onwards. Improvements in the
economy in the past also corresponded with a general improvement in the well-
being of Malaysians and these can be observed through indicators such as

EXECUTIVE SUMMARY
increased life expectancy, lower mortality rates for children and improved
access to utility facilities.
These improvements over the years have made Malaysia a relatively affluent,
upper middle-income country. Since 1987, Malaysia has been classified as a low
middle-income country for the first five years and upper middle-income in the
following twenty-five years. As Malaysia heads towards the high-income
country horizon, the country would need to reflect on its state of development
and key challenges it faces to become an advanced economy. We investigate
this along three dimensions: an intensively knowledge-based economy, high
quality human capital and modern infrastructures.
To map the country’s potential to be a knowledge-based economy, an overview

of the nation’s state of research and development (R&D) activities,
entrepreneurship and economic complexity is provided. A continuous focus on
Malaysia’s innovation capabilities is needed, as innovation is a key driver of
productivity and long-term income growth. However, Malaysia spent a relatively
small amount of resources on research, dedicating only 1.1% of GDP to R&D
activities. In the case of entrepreneurship, Malaysian entrepreneurs despite
seeing easier conditions to set up a business generally do not innovate. From
the perspective of economic complexity, the Malaysian economy’s technical
know-how and the range of products it produces have been steadily increasing
since 1960s, albeit at a slower pace of growth post-2000s. This coincides with
the deindustrialisation phenomenon observed in the same time period.
To complement the knowledge-based economy, the state of human capital

development in this country—of which 20% of government expenditure goes
to education—has plenty of room for improvement. Despite Malaysians
receiving 12 years of schooling, Malaysian students receive only 9 years' worth
of schooling after adjusting for education quality. The central issue of generating
high quality human capital in this country is an important one, as the transition
to a high-income nation requires human capital levels that continuously improve
productivity, sustain growth and are able to create or utilise technological
advancements rather than being substituted by it. Beyond knowledge and
human capital, the provision of modern infrastructures and facilities are
essential for the seamless and efficient functioning of modern economic
activities. Apart from physical infrastructures mentioned earlier, internet and

EXECUTIVE SUMMARY
online services infrastructure is vital for a growing internet user base in

Malaysia. Future-oriented improvements are needed for internet-based
government services to cope with the demands of Malaysians in the future.
However, these issues should not be taken in isolation as we venture into an

uncertain future. Various global and domestic trends—ranging from technological
disruptions, changes in the global economic and geopolitical landscape, and
changes to our biosphere, to demographic changes in the Malaysian society and
lower returns from past growth strategies – pose a challenge to Malaysia’s
economy and the well-being of its people. Given the fact that it is difficult to
accurately predict what the future holds, rather than reacting to events as they
unfold, the best strategy for Malaysia instead, is to build and develop on our
core fundamentals. These fundamentals—broadly identified as openness, human
capital development, economic agility, inclusive growth, and macroeconomic
stability—are essential in ensuring economic security for Malaysians through
both good and trying times.
Conclusion
The three parts of this report could be read independently, and we hope that
even through that it could shed new assessments on the various separate aspects
of the economy. But if read completely, it is our hope that we are providing a
more wholesome picture of how the multiplicity of stories of different Malaysian
households presently could be tied to the long arc of our national economic
development.
We have not provided detailed policy recommendations, but through our

assessments – from the need to appreciate how the diverse economic realities
and challenges of different households, the recognition of the centrality of the
balance of unpaid care-work with regards to gender equality, to the significance
of focusing on strengthening our core economic fundamentals as our nation
wades into a rapidly changing and uncertain global and domestic environment—
it is hoped that we have highlighted areas of priorities that are essential to
address in securing the future of the state of all households in Malaysia.

PART
01
THE STATE OF
HOUSEHOLDS:
DIFFERENT REALITIES 8
1.1 Introduction—
Households in Malaysia 9
1.2 Household Incomes 11
1.3 Household Expenses 32
1.4 Changing Trends in
Inequality 48
1.5 Conclusion 67
References 72
PART 1
THE STATE OF HOUSEHOLDS: DIFFERENT REALITIES
Since the publication of our first State of Households in 2014, by outlining

some of the pressing issues of the nation, the primary focus of our assessment
is that of the well-being of households in Malaysia. In this first part of the third
instalment of the publication, we are following through with this focus,
anchoring on a central and crucial observation that not all households have the
same experience—we all live in different realities. The chapter is in three key
parts, the first being an update on the development in household incomes since
the last report and exploring how the differences in incomes can be explained
by some common factors. The second part is on household expenses, with an
emphasis on the different experiences of different households based on their
income-levels, as well as a longer-term assessment on the changing patterns in
household expenditure in the last decade. The last part takes on an even longer-
term view, providing an overview assessment on the changing contour of
household income distribution and inequality in Malaysia since the 1970s.

PART 1
1.1 Introduction—Households in Malaysia

Figure 1.1: Number of households, 2009 – 2016 Figure 1.2: Number of Malaysian households,
by stratum, 2009 – 2016
Million Million
8.0 8.0
7.0 0.6 7.0

0.5
0.5 1.5
6.0 6.0 1.5
5.0 5.0 1.9
4.0 4.0
6.7 6.9
3.0 6.1 3.0
5.1 5.5
2.0 2.0 4.2
1.0 1.0
0.0 0.0
2009 2014 2016 2009 2014 2016
Malaysians Non- Malaysians Urban Rural
Source: DOSM Source: DOSM
We begin with an introduction to the basic characteristics of households in

Malaysia. A household is defined as a person or group of related or unrelated
persons who usually live together and share the use of food and other living
essentials. The total number of Malaysian and non-Malaysian households in
Malaysia in 2016 stood at 7.5 million households, with 6.9 million households
with Malaysians as heads of household (Figure 1.1). This number increased
from 6.6 million households in 2009, at an average annual rate of 2.0%
between these four years. Given the nature of these available statistics, unless
explicitly stated otherwise, references to households are taken to mean households
with Malaysian citizens as the heads of household.
Nearly 78% of households in Malaysia in 2016 were in urban areas, increasing

from 69% in 2009 (Figure 1.2). This corresponded to 5.5 million households
in 2016, increasing from 4.2 million households in 2009. This was mirrored by
the decrease in the number of households in rural areas. In 2009, there were
1.9 million households in rural areas. In 2016, this number was 1.5 million.

PART 1
In terms of states, Selangor had the largest number of households, with 1.6
million households, while Perlis had only 56,300 households. Figure 1.3 shows
the distribution of households by districts. The larger the circle, the more
households there are in the district. Petaling, Selangor had the highest number
of households at 535,400 households, followed by WP Kuala Lumpur at
461,600 households. Pakan, Sarawak had the smallest number of households at
3,400 households.
Figure 1.3: Number of households, by district, 2016
Number of Household (’000)
0.0 600.0
Source: Department of Statistics Malaysia
In 2016, the average size of a household was 4.1 persons (Figure 1.4). This
follows a long trend of declining household size in Malaysia. For example, in
1980, the average household size was 5.2 persons.
Figure 1.4: Average household size, Malaysia, 1980 – 2016

6.0
5.2
4.9
5.0 4.6
4.3
4.1
4.0
3.0
2.0
1.0
0.0
1980 1991 2000 2010 2016
Source: CEIC (n.d.)

PART 1
1.2 Household Incomes
1.2.1 The national ‘average’

Figure 1.5a: Real & nominal median household Figure 1.5b: Real & nominal mean household
income, 2009 – 2016 income, 2009 – 2016
6,958
RM7,000 RM7,000
6,402
6,141
6,000 6,000
5,491
5,228 5,000
5,000 4,780 5,000 4,716
4,585
3,982 4,025
4,000 3,626 4,000
3,329
3,000 2,841 3,000
2,000 2,000
1,000 1,000
0 0
2009 2012 2014 2016 2009 2012 2014 2016
Median household income Mean household income
Real median household income (2016 prices) Real mean household income (2016 prices)
Source: Department of Statistics Malaysia and KRI Calculations
The median household income in 2016 was RM5,228 per month, while the
mean household income was RM6,958 per month (Figure 1.5a, 1.5b). Median
household income increased at 9.1% per year on average from RM2,841 per
month in 2009, while mean income increased by 8.1% per year on average
from RM4,025 per month in 2009.
With inflation accounted for, real median household income increased by 6.7%
per year on average since 2009. At 2016 prices, the equivalent median
household income in 2009 was RM3,329 in 2009. Real mean household
income, on the other hand, increased by 5.7% per year on average from
RM4,716 in 2009, in 2016 prices.

PART 1
Figure 1.6a: Head of household sources of income, 2012 – 2016

100.0 %
6.5 7.6 8.5 Current transfers received
90.0 9.7 11.4 Income from property and investment
12.9
80.0
17.2
16.0 15.6 Income from self-employment
70.0
60.0
50.0
40.0
66.6 65.0 Income from paid employment
63.0
30.0
20.0
10.0
0.0
2012 2014 2016
Figure 1.6a shows the shares of head of household’s sources of income from
2012 to 2016. To note, data from before 2012 is not available publicly, hence
the choice of 2012 for the start of analysis. The sources of income for the entire
household income itself is also not available.
Paid-employment, followed by self-employment were the two most important

sources of income for household heads, contributing to 63.0% and 15.6% of
their income respectively in 2016. Their relative importance, however, has been
decreasing. In 2012, both sources of income accounted for 66.6% and 17.2%
of total income respectively. Instead, the share of household income from
property and investment, and current transfers (income from government aid
and transfers from family) have been increasing. In 2016, income from property
and investments accounted for 12.9% of household head income, increasing by
3.2 percentage points from 2012. Income from current transfers accounted for
8.5% of household head income in 2016, increasing by 2.0 percentage points
from 2012.

PART 1
Figure 1.6b: Sources of income, contribution to growth, 2012 – 2016

10.0 %
9.0 8.6
8.0
7.0 35.2 Current transfers received
6.0
5.0
4.0 36.3 Income from property and investment
3.0
2.0 13.1 Income from self-employment
1.0
15.5 Income from paid employment
0.0
The picture is slightly different in terms of growth in income. Figure 1.6b

shows the overall growth of household income, and the contribution to the
growth from the constituent sources of income1. Between 2012 and 2016, mean
income of households grew by 8.6% per year. Of this, income from property
and investment contributed 36.3% to the growth, followed by current transfers
at 35.2%. Both self-employment and employment only contributed 13.1% and
15.5% to the income growth.
1 As data is not available for the constituent sources of income for the whole household income, we assumed that the
proportion for the sources of income follows the proportions of household heads income.

PART 1
Figure 1.7: Average annual growth of head of household’s sources of income, and related
indicators, 2012 – 2016
30.0 % 30.0 % 28.2
25.0 25.0
20.0 20.0
16.6 16.1
15.0 15.0
10.0 10.0 8.8

6.9 6.6
5.0 5.0
0.0 0.0
Employment Property and Current transfer Mean wages House prices BR1M
investment disbursement
Source: Department of Statistics Malaysia, Ministry of Finance, NAPIC and KRI Calculations
Figure 1.7 shows that the growth of household income from employment,
including from self-employment, is on average 6.9% per year since 2012. This
is lower than income from property and investment (16.6% per year since
2012) and income from current transfer (16.1% per year since 2012).
The changes in the different sources of household income were broadly in line
with other relevant indicators observed during the same period. The lower rate
of growth in income from employment is reflected by the growth of 6.6% per
year in mean wages from 2012 to 2016. This is lower than the rate of growth
in house prices at 8.8% per year during the same period. Similarly, the rate of
growth in Bantuan Rakyat 1 Malaysia (BR1M) disbursement2 was at 28.2%
per year in the same period, potentially contributing to the growth of household
income derived from current transfers.
2 BR1M disbursement includes transfers both to households and individuals

PART 1
1.2.2 Different Households, Different Realities
National averages can obscure the very diverse realities that different Malaysian
households live in. For the first time ever, the Department of Statistics, Malaysia
(DOS) has released granular household income data down to the district level
in the latest Household Income Survey report. This rich information opens up
the possibility of analysing the experiences of different Malaysian households in
different parts of the country in a much more nuanced manner.
In order to appreciate the diversity in experiences of different households in

Malaysia, one could observe the differences in income-level geographically.
Figure 1.8 is a map of the median household incomes of all the 144 districts
and federal states in Malaysia for 2016. The deeper blue the district, the higher
the median household income of the district. On the opposite end, the deeper
orange the district, the lower the median household income.
Figure 1.8: Median household income district, 2016
Median Household Income
1,000 10,000
Pitas:
RM2,105
National Median:
RM5,228
Greater Kuala Lumpur
Kuala Lumpur:
RM9,073
Households in the vast majority of districts earned less than the national
median household income of RM5,228. Mainly highly urbanised and populated
districts had higher median household income, such as the districts in the
Greater Kuala Lumpur (for example, Petaling at RM7,904), Pulau Pinang (for
example, Timur Laut at RM5,964) and Johor Bahru (Johor Bahru at RM6,518).

PART 1
The differences between districts can be stark: Kuala Lumpur had the highest
median household income at RM9,073, 4.3 times higher than the district with
the lowest median household income in the country: Pitas, Sabah at RM2,105
median household income.
Figure 1.9: Greater Kuala Lumpur and rest of Malaysia mean household income, 2016
RM12,000
10,427
10,000
8,000
6,000 5,719
4,000
2,000
0
Greater Kuala Lumpur Districts outside Greater Kuala Lumpur
Figure 1.9 shows the mean household income between districts within and
outside of Greater Kuala Lumpur 3. Households within Greater Kuala Lumpur
earned RM10,427 in mean household income, nearly two times the mean
household income in the rest of the districts in Malaysia. The district with the
lowest mean household income in Greater Kuala Lumpur, Klang at RM8,606,
was higher than the district with the highest mean household income outside
of Greater Kuala Lumpur, Johor Bahru at RM8,198. Total income of all
households in Greater Kuala Lumpur was almost 40% of the total income of
all households nationally, with only 26.3% of the total number of households
in the country. For comparison, Johor Bahru, which had 6.4% of total income
of all households nationally, only had 5.4% of the total number of households.
Pulau Pinang with 6.0% of the total income of all households nationally, only
had 6.2% of the total number of households.
3 The definition of Greater Kuala Lumpur is adopted from EPU standard, and includes districts Kuala Lumpur, Gombak,
Petaling, Sepang, Putrajaya, Klang & Hulu Langat

PART 1
Figure 1.10: Percentage of households by state below RM7,000, 2016
Kelantan 85.3
Perlis 81.6
Pahang 81.2
Kedah 80.8
Perak 80.0
Sarawak 76.8
Sabah 76.6
Negeri Sembilan 74.6
Terengganu 73.6
MALAYSIA 65.7
Pulau Pinang 65.7
Melaka 64.3
Johor 64.1
Labuan 58.9
Selangor 47.8
Putrajaya 34.6
Kuala Lumpur 34.1
0.0% 20.0 40.0 60.0 80.0 100.0
Below RM2,000 RM2,000- RM3,000 RM3,000-RM4,000
RM4,000-RM5,000 RM5,000-RM6,000 RM6,000-RM7,000
The national mean household income of RM6,958 also masks the variety of
household income at the state level. Figure 1.10 shows the percentage of
households in each state that have household incomes less than RM7,000.
Kelantan had the highest percentage of households below the national mean
household income, where 85.3% of households had incomes below RM7,000.
This is followed by Perlis at 81.6% and Pahang at 81.2%. Selangor,

PART 1
Kuala Lumpur and Putrajaya, where around a quarter of the population reside,
were among the states with the lowest percentage of households below national
mean household income, with Kuala Lumpur the lowest at 34.1%.
The heterogeneity of household incomes can also be seen through how different
it is to be in the different income groups—bottom 40%, middle 40% and top
20%—in each of the states. Figure 1.11 shows the state and national thresholds
for the different income groups in terms of household income. The lower and
higher threshold lines bounding the shaded region represent, nationally, the
highest household income for a household to be categorised in the national
bottom 40% and the middle 40% respectively. This means that households that
earned below RM4,360 per month in 2016 are in the bottom 40% of all
households, while households that earned between RM4,360 and RM9,619 per
month are in the middle 40% of all households. Households that earned above
RM9,619 are in the top 20% of all households.
However, the equivalent state-level thresholds were very different for each state.
In Figure 1.11, the blue squares represent the highest household income of the
bottom 40% in the state, and the orange squares show the highest household
income of the middle 40% in the state. For states in Greater Kuala Lumpur,
such as Kuala Lumpur, households in the bottom 40% in the state may be in
the middle 40% nationally. For example, a household in Kuala Lumpur with
income just below RM7,640 is in the bottom 40% of Kuala Lumpur, but is
considered to be in the middle 40% nationally.
By contrast, the top 20% households in some states may be in the middle 40%
nationally. For example, a household in Kelantan that earned just above
RM5,870 is considered to be in the top 20% of households of the state.
However, they would be part of the middle 40% households nationally, and in
fact in the bottom 40% of households if they’re in Kuala Lumpur.
Only Melaka, Johor and Pulau Pinang coincide roughly with the national
threshold. This means only around 20% of the population in the country can
be roughly segmented using the national threshold into three income groups.

19
Figure 1.11: Income thresholds for household income class, 2016
The income range for M40
Population
PART 1
State Share
Malaysia
Kuala Lumpur
Putrajaya 26%
Selangor
Labuan
KHAZANAH RESEARCH INSTITUTE

Melaka
Johor 20%
Pulau Pinang
Terangganu
Negeri Sembilan
26%
Sarawak
Sabah
Perak
Kedah
Pahang 28%
Perlis
Kelantan 4,360 9,619
RM 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000

Note: The highlighted area represents the income threshold for the M40 group
IncomeinThresholds
2016: More than Rm4,360 and less than RM9,620
Figure 1.12: Annual growth and change in mean household income, 2014 – 2016
Average Annual Change in Annual Growth of Mean
Mean Household Income, 2014 –2016 Household Income, 2014 –2016
Labuan
4.5% Sarawak RM227
Sabah
4.9% Kuala Lumpur RM532
Kedah
Putrajaya
Johor
Negeri Sembilan
Perlis
Pulau Pinang
Melaka
6.4% MALAYSIA RM409
Kelantan
7.1% Selangor RM606
Pahang
Perak
9.5% Terengganu RM480

10.0 5.0 0.0% RM0 500 1000
20
PART 1

PART 1
State differences also extend to the different annual growth rates in household
incomes and the sources to that growth. Figure 1.12 shows the growth rates of
mean household income by state from 2014 to 2016, broken down to the
sources of income that contributed to that growth4. State level data on sources
of income by head of household is not available publicly before 2014, hence
only data since 2014 were presented. Between 2014 to 2016, the national mean
household income grew by 6.4% per year. The mean household income in
Terengganu grew the fastest at 9.5% per year, higher than states such as
Sarawak which grew at 4.5% per year. However, while the household income
in Kuala Lumpur grew at the 4th slowest among all the states, in absolute
terms, household income has increased on average by RM532 per year, one of
the largest increases. Conversely, while Terengganu grew the fastest by nearly
two times at 9.5% per annum, in absolute terms, it has only increased on
average by RM480 per year. Mean household income in Perak grew by 8.9%
per annum, but has increased only on average by RM399 per year.
Figure 1.13 shows the annual contribution to growth by the sources of income
by mean household income. For states with lower than national median
household income such as Terengganu, Perak, Pahang and Kelantan, current
transfers were found to be the largest driver of household income growth. For
example, 35.1% of the growth in household income in Terengganu is driven
by current transfers received. By contrast, in Selangor, which had a higher than
national mean household income, nearly 50% of growth in household income
was driven by income from property and investment. However, other than
Labuan, all other states found non-employment source of income contributed
more to overall growth compared to employment.
4 As previously, as data are not available for the constituent sources of income for the whole household income, we
assumed that the proportion for the sources of income follows the proportions of household heads income.

Figure 1.13: Annual contribution to growth of mean household income by sources of income, by state, 2014 – 2016
100.0%
10.1 8.0
11.5
90.0 20.7
21.9
25.4 25.3
35.1 35.2 36.7 36.3
80.0
46.7
56.1 54.1 55.5 40.1
70.0 57.9
43.8
67.6
32.3
60.0 58.9
36.6 43.8
43.7 23.5
50.0
37.1 32.8
40.0 7.5 11.2 44.6

31.5 12.2
20.6
19.0 36.3
30.0 31.8
15.4 11.2 18.7
12.0 12.0 30.0
11.8 20.2
20.0 2.3 19.8 14.3
22.2
12.6
15.4 8.3
23.5 25.6
10.0 21.0 20.4 18.7 19.3
18.1 15.6
13.4 14.1 15.2
10.4 11.1 11.5 10.8
6.5 7.4
0.0
Perlis
Perak
Johor
Kedah
Sabah
Labuan
Melaka
Pahang
Kelantan
Sarawak
Selangor
Putrajaya
MALAYSIA
Terengganu
Pulau Pinang
Kuala Lumpur
Negeri Sembilan
Increasing Median Household Income
Income from paid employment Income from self-employment Income from property and investment Current transfer received

22
PART 1
PART 1
1.2.3 What explains the diversity in household incomes?
A firm understanding of the reasons underpinning the diversity in household

incomes is essential in appreciating the actual state of households—and more
broadly, the overall state of the Malaysian economy. A comprehensive and
definitive treatment on this matter, however, is complex and is beyond the
scope of this part of the report. With that said, by assessing the association of
Malaysian household incomes with various dimensions of household life, such
as demography, economic participation, urbanisation and degree of human
capital, we seek to unpack some of the empirical regularities on why some
households have higher household income than others, and why large variations
of household incomes across different regions in the country exist.
Demography
One common refrain of why places such as Kuala Lumpur could have higher
household incomes compared to other states is that perhaps there are simply
less retirees or young children compared to adults in the working age5 in the
state. That is, the demographic condition is more economically favourable in
Kuala Lumpur.
Figure 1.14 shows the number of adults in the working age per population for
each state. On average, Malaysian households in 2016 had 0.67 working-aged
adults per population. Putrajaya had 0.6 working-aged adults per population,
the lowest amongst all the states while Kuala Lumpur had the highest number
of working-aged adults per population at 0.71 working adults per population.
5 Between the age of 15 to 64.

PART 1
Figure 1.14: Number of working population per population, by state, 2016

0.80
0.71
0.70 0.67
0.60
0.60
0.50
0.40
0.30
0.20
0.10
0.00
W. P. Putrajaya
Kelantan
Terengganu
Pahang
Sabah
Perlis
Kedah
Perak
Sarawak
Negeri Sembilan
MALAYSIA
Johor
Melaka
W.P. Labuan
Selangor
Pulau Pinang
W.P. Kuala Lumpur

Figure 1.15 shows the ratio between the mean household income of each state
to Kuala Lumpur in blue circles, and the ratio between the adjusted state
household income, assuming the state has the same number of working-aged
adults per population as Kuala Lumpur, to the mean household income of
Kuala Lumpur in orange circles. For both ratios, the larger the ratio is above
1, the larger the state household income is compared to Kuala Lumpur.
Simlarly, the smaller the ratio is below 1, the smaller the state household
income is compared to Kuala Lumpur.
After assuming that each state has the same number of working-aged adults per
population as Kuala Lumpur, state household incomes increase for most states.
However, other than Terengganu, Melaka and Pulau Pinang, the increase is less
than 10%. The household income in Labuan and Sarawak have the smallest
increase at nearly 0% and 1.3% respectively, while household income in Pulau
Pinang would have the largest increase at 19%.

PART 1
Figure 1.15: Ratio of mean household income and adjusted household income by working
population to Kuala Lumpur, 2016
Index = Kuala Lumpur
State household
Income more than
1.2 Kuala Lumpur
1.0 State household

Income less than
Kuala Lumpur
0.8
0.6
0.4
0.2
0.0
W.P. Putrajaya
Kelantan
Terangganu
Pahang
Sabah
Perlis
Kedah
Perak
Sarawak
Negeri Sembilam
MALAYSIA
Johor
Melaka
W.P. Labuan
Selangor
Pulau Pinang
W.P. Kuala Lumpur
Actual ratio of mean household income to Kuala Lumpur Ratio of state household income with Kuala Lumpur,
adjusted to working population per total population
However, the number of working-aged adults could overestimate the number of

adults who are presently working and providing income to the household. This
may be due to some women staying at home to care for the family while others
are unemployed for other reasons, therefore not bringing income to the
household. Therefore, comparing the number of actual income recipient per
household of each state would be more accurate. When there are more income
earners in the household, household income would probably be higher.

PART 1
Figure 1.16a shows the number of income recipient per household for each
state in 2016. The difference in the number of income recipients between states
is small, the smallest being Kedah, Kelantan, Negeri Sembilan, Perak and
Sarawak with 1.7 income recipients per households, and Labuan had the largest
at 2 income recipients per household. For Kuala Lumpur, the number was 1.9
income recipients per household. Correspondingly, the difference in labour force
participation rate across states was also relatively small, between 59.1% of the
population in Kelantan to 77.6% of the working adult population in Putrajaya.
Figure 1.16a: Number of income recipients Figure 1.16b: Labour force participation rate,
per household, by state, 2016 by state, 2016
2.5 90%
80 77.6
2.0
2.0
70 67.7
1.8 59.1
1.7
60
1.5
50
40
1.0
30
0.5 20
10
0.0 0
Kedah
Kelantan
Negeri Sembilan
Perak
Sarawak
Johor
MALAYSIA
Melaka
Pulau Pinang
W.P.Putrajaya
W.P. Kuala Lumpur
Pahang
Perlis
Sabah
Selangor
Terengganu
W.P. Labuan
Kedah
Kelantan
Negeri Sembilan
Perak
Sarawak
Johor
MALAYSIA
Melaka
Pulau Pinang
W.P.Putrajaya
W.P. Kuala Lumpur
Pahang
Perlis
Sabah
Selangor
Terengganu
W.P. Labuan

PART 1
If the other states have the same number of income recipient per household as
Kuala Lumpur, while everything else remains the same, would the household
income of these states be as high as Kuala Lumpur? To see if this is true, the
exercise above is repeated but this time equalising income recipients per
household; we adjusted the state household income by assuming that each state
has the same number of income recipients per household as Kuala Lumpur.
Figure 1.17 shows the ratio between the actual mean household income of each
state to Kuala Lumpur in blue circles. The orange circles represent the ratio
between the adjusted state household income, assuming that each state has the
same number of income recipient per household as Kuala Lumpur, to the mean
household income of Kuala Lumpur. For both ratios, the larger the ratio is
above 1, the larger the state household income is compared to Kuala Lumpur.
Simlarly, the smaller the ratio is below 1, the smaller the state household
income is compared to Kuala Lumpur.
After assuming that each state has the same number of income recipients per
household with Kuala Lumpur, for most states, the hypothetical state household
incomes increase. The gap between Kuala Lumpur and the rest narrows if we
take into account the degree of economic participations that varies across
different households for different states. However, the quantum is not large—
less than a tenth of the gap. Negeri Sembilan has the largest increase at 6.5%,
while Pahang, Perlis, Sabah, Selangor and Terengganu would remain the same,
as these states have the same number of income recipient per household as
Kuala Lumpur.
This hypothethical exercise is meant to provide a cursory illustration that

demography, even after accounting for the degree of economic participation,
does not meaningfully explain the large variations in household income between
the states.

PART 1
Figure 1.17: Ratio of mean household income and adjusted household income by income
recipient to Kuala Lumpur, 2016
Index = Kuala Lumpur
State household
1.2 Income more than
Kuala Lumpur
1.0
State household
Income less than
0.8 Kuala Lumpur
0.6
0.4
0.2
0.0
Kedah
Kelantan
Negeri Sembilan
Perak
Sarawak
Johor
MALAYSIA
Melaka
Pualau Pinang
Putrajaya
Kuala Lumpur
Pahang
Perlis
Sabah
Selangor
Terengganu
Labuan
Actual ratio of mean household income to Kuala Lumpur Ratio of state household income with Kuala Lumpur,
adjusted to income recipient per household
Urbanisation
Another potential factor that could explain the differences in household income
is urbanisation. Urban areas are often more economically productive than rural
areas, for a variety of reasons. Therefore, an urban household typically has a
higher income compared to a rural household.
In 2016, nationwide, urban households earned more than 1.7 times of rural
households. This pattern is also true at state level. Figure 1.18 shows the ratio
of urban median household income to rural median household income. The
results show that across all states, urban median household income was higher
than rural income. The largest difference in household income was in Sarawak,
where urban households earned 1.8 times more than rural household income.
This is followed by Sabah and Selangor, where urban households earned 1.5
times more than households in rural areas. The smallest difference is in Perlis,
where urban households earned 1.1 times more than rural households. Urban

PART 1
households in the other states earned between 1.1 times to 1.5 times of rural
households. The degree of urbanisation matters—an urban household in
Malaysia was on average 70% richer than their rural counterpart. This
observation holds true even when we look at it within each state. It should be
noted that the precise mechanism of why this is so is not explored here, and
as such, it should not be used to imply that urban Malaysia is unequivocally
better than rural Malaysia. What this shows, however, is that the rural-urban
dimension is a salient angle to shed further light on why the large variation of
household incomes exist in Malaysia.
Figure 1.18: Ratio of urban to rural median household income, by state, 2016
2.0
1.8
1.8 1.7
1.6 1.5 1.5

1.4 1.4 1.4
1.4 1.3 1.3 1.3 1.3
1.2 1.2
1.2 1.1
1.0
1.0
0.8
0.6
0.4
0.2
0.0
W.P. Labuan
Perlis
Terengganu
Negeri Sembilan
Pulau Pinang
Melaka
Perak
Pahang
Kedah
Johor
Kelantan
Selangor
Sabah
MALAYSIA
Sarawak

PART 1
Education and skills

In economics, human capital is a measure of the skills, education, capacity and
attributes of individuals which influence their productive capacity and earning
potential. It is also one of the most important determinants of overall economic
outcomes for both households and the overall economy6. As such, it is likely
that the large variation in household income could be explained by the
differences in human capital for each household—measured, albeit indirectly,
through their education and occupational skill-levels7.
Figure 1.19: Ratio of median household income to no certificate income, 2016

4.0
3.6
3.5
3.0
2.5 2.3
2.0 1.7 1.6

1.5 1.3
1.0
1.0
0.5
0.0
Degree
Diploma/ certificate
STPM
SPM/SPMV
PMR/SRP
No certificate
Figure 1.19 shows the ratio of median household income by education level of
household heads relative to household heads with no certificate. Household
heads who had at least a degree qualification had household incomes of more
than 3.6 times to those with no certificate. This was more than 2.1 times the
difference between urban and rural households.
6 A comprehensive discussion on this is in Chapter 3 of this report.

7 The categorisation of education level and occupation level is according to DOS’s standard of categorisation.

PART 1
Figure 1.20: Ratio of median household income to elementary occupations income, 2016
3.5 3.2
2.8
3.0
2.5
1.9
2.0 1.6
1.5 1.3 1.3 1.3
0.9 1.0
1.0
0.5
0.0
Managers
Professionals
Technician and
associate
Clerical support
workers
Service and sales

workers
Skilled agricultural,
foresty
Craft and related

trades workers
Plant and machine-

operator
Elementary
occupations
Figure 1.20 shows the ratio of median household income of household head
occupation relative to household heads working in elementary occupations.
Similarly, household heads who were in the high-skilled, manager category
earned 3.2 times more than household heads who are in low-skill, elementary
occupations. Generally, the higher skilled occupations the heads of household
had, the higher the overall household income. The magnitude of the differences
is not trivial—households with higher human capital have considerably higher
household incomes.
In this section, we discussed the differences in household incomes in Malaysia,

and how they are associated with three relevant dimensions—demography,
urbanisation and human capital. From these observations—demography does
not seem to meaningfully account for the differences in household incomes
across states. More could be explained by the degree of urbanisation, and even
more so by the degree of human capital. Urban households earn more than
rural households, and households with heads with higher education and skill
levels have much higher household incomes. The latter will be explored in
greater depth in Part 3 of this report in the broader context of the economic
development of Malaysia.

PART 1
However, having higher household income does not fully reflect the well-being
of the household. For example, goods and services may be more expensive in
some areas, requiring higher household income to maintain the same quality of
life. The next section seeks to look at the expenditure of households to further
explore the different experiences of Malaysian households.
1.3 Household Expenses
1.3.1 A national overview
Assessing the well-being of households through the perspective of income is

important, but inadequate. Complementing the analysis with understanding the
trends in household expenses serves to provide a more complete picture of how
Malaysian households have fared.
Figure 1.21: Household expenditure and income, 1993 – 2016

RM8,000
Household Expenditure Household Income growth 6,958
7,000
growth per Annum: 5.6% per Annum: 6.3% 6,141
6,000
5,000
4,025 4,033
4,000 3,578
3,249
3,000 2,539
1,953 2,190
2,000 1,705 1,631
1,161
1,000
0
1993 1998 2004 2009 2014 2016
Household Expenditure Mean Household Income

Note: The surveys for household income and expenditure were not done simultaneously before 2014.
The average household expenditure in 2016 was RM4,033, increasing from

RM1,161 in 1993. Household expenditure has grown in line with mean
household income, with income growing slightly faster than expenditure (Figure
1.21). Mean household expenditure has grown by 5.6% per year since 1993,
while mean household income has grown by 6.3% per year in the same period.

PART 1
Figure 1.22: Household expenditure as percentage of household income, 2016

80.0 %
70.0 68.1
64.2
60.1 58.3 58.0
60.0 54.4
50.0
40.0
30.0
20.0
10.0
0.0
1993 1998 2004 2009 2014 2016
Figure 1.22 shows household expenditure as a percentage of household income.

The share of mean household expenditure was 58.0% of mean household
income in 2016, decreasing from 68.1% in 19938. The share of household
expenditure dipped in 2009 to 54.4% before increasing again in 2014.
1.3.2 Diverging experiences for lower- and higher-income households
Yet again, the overall national figures mask important differences in experiences
across different households. Figure 1.23a shows the proportion of household
expenditure per household income for households of different income classes.
The share of household expenditure per household income has increased for all
income levels from 2014 to 2016. In 2016, households with incomes below
RM2,000 spent 94.8% of their incomes in consumption items listed in the
household expenditure survey, increasing from 91.9% of their income in 2014.
Conversely, households earning above RM15,000 monthly incomes only spent
45% of their incomes in 2016, increasing from 41.9% of their income. The
median household income in 2016 was RM5,228, correspondingly, about 67%
of it is spent on household expenditure, up from 65.1% in 2014.
8 To note, the surveys for household income and expenditure are not done simultaneously before 2014. Data quoted
before 2014 were based on separate household surveys.

PART 1
This means that the income remaining after expenditure, that is the residual
household income, has reduced for all income classes. Figure 1.23b shows the
residual household incomes of the different income classes. Worryingly, for
households earning below RM2,000, the income remaining after accounting for
inflation (i.e. real residual income) is only RM76 in 2016, reducing from
RM124 in 2014. This highlights that households earning below RM2,000 are
potentially very vulnerable against any economic shocks or emergencies.
Figure 1.23a: Share of expenditure to household income, 2014 – 2016

100.0 % 94.8
91.9
90.0
80.0
70.0 65.1 67.0

60.0
50.0 45.0
41.9
40.0
30.0
20.0
10.0
0.0
<RM1,999
RM2,000 - 2,999
RM3,000 - 3,999
RM4,000 - 4,999
RM5,000 - 5,999
RM6,000 - 6,999
RM7,000 - 7,999
RM8,000 - 8,999
RM9,000 - 9,999
RM10,000 - 14,999
>RM15,000
2014 2016
This is in contrast to households earning above RM15,000, who had RM13,100

remaining in 2016, decreasing from RM14,458 in 2014. Households earning
around the median household income had RM1,811 remaining in 2016, a
reduction from RM1,990 in 2014.

PART 1
Figure 1.23b: Real residual household income, 2014 – 2016 (2016=100)

RM16,000 14,458
13,100
14,000
12,000
10,000
8,000
6,000
4,000
1,990 1,811
2,000
124
76
0
<RM1,999
RM2,000 - 2,999
RM3,000 - 3,999
RM4,000 - 4,999
RM5,000 - 5,999
RM6,000 - 6,999
RM7,000 - 7,999
RM8,000 - 8,999
RM9,000 - 9,999
RM10,000 - 14,999
>RM15,00
2014 2016
Important to note, however, residual household income still includes income to

be paid as tax and compulsory social security schemes. Higher income
households most likely pay larger amounts of residual household income for
taxes.
What led to the reduction of residual income? Figure 1.24 shows the changes
in quantity of item consumed and expenditure per year from 2014 to 2016 by
income class. Two important distinctions have to be made. Changes in quantity
consumed is calculated from the growth in real expenditure to remove the
effects of inflation, hence measuring the changes in the actual quantity of item
consumed by the household. Changes in expenditure is calculated from the
growth of actual money spent on expenditure.

Figure 1.24: Change in expenditure on selected items by household income class, 2014 – 2016
Percentage change in expenditure, annual(%)
Recreation &
Income class Housing & Health and Food away
Food at Home Transport Communication cultural
of households housing-related Education from Home
services
Below RM3,000 3.2 5.6 -6.0 11.0 2.4 4.4 -5.9
RM3,000 to
Cost of living? 2.5 4.1 -2.1 12.3 -0.7 3.4 -2.9 Lifestyle?
RM5,000
RM5,000 to
1.5 3.7 -3.7 9.4 -2.9 4.3 -0.2
RM10,000
Lower income Higher income
RM8,000 to
households' 0.1 1.6 -1.7 8.6 -2.0 4.8 5.1 households'
RM10,000
spending's on Above expenditure
2.3 1.6 0.9 5.8 -0.1 4.5 6.0
RM10,000
most items grew overall
continue to for most items,
grow except including
for recreation recreation and
and cultural cultural
services... Percentage change in quantity consumed, annual(%) services...
Recreation &
Income class Housing & Health and Food away
Food at Home Transport Communication cultural
of households housing-related Education from Home
services
Below RM3,000 -1.1 2.5 -3.7 7.0 1.5 -0.6 -8.5
RM3,000 to
-1.3 1.3 2.2 8.3 -1.4 -0.9 -5.4
RM5,000
RM5,000 to
-2.2 1.0 0.7 5.8 -3.3 0.3 -2.4
... but actual RM10,000 ... and on
quantity RM8,000 to actual quantity,
-3.5 -0.9 2.9 5.2 -2.3 0.8 3.0
RM10,000
consumed in Above food consumed
-1.2 -0.6 5.9 2.8 -0.1 0.8 4.1
fact declined RM10,000 at home
for many items, declined but is
even overall substituted for
food, given food away

higher prices. from home.
36
PART 1

PART 1
From this perspective, we can observe a very clear divergence in experiences

between lower- and higher-income households. For households with incomes
below RM5,000, cost of living could be a key factor affecting their expenditure
patterns. This is most telling with regards to expenditure on food. While overall
money spent increased for food at home9, the quantity of food consumed at
home reduced. This reduction in the amount of food at home consumed is not
substituted by food purchased away from home10, as the quantity consumed
also reduced. This coincided with the rise in prices for both food at home and
food away from home (Figure 1.25). Aside from food, lower income households
also reduced consumption in several expenditure categories, especially those that
are more discretionary in nature. For example, both the expenditure and
quantity of recreation and culture services consumed reduced. For households
with income below RM3,000, even the actual quantity consumed for
transportation declined despite the overall decline in prices for this expenditure
category.
Figure 1.25: Cumulative change in CPI, 2014 – 2016

Food at home 10.1
Housing and furnishings 7.2
Transport -3.3
Health and education 8.4
Communication -0.3
Food away from home 11.6
Recreation and culture 6.0
Others 14.2
-5.0 0.0 % 5.0 10.0 15.0 20.0
9 Food at home includes food purchased in groceries or cultivated to be prepared or cooked for consumption at home.
10 Food away from home includes food purchased for consumption in restaurants and cafes.

PART 1
On the other hand, the expenditure patterns of higher income households are
very different, highlighting perhaps more of a trend in lifestyle. While households
earning above RM5,000 have reduced the consumption of food at home, they
substituted it with eating more food away from home. Also, unlike lower-
income households, the quantity of recreation and culture services consumed
also increased for these households. Furthermore, as transportation prices have
reduced given the decline in petrol prices during this period (Figure 1.25), the
quantity of transportation consumed increased even though actual money spent
reduced.
Overall, this observation is very revealing. Is the changing pattern of Malaysian

consumption in the last few years a reflection of the rising cost of living, or an
outcome of shifts in lifestyle? The answer—it seems—is both, depending on
whether you fall under the poorer or richer halves of Malaysian households.

PART 1
1.3.3 Long-term expenditure patterns
Going beyond the short-term changes between 2014 and 2016, we look further
into the past on changes in what households choose to spend since 2004. A
long-term understanding on changes in the share of household expenditure can
shed light on the evolving socio-economic conditions of Malaysian households.
In order to ensure an accurate comparison, the assessment here is from 2004,
the earliest year in which publicly available statistics use the current definition
in the expenditure items.
Figure 1.2611 shows the share that the different categories of expenditure
households spend on, compared to total expenditure for 2004 and 2016. In
2016, the share of expenditure in housing and housing-related items occupied
the largest share in household expenditure at 28.2%. This increased from
26.3% in 2004, which also was the largest share in expenditure for that year.
However, besides housing and housing-related items, the share of other
expenditure categories that are considered less discretionary in nature have
decreased. Food at home was 18% of total household expenditure in 2016,
reducing from 20.1% in 2004, both the second largest expenditure item for the
respective years. Transport was 13.7% of total expenditure in 2016, a 2.4
percentage point decrease from 16.1% of household expenditure in 2004, the
largest change in expenditure share.
In contrast, the share of expenditure on items that are more discretionary in

nature has increased during the same period. Food away from home was
12.8% of total expenditure in 2016, an increase from 10.5% in 2004.
Recreation and culture services occupied 4.9% of expenditure in 2016,
increasing from 4.7% in 2004.
11 The expenditure items are based on categories in the Household Expenditure Survey. These are housing and housing-
related (which includes housing and furnishing expenditure), food at home (which includes food and non-alcoholic
beverages), transport, communication and health & education. For analytical purposes, we consider these expenditure
categories to less discretionary in nature. The other expenditure categories are recreation and culture services, food away
from home and others (which includes alcoholic beverages & tobacco, clothing & footwear, accommodation services
and miscellaneous goods and services).

Figure 1.26: Share of expenditure, 2004 and 2016
2004 2016
4.7%
26.3% 4.9%
Recreation
and Culture Recreation
10.5% Housing and 12.8% and Culture 28.2%
Food Away Housing-Related Food Away
from Home from Home Housing and
Housing-Related
13.8%
14.1%
Others
Others
31.9%
29.0%
Discretionary Discretionary
Neccesities Neccesities
71.0% 68.1%
3.3%
Health and
Education 3.2%
20.1% Health and

Education
5.3% Food at Home
18.0%
Communication Food at Home
5.0%
13.7%
16.1% Communication
Transport Transport

40
PART 1
PART 1
Figure 1.27: Change in nominal expenditure share, 2004 – 2016

6.0 %
1.9 2.3
4.0
2.0 0.2 0.4
0.0
-0.2
-2.0
-0.2
-4.0 -2.4
-6.0
-2.1
-8.0
Food at home
Transport
Housing and
housing-related
Health and
education
Communication
Food away
from home
Recreation
and culture
Others
More discretionary in nature
Quantity Change Price Change Change in Expenditure Share
The change in the share of expenditure here can be decomposed into two
components—the change due to the change in actual quantity consumed, and
the change due to the changes in prices. This is shown in Figure 1.27, which
shows the overall change in expenditure shares of the various expenditure
categories, and the constituent quantity and price effects12.
There are a number of observations worth highlighting. The expenditure share

of food at home has fallen by 2.1% from 2004 to 2016. This has been driven
fully by the quantity effect. The price effect has in fact been a large positive,
which is unsurprising given that the price of food at home has increased by
53.3% since 2004 (Figure 1.28). The fall in expenditure share of food at home
is accompanied by the increase of 2.3% in share of food away from home
expenditure in total expenditure, driven by both positive price and
quantity effects.
12 Quantity purchased is measured by changes in the share of expenditure items in total expenditure in real terms. The
residual from the difference between this share and the share of nominal expenditure items to nominal total expenditure
is thus taken be effects from the changes in prices on the share of expenditure.

PART 1
The opposite trend is observed for the share of expenditure on transportation.

The share of expenditure in the transport category to total expenditure has
fallen by 2.4% between 2004 and 2016, driven by both negative price and
quantity effects.
Communication share of expenditure in total expenditure has also fallen by

0.2%. Interestingly, this quantity effect is actually positive, but the overall share
declined as the negative price effect more than offsets the positive price effects.
This is in line with the lower prices in the communication category, which
declined by nearly 6.0% during this period as measured by the CPI.
Figure 1.28: Cumulative change in CPI, 2005 – 2016

60.0 % 56.8
53.3
50.0
40.0
33.5
30.0 28.5
22.3
20.0 16.5 17.3
10.0
-5.8
0.0
-10.0
Food at home
Transport
Housing and
housing-related
Health and
education
Communication
Food away
from home
Recreation
and culture
Others
More discretionary in nature

PART 1
Overall, in the recent decade, the change in the expenditure pattern of

Malaysian households has saw a shift towards a greater share of expenditures
that are more discretionary in nature. By decomposing the change in share into
quantity and price effects, it can be observed that changes in the prices for
different expenditure categories have important consequences on the overall
expenditure patterns. This is particularly clear for the case of expenditure on
food, which has seen large price increases, as well as expenditure on
communication, in which prices have declined.
Table 1.1: Cumulative and annual change in CPI, 2005 to 2016

Cumulative change in Annual average change in
CPI (%) CPI (%)
Food at Home 53.3 4.0
Transport 16.5 1.4
Housing and Housing-Related 22.3 1.8
Health and Education 28.5 2.3
Communication -5.8 -0.5
Food Away from Home 56.8 4.2
Recreation and Culture 17.3 1.5
Others 33.5 2.7
Source: CEIC (n.d.)
Table 1.1 shows the per annum changes in CPI. The relatively large cumulative
changes from 2005 to 2016 could be the consequence of small increases per
year. For example, the 53.3% cumulative increase in food at home CPI from
2005 to 2016 only requires a 4.0% increase per annum, while the increase of
56.8% increase in food away from home requires only a 4.2% increase per
annum.
Box 1.1: Snapshot of basic amenities
The first two editions of The State of Households provided snapshots of

household access to basic amenities, based on the previous releases of the
HIS by DOS. In keeping with this, we looked at the statistics provided by
the 2016 HIS release for further insights into outcomes related to living

PART 1
standards, as a complement to analyses of household income and expenses

to understand the wellbeing of households.
In this respect, findings for 2016 indicate continued improvements for

states that were lagging behind in some areas of basic amenities. Figure
1.29, Figure 1.30 and Figure 1.31 show that Sabah improved access for
rural households to pipe water and schools, while Sarawak too improved
these provisions in addition to access to health centres.
However, it is worth noting that rural households in several states saw

small declines in these metrics from 2014 to 2016. In Kelantan, Pahang
and Labuan, slightly fewer rural households had access to pipe water.
With respect to proximity to services, fewer rural households in Johor,
Pulau Pinang and Labuan were in close proximity to government
secondary schools, while fewer in Johor, Pahang, Sabah, Selangor and
Labuan were in close proximity to public health centres.
Figure 1.29: Percentage of rural households with access to pipe water, by state,
2014 and 2016
100.0 %
80.0
60.0
40.0
20.0
0.0
Terengganu
Johor
Kedah
Kelantan
Labuan
Malaysia
Melaka
Negeri Sembilan
Pulau Pinang
Pahang
Perak
Perlis
Sabah
Sarawak
Selangor
2014 2016

PART 1
Figure 1.30: Percentage of rural households located <5km from a secondary school, by
state, 2014 and 2016
100.0 %
80.0
60.0
40.0
20.0
0.0
Johor
Kedah
Kelantan
Labuan
Malaysia
Melaka
Negeri Sembilan
Pulau Pinang
Pahang
Perak
Perlis
Sabah
Sarawak
Selangor
Terengganu
2014 2016
Figure 1.31: Percentage of rural households located <5km from a public health centre, by
state, 2014 and 2016
100.0 %
80.0
60.0
40.0
20.0
0.0
Johor
Kedah
Kelantan
Malaysia
Melaka
Negeri Sembilan
Pahang
Perak
Perlis
Pulau Pinang
Sabah
Sarawak
Selangor
Terengganu
Labuan
2014 2016

PART 1
The 2016 HIS for the very first time also released statistics on basic amenities
down to the district level, which reveal a clearer illustration of the disparities
between and within states, especially between East Malaysia and Peninsular
Malaysia.
With respect to household access to electricity, the 2016 figure at the state
level suggests that nearly all households have access to electricity. The figures
for rural households in Sabah and Sarawak stood at 98.7% and 99.3%,
respectively, indicating that these two states were just under full coverage.
However, district data indicate a considerable gap for a few districts,
including Beluran and Tongod district, where 8.6% and 6.8% of households,
respectively, did not have access to electricity. This constitutes approximately
1,000 households in Beluran and 300 in Tongod.
In terms of access to pipe water, several districts still have shares as low as
under 30% of households with access, with these households largely
concentrated in districts in Kelantan, Sarawak, and Sabah (Figure 1.32).
Figure 1.32: Percentage of households with access to pipe water, by district, 2016
29.50 100.00
Likewise, some of the same districts in Sabah and Sarawak lagged especially
far behind also in terms of proximity to government secondary schools and
public health centres (Figure 33 and Figure 34). Some districts in particular
had shares of less than 6% of households located within 5km from a
government secondary school, and some had shares of less than 20% being

PART 1
located within 5km of a public health centre. An excess of 50% of households

in some of these districts were located further than 9km to a public health
centre. Nevertheless, some districts in Peninsular Malaysia also lagged behind,
with a remaining small share of households several districts lacking in
proximity to both public health centres and government secondary schools.
Figure 1.33: Percentage of households located <5km from a secondary school, by district, 2016
5.40 100.00
Figure 1.34: Percentage of households located <5km from a public health centre, by district, 2016
17.70 100.00
Overall, these findings provide an alternative illustration of the different

realities for households across Malaysia.
For an interactive exploration of these statistics, visit KRI Visualisations for the accompanying “The State of Households
2018: An Interactive Visualisation”.

PART 1
1.4 Changing Trends in Inequality
In the past State of Households reports, inequality has always been an important
focus. In those reports, we explored the issue of economic inequality of
households in Malaysia from various perspectives to provide a richer
understanding of the actual situation in Malaysia. In this report, we further
extend our assessment by providing a long-term perspective of the changing
trends in inequality, touching briefly on how the standard measure of inequality
in Malaysia could be improved to better reflect economic reality.
1.4.1 Income inequality declined over the years
The collection of official data on household incomes in Malaysia began almost

five decades ago, in 197013. Household income in Malaysia has been steadily
increasing from 1970 until 2016. In 1970, household median income was
RM819 in 2016 prices (Figure 1.35). Today, this figure has increased 6.4 times
to RM5,228. It is also noted that growth has been broadly inclusive, as
household income inequality fell from a high Gini14 coefficient of 0.513 in 1970
to 0.399 in 2016. The greatest continuous drop in inequality occurred from
1976, when the Gini coefficient was 0.557, to 1989, when it was 0.442. From
1989 to 2004, inequality has remained somewhat stagnant. Post 2007,
inequality started falling again, and between the last two Household Income
Surveys, inequality fell from 0.401 in 2014 to 0.399 in 2016 (0.5% lower) as
Figure 1.35 shows.
13 It is important to note that the Household Income Survey officially commenced in 1984. Prior to that, the official data
on household incomes was obtained from the Post Enumeration Survey in 1970 and 1974, and the Agriculture Census
1977 for 1976. The figures on historical household income prior to the 1984 may not be entirely comparable to those
after, hence care is taken in interpreting these figures prior.
14 The Gini coefficient measures the degree of inequality by ranking each household from poorest to richest and calculating
the distance of the cumulative households from the 45-degree line which indicates perfect equality (income share =
household share). A Gini coefficient of 0 indicates a perfectly equal society while a Gini coefficient of 1 suggests that
one household holds all the income.

PART 1
Figure 1.35: Real household median income and level of inequality, 1970 – 2016
Gini coefficient
RM6,000 0.600
RM5,228
5,000 0.500
4,000 0.400
3,000 0.300
2,000 0.200
1,000 RM819 0.100
0 0.000
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Median (LHS) Gini (RHS)
Source: EPU and World Development Indicators
The improvement in income inequality can also be observed when we focus

more directly on the conditions at the top and bottom end of the income
distribution. Figure 1.36 shows how the percentage of households living with
less than 60% of median household income, a measure of relative poverty (on
the x-axis), and the share of total income earned by the top 10% of households
(on the y-axis) have evolved from the mid-1980s to now. From the mid-1980s
to the early 2000s, we witnessed improvement in relative poverty, but top
income shares remained relatively flat. After the early 2000s however, we
moved to the bottom left quadrant, with both relative poverty declining and
incomes that go to the top 10% of households reducing, pointing towards
improvement in inequality that comes from both ends of the income distribution.

PART 1
Figure 1.36: Households in relative poverty and income share of top 10% of households, 1984 – 2016
39.0 %
1997 1984
1995
38.0 1999
1987
37.0 1992
2002
36.0 1989
35.0 2004
2007
34.0
33.0 2009
2012
32.0
31.0
2016
2014
30.0
29.0
20.0 25.0 30.0 35.0 40.0 45.0
Estimated Poverty Rate (% of Households with Income Less than 60% of Median)
Source: EPU, PovcalNet and KRI calculations
Another angle at which improvements in income equality was seen is by

looking at the trends of household incomes in the different income groups—the
bottom 40%, middle 20% and the top 10%. Figure 1.37 shows that all income
groups experienced an upward trend in mean income, after adjusting for
inflation since 1970. Additionally, the mean household income of the bottom
40% and middle 40% of households have increased as a share of the mean
household income of the top 20% of households. In 1970, the mean household
income for the bottom 40% of households was only 10.3% of the mean
household income of the top 20% of households. This improved substantially
in 2016, with the bottom 40% income increasing to 17.7% of top 20% mean
income. The mean household income for the middle 40% was 29.4% of the
top 20%, while in 2016, it became 40.4% (Figure 1.38).

PART 1
Figure 1.37: Real mean household income by income group, 1970 – 2016
RM18,000
16,000 T20
14,000
12,000
10,000
8,000
Malaysia
M40
6,000
4,000
B40
2,000
0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Source: Department of Statistics Malaysia and World Development Indicators

PART 1
Figure 1.38: B40 and M40 mean household income as share of T20 mean income, 1970 – 2016
50.0 %
45.0
Malaysia
40.0 M40
35.0
30.0
25.0
20.0
B40
15.0
10.0
5.0
0.0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Source: Department of Statistics Malaysia and World Development Indicators
The bottom 40% of households experienced the greatest cumulative growth in

income from 1970. Mean household income for the bottom 40% was 7.6 times
higher in 2016 compared to 1970. The middle 40% of households also saw
significant improvement; mean household income was 6.1 times higher. The top
20% experienced the least cumulative growth in income, but still a respectable
increase of 4.4 times from 1970 (Figure 1.39). The only period in which the
top 20% households experienced higher annual income growth than the other
two groups was between 1987 and 1997 (Figure 1.40).

PART 1
Figure 1.39: Cumulative change in household income by income group, 1970 – 2016
1970 prices
700.0 %
B40
600.0
Malaysia
M40
500.0
400.0
T20
300.0
200.0
100.0
0.0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
-100.0
Source: Department of Statistics Malaysia, World Development Indicators and KRI calculations
Figure 1.40: Growth in real income (annualized)

9.0 %
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1970 - 84 1987 - 97 1999 - 2007 2009 - 16
Top 20% Mid 40% Bottom 40% Malaysia

PART 1
1.4.2 No convergence in income between states
Thus far, we have been looking at the vertical dimension of income inequality—
that is trends relating to households in different parts of the income distribution.
The changing trends in household income can be analysed through a spatial
dimension. In this section, we look at the changing trends in household income
across different states in Malaysia. Reflecting the national trend, household
income of each state rose steadily over the years too. However, some states
have consistently higher incomes than others (Figure 1.41). Kelantan had the
lowest income at RM392 in 1970, while Selangor had the highest at RM1,317
(3.4 times higher). In 2016, Kelantan again had the lowest median, a figure of
RM3,079, while Kuala Lumpur had the highest at RM9,073 (2.9 times higher).
Figure 1.41: Real median household income by state, 1970 – 2016

RM10,000
9,000
8,000
7,000
6,000
Malaysia
5,000
4,000
3,000
2,000
1,000
0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Source: EPU, World Development Indicators

PART 1
For ease of analysis and exposition, the different states are categorised into
three groups. Selangor, Kuala Lumpur and Putrajaya, having the highest
income, are referred to as Group 1. Pulau Pinang, Johor, Melaka and Negeri
Sembilan are referred to as Group 2. These states have household median
incomes which closely track the national median. Group 3 consists of the
remaining states located along the eastern coast of Peninsular Malaysia and
East Malaysia which have income levels below the rest of the country (Figure
1.42).
Figure 1.42: Real household median income by state clusters, 1970 – 2016
RM9,000
8,000
Group 1
7,000
6,000
Group 2
5,000 Malaysia
4,000 Group 3
3,000
2,000
1,000
0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Overall, the distance between the median household income of each group has
not significantly converged over the years. Despite increasing incomes, the ratio
of the median income of any group of states to the Group 115 cluster has
remained rather stagnant over time (Figure 1.43). Throughout the last four
decades, Group 2 and 3 median household incomes have been roughly 70%
and 50% of that of Group 1, respectively.
15 Note that for 1970, 1974 and 1979, Kuala Lumpur and Putrajaya were not included in the Selangor, Kuala Lumpur
and Putrajaya cluster due to unavailability of data and the non-existence of Putrajaya. From 1976, and 1984 to 2004,
this cluster includes Selangor and Kuala Lumpur. From 2007 to 2016, the median income of Selangor and Kuala
Lumpur were included in the calculation of the average median income in the cluster.

PART 1
Figure 1.43: Household median income as proportion of Selangor, Kuala Lumpur and Putrajaya
median, 1974 – 2016
90.0 %
80.0
70.0 Group 2
Malaysia
60.0
50.0 Group 3
40.0
30.0
20.0
10.0
0
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Figure 1.44: Cumulative change in household median income by state group, 1974 – 2016
600.0 %
Group 3
Malaysia
500.0 Group 1
Group 2
400.0
300.0
200.0
100.0
0.0
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016

PART 1
Figure 1.45: Annual growth in household income by state group in four periods
9.0 %
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1970 - 84 1987 - 97 1999 - 2007 2009 - 16
Group 1 Group 2 Group 3 Malaysia
In terms of income inequality within states, some states are more unequal than
others even when overall inequality has declined (Figure 1.46). In 1974, the
most unequal state was Pulau Pinang which has a Gini coefficient of 0.597,
while the least unequal was Perlis, at 0.425. In 2016, Sabah was the most
unequal with a Gini of 0.402, while Pahang was the least unequal at 0.324.

PART 1
Figure 1.46: Gini of states, 1970 – 2016

0.650
0.600
0.550
0.500
0.450
0.400 Malaysia
0.350
0.300
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
National-level inequality also tends to be higher than state-level inequalities,

suggesting that income differences between states contribute to a higher national
Gini coefficient overall. Figure 1.47 shows inequality through three different
measures: 1) the usual national-level Gini coefficient, 2) weighted inequality
which assigns different weights to each state based on the number of
households16, and 3) between-state inequality which assumes that each household
within a state earns the state mean income. Weighted inequality gives an idea
of how inequality has changed within each state (“within-state inequality”),
while between-state inequality shows how differences in income between states
have evolved.
Within-state inequality decreased in line with overall national inequality. In

1974, the weighted inequality by states was 0.497, while in 2016, the figure
decreased to 0.369. In contrast, there has been no clear improvement in
between-state inequality over the entire period. This is consistent with the
observation that has not been any clear convergence in household incomes
between the different states. Nevertheless, it can be observed that the period
with the greatest change was from 1989 to 1997, where between-state inequality
16 Population share is used for years in which on number or share of households is unavailable.

PART 1
increased from 0.154 to 0.218 (41.6% higher). This coincides with the rapid
industrialisation period of the Malaysian economy. Overall national inequality,
however, remained somewhat unchanged, implying that despite increasing
between-state inequality during this rapid industrialisation period, the
improvement in within-state inequality has offset the overall rise in income
inequality for Malaysia.
Figure 1.47: National versus “between” state inequality, 1970 – 2016

0.600
0.550
0.500
0.450
Gini
0.400
Weighted
0.350
0.300
0.250
0.200
“Between”
0.150
0.100
1970 1974 1976 1979 1984 1987 1989 1992 1995 1997 1999 2002 2004 2007 2009 2012 2014 2016
Source: Department of Statistics Malaysia, CEIC, Population of Malaysia (Saw Swee Hock, 2007) and KRI calculations
Is income inequality in Malaysia underestimated?17

It is fair to ask if the official measure of income inequality could somehow
underestimate the true extent of income inequality in Malaysia. Statistically, the
measurement of income inequality derived from household surveys typically
suffers from under-sampling and under-reporting of households in the upper-
end of the income distribution. This “missing income” could lead to the
underestimation of income inequality.
For the case of Malaysia, the degree of underestimation is further compounded

by the fact that income from non-citizens are not included in the official
measurement of income inequality, most of who occupy the lower-end of the
income distribution. From an economic perspective, if the changing trend in
income inequality is taken to be a consequence of underlying socio-economic
17 For a more detailed technical discussion, refer to accompanying Technical Note—1 “More or Less Equal? Accounting
for missing top and bottom incomes in measurement of income inequality in Malaysia”.

PART 1
processes, then including all households and not just Malaysian citizens would
give a more accurate and complete representation. The following section
attempts to account for missing incomes for both the upper- and lower-end of
the income distribution for the period between 2012 and 2016.
The total income from household surveys is often smaller than household
consumption in the national accounts. Survey income is 79.5% of final
household consumption in 2012, 84.9% in 2014 and 86% in 2016, and it is
highly likely that under-sampled and under-reported top incomes are the reason.
High income earners are incredibly rare, so even if the surveyor were to
encounter one high income earner, the mean income of this household may not
necessarily reflect the whole spectrum of the top income class. It is also more
difficult to establish contact with higher income households, and even if this is
accomplished, these households may understate incomes. Household final
consumption expenditure from the national accounts is often more reflective of
total household income as it closely tracks consumption. Missing top incomes
are calculated from taking household final consumption expenditure18 and
subtracting total household income from the Household Income Survey and
missing bottom income (details below).
Figure 1.48 shows the gap between final household consumption expenditure
adjusted for missing bottom income and income from the household survey.
This gap is non-trivial, although there has been an improvement in that missing
income as a portion of survey income has been falling (83.7% in 2012, 90%
in 2014 and 91.3% in 2016).
18 This item excludes expenditure by non-profit institutions serving households from final private consumption expenditure.

PART 1
Figure 1.48: Total household consumption from national accounts versus total household
income from household survey, 2012 – 2016
RM700.0 b
Gap =
600.0 b RM56.0 b
Gap =
RM55.0 b
500.0 b
Gap =
RM75.0 b
400.0 b
300.0 b
200.0 b
100.0 b
0.0 b
2012 2014 2016
Consumption from National Accounts Income from Household Survey
Source: Department of Statistics Malaysia and KRI calculations
Missing bottom income is due to often-neglected foreign workers representing

a sizable part of Malaysia. The share of foreign workers to the total number
of employed in Malaysia has increased in the past four years. Over half of all
workers with no formal education and over 45% of workers educated up to
the primary level are of foreign origin. The missing bottom income is calculated
by estimating the total income accrued to foreign workers. The total income for
foreign workers with an education level up to primary is added to the lowest
decile of the Malaysian income distribution. The income of those with secondary
education is added to the second lowest decile. Foreign workers with tertiary
level qualifications are not considered. The number of households in each decile
was converted into number of income recipients due to the addition of foreign
workers, although household inequality is still the focus.
Figure 1.49 shows estimated income from low- and semi-skilled foreign workers
from 2012 to 2016. Again, this is non-trivial and foreign income is observed
to have increased to RM38.0b in 2016.

PART 1
Figure 1.49: Estimated total income from low- and semi-skilled foreign workers, 2012 – 2016
RM50.0 b
40.0 b RM38.0 b
RM33.0 b
30.0 b
RM24.0 b
20.0 b
10.0 b
0.0 b
2012 2014 2016
Adjusting for missing top incomes increases the Gini coefficient from 0.431 to
0.498 (15.5% higher) in 2012, 0.401 to 0.437 in 2014 (9% higher) and 0.399
to 0.435 in 2016 (9% higher). Having adjusted for missing foreign income at
the lower end of the distribution, the Gini coefficient has further increased by
0.3% to 0.499 in 2012, 1.4% to 0.443 in 2014 and 1.4% to 0.441 in 2016.
Despite this increase in level of inequality, the trend of declining income
inequality nonetheless remains. However, inequality is still one of the most
important concerns of our time and getting the right measure for it is the
first step.
Figure 1.50: Income inequality, adjusted for missing upper and lower incomes, 2012 – 2016
0.51 0.499
0.498
Adjusted for
0.47 low tail and
0.443 0.441 high tail
0.431
0.43 Adjusted for
0.437 0.435 upper tail
0.401 0.399
Gini
0.39
2012 2014 2016

PART 1
Box 1.2: The difference between relative and absolute measures
Although official estimates show that inequality has been decreasing, the
public are not sympathetic to this notion. Public discussion often revolves
around how inequality is still a pervasive problem which has not improved
in the past few decades. The general perception is that the rich are getting
richer, while the poor are getting poorer. This is not consistent with the
2016 Gini coefficient of 0.399, which is closer to OECD levels.
A different way of looking at the data can provide another reason as to why
perception differs from official estimates. Relative measures of inequality
look at how inequality changes relative to a reference point, while absolute
measures only look at the magnitude of change.
Relative income could be converging, but the absolute income gap continues
to increase.
A household which starts from a lower base, for example, RM1,000, could
have tripled their income in one year to RM3,000. Meanwhile, a household
which starts from a high base, like RM10,000, could have doubled their
income to RM20,000. In the previous year, the high-income household
earned 10 times the low-income household, while in the present year the
high-income household earns only 6.7 times the low-income household, since
the income of the high-income households grew less than the income of the
low-income household. Additionally, the Gini coefficient would even be
lower. However, the gap between these two households in the previous year
was RM9,000, while in the present year it is RM17,000.
From Figure 1.51, household income of the top 20% as a multiple of

bottom 40% household income has significantly decreased from 1970 to
2016. Similarly, it has decreased as a multiple of middle 40% income.
Middle 40% income as a multiple of bottom 40% income has also decreased.
However, the absolute gap between all three income groups have increased,
the gap between the top 20% and bottom 40% is particularly striking, and
this could the reason for resentment and the negative perception of inequality.

PART 1
Figure 1.51: Household income as a multiple of income group, 1970 – 2016

12x
10
6
T20 to B40
4
T20 to M40
2 M40 to B40
0
1970
1974
1976
1979
1984
1987
1989
1992
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Figure 1.52: Difference in real mean household income, 1970 – 2016

RM14,000
T20 to B40
12,000
10,000
T20 to M40
8,000
6,000
4,000
M40 to B40
2,000
0
1974
1979
1997
1970
1976
1984
1987
1989
1992
1995
1999
2002
2004
2007
2009
2012
2014
2016

PART 1
Poverty rate could be declining, but more people could be impoverished. Say,
for instance, in a year Malaysia has a poverty rate of 40%, while in the
following year its poverty rate is 30%. The percentage of households living
in poverty has clearly fallen. Suppose however that the population in the
first year was 10.0 million while the population in the following year was
20.0 million. This would mean that there were 4.0 million poor households
in the first year and 6.0 million in the following. The number of poor
households has increased by 2.0 million.
Looking at the figures below, the poverty rate has been falling from 1995
to 2016, but the number of poor households increased due to population
growth.
Figure 1.53: Percentage of households living under 60% median, 1995 – 2016
46.0 %
45.0
44.0
43.0
42.0
41.0
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Source: EPU, World Development Indicators and KRI calculations

PART 1
Figure 1.54: Number of households living under 60% median, 1995 – 2016
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1995
1997
1999
2002
2004
2007
2009
2012
2014
2016
Source: Department of Statistics Malaysia, EPU and KRI calculations
We would need to ask ourselves which measure matters more. To

policymakers and economists, looking at relative measures is important to
compare how much a parameter has changed relative to a reference point.
Researchers can observe whether certain redistributive policies are effective
based on whether inequality has declined over time. Sometimes, relative
measures are important to ordinary households too when comparing how
much their conditions have changed relative to a reference year. However,
absolute measures are a lot more obvious and easier to compute. Households
would scarcely find out how much their income as a percentage of top 20%
household income has changed over time. They are likely more interested in
the difference between their income and the income of another household.
The existence of falling inequality is not enough to reassure the public since
inequality, nonetheless, still exists. The growing number of poor households
is clearly quite visible to the public, thus fuelling the negative sentiment
surrounding inequality. It may also be worth noting that globalisation has
opened markets to many international goods and services. Rather than
comparing with historical conditions, which would imply that households
have a better standard of living compared to previous generations, households
are now able to compare with others (even from different countries) in the
present. We always tend to compare with those who are better off, rather
than those who are worse off.

PART 1
1.5 Conclusion
In this part, through the central focus of households as the unit of reference,
we have explored multiple perspectives relating to the economic well-being of
Malaysians. While the perspectives explored are varied, they are tied through a
common theme—that different households have very different experiences. To
fully appreciate the state of households in Malaysia, there is a need to look
beyond conventional, high-level economic indicators that could mask the
experiences of Malaysians living in different economic realities. Hopefully, this
chapter managed to clearly illustrate this through the discussion on, amongst
other, the large variations of household income across different households, the
different economic challenges faced by Malaysians from lower income households
that otherwise would not have been able to be discerned by looking at national
averages. The fact that even when the statistics on income inequality is
improving, the absolute gap between income groups and the number of
households living in relative poverty are continuing to rise. These are far from
exhaustive, but they serve to highlight the broader message that it is essential
to complement national-level economic assessments with analyses that are
sensitive to the differences at a more refined level.
This in turns underlies an important point—the significance of having access to

more granular level statistics and to have the right socio-economic indicators
that could adequately reflect the richness of the warp and weft of economic
realities. DOS and many other official agencies have begun to make important
and earnest efforts in recent years towards this end. Going forward, the
continued effort in this regard is essential for both the research community and
policymakers in Malaysia to improve our understanding of the pressing issues
of the economy and the necessary actions required to address them.

PART 1
Box 1.3: Household income inequality and the labour income share
It is important to appreciate that income inequality does not occur in

isolation of other developments in the economy. It is instead the outcome of
some underlying macroeconomic processes. For us to truly understand the
changing trends in income inequality, we would need to have a better grasp
of these underlying processes.
One such processes is the changing share of national income that is paid to
labour. Labour income share declines when real wages grow more slowly
than labour productivity. This, in turn, implies that a growing fraction of
the gain of productivity in the economy is going to capital. Since capital
tends to be concentrated amongst richer households, falling labour income
share is likely to increase income inequality.
Declining labour income shares is indeed one of the defining developments

in the global economy over the past few decades. True for most advanced
economies and many major emerging economies, this development is
associated with the worsening of income inequality in these economies. This
is found to have been driven in a large part by the combination of impacts
from technology and the consequences of increased global integration.
Figure 1.55: Labour income share and Gini Coefficient, 2005 – 2016
0.50
0.48
0.46
0.44 Labour income

share (incl. own
0.42 account workers)
0.40 Gini coefficient
0.38
0.36
0.34
0.32
0.30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: KRI (forthcoming)

PART 1
Malaysia, an outlier
In contrast to the global trend, Malaysia’s labour income share has instead
been increasing since the official statistics were made available in 2005,
together with declining household income inequality, as shown in Figure
1.55. Between 2005 and 2016, including income share going to self-
employment, labour income share has increased by 7.5 percentage points.
Based on our research, this increase in labour income share in Malaysia can
be explained by three factors:
• More self-employment. More than a fifth of the increase in labour

income share since 2005 can be accounted for by the increasing share of
the Malaysian workforce who are in self-employment. The increase has
been apparent in urban areas and amongst women joining the labour
force. Part 2 explores these trends at greater length.
• Structural shifts to economic sectors with higher labour income share.

The share of the services sector in the Malaysian economy has been
growing, particularly in the more traditional services sub-sector such as
wholesale and retail trade. At the same time, the share of the manufacturing
sector in the overall economy has been gradually declining, especially in
high-tech manufacturing. Since the services sector has higher labour
income share relative to the manufacturing sector, this has led to an
overall increase in the economy-wide labour income share. From 2005 to
2016, close to 30% of the increase in labour income share can be
attributed to this shift.
• Greater reliance on labour-intensive production. Almost half of the

overall increase in labour income share since 2005 can be attributed to
the individual increases in labour income share within all major economic
sectors. This is turn can be explained by the greater reliance on labour-
intensive production in most economic sub-sectors. It is found that the
sub-sectors with the higher increase in labour income share are associated
with decreased investment in technology and higher increase in the
proportion of low-skilled foreign workers hired.

PART 1
Overall, the increase in the labour income share in Malaysia has been broad-
based, with all economic sectors experiencing increases to varying degrees,
together with a higher share of self-employment in the workforce. This
development is not inconsistent with the deindustrialisation of the Malaysian
economy in which the share of manufacturing sector has been gradually
declining after peaking in the early 2000s, replaced by the services sector.
Figure 1.56: Decomposition of the increase in labour income share, 2005 to 2016
8.0%
7.0
Change in own More self-
account workers employment
6.0
5.0 Shift to sectors

Between
with higher labour
economic sectors
income share
4.0
Unadjusted labour
income share
3.0
Greater reliance on
2.0 Within economic
labour-intensive
sectors effect
production
1.0
0.0
Source: KRI (forthcoming)

PART 1
Good for the future?

From the increase in labour income share and the improving income
inequality, it appears that over the last decade, the growth of the economy
has become more inclusive in nature—benefiting many Malaysians.
Structurally, however, this has been accompanied by a transition away from

a more capital-intensive to a more labour-intensive model—a structure that
is skewed towards lower skilled workers rather than investment in technology,
and more traditional services sub-sectors rather than high-tech manufacturing.
If our potential for sustained economic growth in the future lies in our
ability to harness innovation and improve productivity growth, this structural
change that is accompanying our deindustrialisation could work to our
disadvantage.
Our findings highlight that the transition towards an economy that is

simultaneously inclusive and productivity-driven could be wrought with
trade-offs that would need to be carefully managed.
For a more complete treatment of this box, read our forthcoming research paper—What Explains the Increase of Labour
Income Share in Malaysia?

PART 1
References
Ahluwalia, Montek S. 1976. A Social Accounting Matrix for Malaysia.
Washington, D.C.: Development Research Center, World Bank.
Anand, Sudhir. 1983. Inequality and Poverty in Malaysia. Oxford: Oxford
University Press.
Anand, Sudhir, and Paul Segal. 2015. “The Global Distribution of Income.” In
Handbook of Income Distribution, 937-979. Amsterdam: Elsevier.
Ang, Jian Wei, and Athreya Murugasu, Chai Yi Wei. 2018. Low-Skilled
Foreign Workers' Distortions to the Economy. Annual Report, Kuala
Lumpur: Bank Negara Malaysia.
Armour, Philip, Richard V. Burkhauser, and Jeff Larrimore. 2013. “Using the
Pareto Distribution to Improve Estimates of Topcoded Earnings.” Ithaca:
Cornell University.
Atkinson, A. B. 2015. Top Incomes in Malaysia 1947 to the Present (With a
Note on the Straits Settlements 1916 to 1921). Paris: World Wealth and
Income Database.
Atkinson, A. B., and Thomas Piketty. 2007. Top incomes over the twentieth
century: a contrast between continental European and English-speaking
countries. Oxford: Oxford University Press.
—. 2010. Top incomes: a global perspective. Oxford: Oxford University Press.
Bandiera, Oriana, and Ashwini Natraj. 2013. “Does Gender Inequality Hinder
Development and Economic Growth? Evidence and Policy Implications.”
World Bank Research Observer 28 (1): 2-21.
Bureau of Economic Analysis. 2012. Bureau of Economic Analysis. U.S.
Department of Commerce. 24 April. Accessed January 01, 2018.
https://www.bea.gov/faq/index.cfm?faq_id=1009.
Carr-Hill, Roy. 2013. “Missing Millions and Measuring Development.” World
Development 46: 30-44.
Cowell, Frank. 1998. Measurement of Inequality. London: Distributional
Analysis Research Programme.
Deaton, Angus 2005. “Measuring Poverty in a Growing World (Or Measuring
Growth in a Poor World).” The Review of Economics and Statistics 87 (1): 1-19.
Deaton, Angus. 2001. “Counting the World's Poor: Problems and Possible
Solutions.” The World Bank Research Observer 16 (2): 125-147.

PART 1
Dutta, Soumitra, Bruno Lanvin, and Sacha Wunsch-Vincent. 2017. The Global
Innovation Index 2017: Innovation Feeding the World. Ithaca, Fontainebleau,
and Geneva: Cornell University, INSEAD,
and
World Intellectual Property Organization.
Focus Malaysia. 2017. “The super rich getting richer.” Focus Malaysia,
3 November.
George Town World Heritage Inc. Directory of Traditional Trades and
Occupations in George Town World 2012 (by streets). George Town:
George Town World Heritage Inc.
Goesling, Brian. 2001. “Changing Income Inequalities within and between
Nations: New Evidence.” American Sociological Review 66 (5): 745-761.
Groves, R. M., and M. Couper. 1998. Nonresponse in Household Interview
Surveys. Hoboken: Wiley.
Guvenun, Fatih, and Greg Kaplan. 2017. Top Income Inequality in the 21st
Century: Some Cautionary Notes. Cambridge: National Bureau of Economic
Research.
International Labour Organization. 2016. Review of labour migration policy in
Malaysia. Tripartite Action to Enhance the Contribution of Labour Migration
to Growth and Development in ASEAN, Thailand: ILO Regional Office for
Asia and the Pacific.
Jantzen, Robert T., and Klaus Volpert. 2012. “On the Mathematics of Income
Inequality: Splitting the Gini Index in Two.” The American Mathematical
Monthly. 119: 824-837. The Mathematical Association of America
Kazandjian, Romina, Lisa Kolovich, Kalpana Kochhar, and Monique Newiak.
2016. “Gender Equality and Economic Diversification.” IMF Working
Paper. Washington D.C.: IMF.
Korinek, Anton, Johan A. Mistiaen, and Martin Ravallion. 2005. “Survey
Nonresponse and the Distribution of Income.” World Bank Policy Research
Working Paper 3543. Washington D.C.: World Bank.
Lakner, Christoph, and Branko Milanovic. 2015. “Global Income Distribution:
From the Fall of the Berlin Wall to the Great Recession.” World Bank
Economic Review. Washington D.C.: World Bank.
Lee, Hwok-Aun, and Muhammed Abdul Khalid. 2016. “Is inequality in
Malaysia really going down? A puzzle explored.” Kuala Lumpur: Development
Research Group Kuala Lumpur Seminar Series.

PART 1
Ministry of Finance Malaysia. Various years. Economic Report. Putrajaya:

Ministry of Finance Malaysia.
OECD. 2001. Glossary of Statistical Terms. 25 September. Accessed January
01, 2018.
https://stats.oecd.org/glossary/detail.asp?ID=1305.
—. n.d. What are Equivalence Scales? Accessed February 6, 2018.
http://www.oecd.org/eco/growth/OECD-Note-EquivalenceScales.pdf.
Sabelhaus, John, David Johnson, Stephen Ash, David Swanson, Thesia Garner,
John Greenlees, and Steve Henderson. 2012. “Is the Consumer Expenditure
Survey Representative by Income?” Washington, D.C.: Federal Reserve
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Measurement of Personal, Civil, and Economic Freedom. Washington D.C.,
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Geneva: World Economic Forum.

PART
02
THE MALAYSIAN
WORKFORCE:
A CHANGING LANDSCAPE 76
2.1 Women in the Workforce—
A Work in Progress 77
2.2 Foreign Workers and the
Economy—A Review 119
References 134
PART 2
THE MALAYSIAN WORKFORCE: A CHANGING LANDSCAPE
Employment is one of, if not the, most important aspects of a modern economy.
For households, employment is not just the primary source of income but also
the principal means to participate productively in the economy and society. For
the country as a whole, a healthy level of employment and creation of decent
work opportunities are central to fostering equitable, inclusive and sustainable
economic growth. Building on the issues discussed in the previous State of
Households, this chapter explores in greater depth two important topics that
had and will continue to have important implications in shaping the Malaysian
employment landscape. The first is on women in the workforce—on the
progress made and challenges that remain. Second is on the issue of foreign
workers and their impact on the economy.

PART 2
2.1 Women in the Workforce—A Work in Progress
Half of Malaysian working-age population are women, but they constitute only
two-fifths of the labour force. In the 2017 Global Gender Gap report 19
published by the World Economic Forum (WEF), Malaysia ranks 87 out of 144
countries in terms of Economic Participation and Opportunity, down seven
places from a year ago. Among ASEAN countries, we rank higher only to
Indonesia (108th place), whereas most of our regional peers rank significantly
above us—Laos at 22nd, Singapore 27th, Vietnam 33rd, and Brunei 61st.
Whilst global awareness of the gender gap in the labour force has burgeoned
in recent years, there remains much to be studied with regards to the state of
women in the economy in Malaysia. This section aims to fill this gap. By
exploring existing data, we examine women’s labour force participation rate
and some important gender gaps within the labour force, with emphasis on
issues that stand out from the analysis. This section concludes with a discussion
on why overcoming these challenges for women is crucial for Malaysia.
2.1.1 Gender differences in labour force participation
Gender gap in the labour force begins with women’s higher barrier to entry
relative to men. In Malaysia, working-age women are less likely than men to
participate in the labour force, with different groups of women experiencing
different levels of participation. This section looks at women’s labour force
participation rate20 (LFPR) and its trends, as well as how they compare
with men.
19 The Global Gender Gap Report is an annual report published by the World Economic Forum (WEF), which contains
an index that measures the relative gap between men and women across four key categories (sub-index)—Economic
Participation and Opportunity, Educational Attainment, Health and Survival, and Political Empowerment. The Economic
Participation and Opportunity sub-index quoted here is a combined indicator of labour force participation gap,
remuneration gap, and advancement gap. Malaysia ranks 87 out of 144 countries for this sub-index. As for the overall
Gender Gap Index, Malaysia ranks 104—the lowest rank in ASEAN. For more information about the index, please refer
to WEF (2017).
20 Defined as the proportion of working-age population (ages 15 to 64) who are currently employed or are actively seeking
employment.

PART 2
Labour force participation rate and its trend

Over the years, men and women make up roughly equal proportion of the
working-age population, but LFPR of both sexes differ significantly. In 2017,
Malaysian working-age population comprises 9.5 million women and 9.8
million men21. Of this, only 53.5% of women participated in the labour force,
whilst 77.7% of men did (Figure 2.1). In fact, women’s LFPR has historically
been lower than men’s, making the gender gap in LFPR a long-standing issue
in Malaysia.
Nonetheless, it should be appreciated that progress has taken place over time.
Within the past two decades, gender gap in LFPR has narrowed by almost 38%
from 38.9 percentage points in 1995 to 24.2 percentage points in 2017.
Underlying this progress is a long-term downward trend in participation rates
for men, and a corresponding upward trend for women.
Figure 2.1: Labour force participation rate, by sex, 1995 – 2017

100.0 %
90.0 83.5
77.2 77.7
80.0 Men
70.0
60.0 53.5
45.5 Women
50.0 44.6
40.0
30.0
20.0
10.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: CEIC
21 Source: Department of Statistics Malaysia

PART 2
Particularly, the improvement and the narrowing of the gender gap in the past
seven years has been impressive. From 2010 to 2017, whilst men’s LFPR has
remained somewhat stable, women’s LFPR increased by 8.0 percentage points
from 45.5% to 53.5%, nine times more than the 0.9 percentage point increase
recorded in the 1995 – 2010 period. As a result, within the seven-year period
alone, gender gap in LFPR narrowed by 23.7%. However, this gap remains
relatively large by international comparison. Figure 2.2 shows that in 2017,
Malaysia’s gender participation gap is one of the largest among the selected
countries, second only to India. This is despite the fact that Malaysian women’s
LFPR is actually comparable with, if not higher than, most of the advanced
economies.
Figure 2.2: Labour force participation rate and gender gap, by selected country and country
group, 2017
LFPR Gap (Percentage points) Women’s LFPR
80.0 80.0%
69.2
70.0 70.0
59.2
60.0 55.7 54.9 53.5 60.0
52.5 53.2
51.3 50.5 51.6
50.0 50.0
40.0 40.0
30.0 30.0
24.2 27.2
20.3 20.0 21.5
20.0 15.7 17.4 17.2 20.0
11.9 12.5
10.0 10.0
0.0 0.0
Low income
countries
United States
High income
countries
East Asia & Pacific
OECD members
Upper middle
income countries
Japan
Brazil
Malaysia
India
LFPR Gap (LHS) Women’s LFPR (RHS)
Source: World Development Indicators and Department of Statistics Malaysia
A deeper investigation into the statistics reveals that different groups of women
exhibit different levels of labour force participation. To begin with, on average,
women in rural areas have a lower LFPR than those in urban areas, but the
reverse is true for men. This follows that gender gap is larger in rural areas,
and more prominent than the national average (Figure 2.3).

PART 2
Figure 2.3: LFPR, by sex and urban/rural, 2017

100.0 %
77.7 77.3 79.1

80.0
60.0 53.5 55.3

47.0
40.0
20.0
0.0
Total Urban Rural
Men Women
Figure 2.4: LFPR, by sex and education level, 2017

100.0 %
82.6 79.3
80.0 73.6
64.2
59.0
60.0
50.6
39.3
40.0 32.8
20.0
0.0
No formal Primary Secondary Tertiary
education
Men Women
Women of different education levels, too, exhibit different levels of participation.

The higher the education level, the higher is women’s LFPR (Figure 2.4).
Notably, tertiary-educated women record the highest LFPR, but we see later in
the section that they also face the highest unemployment rate among all.
Nonetheless, tertiary-educated women still fare best relative to their male
counterparts in participation rate, exhibiting the smallest gender gap at 9.4
percentage points.

PART 2
Another important dimension is the age dimension. Figure 2.5 shows that, at
every age group, women’s LFPR trails behind men’s, with the gap being the
largest at 39.4 percentage points for the 50 – 54 age group, where men’s LFPR
stands at 91.7%, and women’s, 52.3%. In fact, LFPR for prime-age men—ages
25 to 54, also known as one’s peak earning years, when decisions to stay out
of the labour force can be especially costly for one’s career22—are close to
100%. By contrast, women’s LFPR peaks at ages 25-29 at 75.2%, only to
decline gradually for all subsequent age groups.
Figure 2.5: LFPR, by sex and age group, 2017

100.0 %
90.0
80.0
70.0
60.0
50.0 Men
40.0
Total
30.0
Women
20.0
10.0
0.0
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Before discussing further, it is important to understand that the shape and level
of LFPR curves above represent the combined results of two underlying
effects—cohort (year of birth) and life-cycle (age) effects. On one hand, each
age group could be seen as representing people of different birth cohorts, hence
their respective LFPR is influenced by the general social and cultural norms of
their time, such as education level and gender stereotypes that could potentially
affect participation decision. On the other hand, each age group represents also
different stages of life, hence the decision to participate in the labour force
could be tied to other decisions relevant to various points in life, for example,
decision to study, get married, or retire.
22 Brookings Institution (2017)

PART 2
The separate influences of both effects are inherently difficult to identify23, but
one way to do so is by comparing “synthetic” labour force participation curves
for different birth cohorts. These birth cohorts are created by linking age
groups over time for a given cohort. For example, those who were born from
1977 to 1981 will all be between ages 15 and 19 in 1996, and between ages
20 and 24 in 2001, and so on. With this, we can track the experiences of the
group as they age, without actually having data on specific individuals24.
Figure 2.6 presents the synthetic curves for both men and women. By construct,
life-cycle effect determines the shape of each curve—how participation decisions
change throughout different stages of individuals’ lives; whereas cohort effect
shifts the participation curve of a cohort up or down25, so that, say, a generation
with proportionately more women working would have participation rates
higher than the earlier cohorts, and vice versa. With this understanding, several
important observations can be made.
23 Goldin and Mitchell (2017)

24 Ibid
25 Ibid

PART 2
Figure 2.6: Synthetic labour force participation curves26, by age group and cohort born from 1952 to 1981
Men
100.0 %
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Women
100.0 %
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Cohort born between: 1977-81 1972-76 1967-71
1962-66 1957-61 1952-56

26 Data from DOS are only available for the period 1995 to 2017, hence for earlier cohorts, their experiences at younger
stages of life are unavailable; whereas the more recent cohorts have not reached their older years, so the information
has yet to be uncovered. Unfortunately, the time period covered by the data is not long enough for us to create a
complete synthetic curve that includes experiences of a given cohort throughout their working ages.

PART 2
First, for the more recent cohorts, women’s life-cycle curves show broadly
similar shape. Labour force participation rate generally declines, albeit slightly,
as women enter their 30s and increase thereafter at a higher rate around their
40s. The decline coincides with the typical ages when one starts their families,
whereas the rise corresponds with the ages when their children reach a certain
age, and women return to the workforce again. Interestingly, across cohorts,
the decline and uptick in participation rates seem to have moved forward to
younger ages, the reasons for which demand more in-depth understanding of,
among others, the shift in marriage and childbearing ages of women across
generations to explain possible changes in women’s life-cycle patterns.
Second, women from the younger generations are increasingly participating in

the economy compared to the older generations at almost every age, signalling
strong cohort effects at work. This can be seen from the improvements in
labour force participation rates with each cohort, especially for cohorts born
since the late 1960s. To a large degree, the downward sloping curve observed
in Figure 2.5 could be explained by this cohort effect—the older the generation,
the lower the participation rate.
Third, for men, not much has changed across cohort, especially for prime-age
men, given that the curves have maintained at almost identical levels throughout.
Perhaps unsurprisingly, we observe that men’s life-cycle curves seem to have
persistently followed a rather simple narrative. Participation rate is low between
ages 15 and 24—the typical schooling years—after which it gradually rises to
almost full participation throughout prime ages. After ages 50 to 54, men start
falling out of the labour force as retirement hits.
Evidently, progress has been made over time in lifting women’s participation in
the economy at every stage of life. More notably, by distinguishing the life-cycle
and cohort effects, the analysis shows that Malaysian women may not actually
drop out permanently of the workforce after childbearing years. The downward
sloping curve of women’s LFPR is largely due to participation rates differential
in different cohorts, where older generation shows lower LFPR, and younger,
higher. This finding is consequential given that it is dissimilar with past research
findings27 as well as general perception that suggest women generally phase out
of the workforce after childbearing ages. Further research to help us understand
27 See KRI (2016) and World Bank (2012)

PART 2
this in-depth is very important as it changes the way that we should be

approaching the issue of women’s participation in the workforce.
Women in the labour force

For those who join the labour force, who are they? Malaysian women labour
force is, on average, higher educated than men. Almost 40% of the women
obtained an STPM certificate and above, compared to only about 27% of men
(Figure 2.7). However, in absolute terms, they represent around the same
number of persons, that is 2 million persons each.
In addition, labour force in urban areas are generally higher educated than
those in rural areas, for both men and women. In both the rural and urban
areas, women have a higher proportion of labour force with STPM qualification
and above (Figure 2.8), although in absolute terms, again, they represent
somewhat similar numbers as their male counterparts.

PART 2
Figure 2.7: Malaysian labour force education profile, by sex, 2017

100.0 %
14.7 11.5
90.0 19.5 Degree
9.5
80.0 11.3 3.6
2.9 2.5 14.1 Diploma
70.0 2.3 1.8 Certificate
60.0 4.3 STPM/equiv.
50.0 44.5
43.0
40.0 40.7 SPM/equiv.
30.0
20.0 14.3
12.2 PMR/ equiv.
9.0
10.0 10.1 UPSR/equiv.
8.5 6.3
4.1 4.0 4.2 No certificate/ Not applicable
0.0
Total Men Women
Number of Persons (’000)
8,000
7,000 873
721
6,000 271
193
5,000
994 Degree
4,000 3,377 717 Diploma
94
3,000 218 Certificate
STPM/equiv.
2,000 2,077 SPM/equiv.
1,082
PMR/ equiv.
1,000 460 UPSR/equiv.
763
302 321 216 No certificate/ Not applicable
0
Men Women

PART 2
Figure 2.8: Malaysian labour force education profile, by sex and urban/rural, 2017
Men Women
100.0 % 3.9
4.6 11.0 Degree
13.7
90.0 2.8 21.4
2.7 9.1 Diploma
80.0 10.9 1.8 Certificate
3.8 5.4 STPM/equiv.
70.0 2.5 15.1
43.8 1.9
60.0 4.0
39.3 SPM/equiv.
50.0
44.7
40.0
41.1
17.8
30.0
10.9 PMR/ equiv.
20.0
13.3 15.9 11.4 UPSR/equiv.
10.0 8.6
8.4 5.2 No certificate/
8.5 11.1
2.7 2.7 Not applicable
0.0
Urban Rural Urban Rural
Source: Department of Statistics Malaysia and KRI estimations
Age wise, 77.0% of the women labour force are of prime ages, slightly higher
than men’s 74.6% (Figure 2.9). However, in absolute terms, prime-age women
labour force is only 3.9 million—that is almost 2 million persons less than 5.7
million men.

PART 2
Figure 2.9: Malaysian labour force age profile, by sex, 2017

100.0 % 8,000
8.9 10.1 7.1
90.0 763
7,000
80.0
29.7 30.5 28.5 6,000
70.0 2,316
5,000 359 55-64
60.0
50.0 4,000 1,452 40-54

28.7 27.9 29.9
2,119
40.0
3,000
1,524 30-39
30.0
17.1 16.1 18.6 2,000
20.0 1,220
946 25-29
1,000
10.0
15.6 15.4 16.0 1,165
814 15-24
0.0 0
Overall Men Women Men Women
Some striking patterns emerge when we look at the composition of men and
women in the labour force at each age group, as illustrated in Figure 2.10.
Across all age groups, there are significantly more men than women. Women
constitute only 40.2% and 41.0% of the overall and prime-age labour force
respectively.

PART 2
Figure 2.10: Women as a percentage of total labour force, by age group, 2010 and 2017
Figure 2.10: Women as a percentage of total labour force, by age group, 2010 and 2017
100.0 %
90.0
More women
80.0
70.0
60.0
50.0
40.0
More men
30.0
20.0
10.0
0.0
Total Prime age 15-24 25-29 30-39 40-54 55-64
2010 2017
Women’s presence peaks at ages 25 – 29 at 43.7%, after which it starts

declining at all subsequent age groups, reaching a minimum of 32.0% at ages
55 – 64. This “disappearing women” phenomenon mirrors the shape of LFPR
curve observed in Figure 2.6. Because there are increasingly fewer women in
the labour force across age groups, whilst men continue to maintain full
participation, hence women’s presence gradually erodes as we move up the age
ladder. This will affect gender equality in occupational opportunities, which will
be discussed in detail in the next section. Nonetheless, just as women’s labour
force participation has improved for all age groups over the years, women’s
presence in each age group has also seen obvious increase from 2010 to 2017.

PART 2
Women outside the labour force

As for those who stay outside the labour force, who are they? As implied
above, there are substantially more women outside the labour force than men—
two times to be exact, with 4.4 million women and 2.2 million men. These are
people who are currently not employed and not actively seeking employment.
Similar to those in the labour force, women outside the labour force are higher
educated than men, given that 15.1% of them have at least an STPM
qualification, compared to 14.6% of men (Figure 2.11). The difference is more
remarkable in absolute terms—they represent 669,200 women, more than twice
the number of men at 317,100.
Urban and rural areas display different education profiles for those outside the
labour force. Both men and women in urban areas are higher educated than
those in rural areas. But in both areas, there are larger proportions of women
with at least an STPM qualification compared to men (Figure 2.12).

PART 2
Figure 2.11: Education profile of population outside the labour force, by sex, 2017
100.0 % Degree
3.0 2.9 3.0
5.2 5.2 5.3 Diploma
90.0 0.9 1.0 0.9 Certificate
5.7 5.5 5.9
STPM/equiv.
80.0
70.0 33.1
60.0
50.0
40.0
26.4 32.7 23.2 PMR/ equiv.
30.0
20.0
14.0 UPSR/equiv.
14.0
10.0 14.2
7.7 5.5 8.8 No certificate/ Not applicable
0.0
Total Men Women
4,500 Degree
134
234 Diploma
4,000 40 Certificate
261
STPM/equiv.
3,500
3,000 1,720 SPM/equiv.

2,500
63 113
2,000 23 119
1,500 721 1,029 PMR/ equiv.
1,000
713 618 UPSR/equiv.
500
310 390 No certificate/ Not applicable
120
0
Men Women

PART 2
Figure 2.12: Education profile of population outside the labour force, by sex and urban/rural, 2017
Men Women
3.3 1.1 3.5 1.5
100.0 %
1.1 2.2 3.0 Degree
5.9 3.8 6.0 0.7 Diploma
90.0 1.0 5.6
1.0 Certificate
5.9 6.0
STPM/equiv.
80.0 29.3
34.0
39.4
60.0
50.0
38.3
40.0 24.7 PMR/ equiv.
31.3 22.9
30.0
20.0 16.0 UPSR/equiv.

16.1 13.3
10.0 13.8
No certificate/
8.1 7.9 11.7
4.9 Not applicable
0.0
Source: Department of Statistics Malaysia and KRI estimation
By age group, two key observations can be drawn from Figure 2.13. Firstly,
men outside the labour force are substantially younger than women. Seven out
of 10 men are 15 to 24 years of age, making them the largest group among
the men. Comparably, only four out of 10 women are of this age group.
Secondly, almost two million women outside the labour force are of prime
ages—that is almost ten times that of men’s (0.2 million). In other words,
women made up almost 90% of the prime-age population outside the
labour force.

PART 2
Figure 2.13: Age profile of population outside the labour force, by sex, 2017
100.0 % 5,000
90.0 18.1 18.7 17.8 4,500
80.0 5.7 4,000 787 55-64

16.3 2.4
70.0 2.5 21.6 3,500
955 40-54
60.0 9.8 3,000
5.6 13.4
50.0 2,500
592 30-39
7.1
40.0 2,000 407 312 25-29
70.6 125
52 55
30.0 1,500
50.3
20.0 40.2 1,000 15-24
1,538 1,776
10.0 500
0.0 0
Overall Men Women Men Women
So why do people stay out of the labour force? 69.3% of men stay outside the
labour force for education (Figure 2.14), which corresponds with the proportion
of men who are between 15 and 24 years of age (see Figure 2.13)—the typical
schooling years. As for women, 58.0%, or 2.6 million women do not join the
labour force due to family responsibilities. By contrast, only 3.2%, or 69,800
men do the same. In proportional terms, housework also affects more women—
and men—in rural than in urban areas (Figure 2.15).

PART 2
Figure 2.14: Population outside the labour force, by sex and reasons for not seeking work, 2017
100.0 % 4.9 3.0 Others
8.8 4.0
8.8 Retired
80.0 18.6
3.2 Housework/
39.9 58.0
60.0 Family responsibilities
40.0
69.3
20.0 46.3
35.0 Education
0.0
Total Men Women
5,000
132.6 Others
4,000 176.9 Retired
3,000 Housework/
2,563.8
Family responsibilities
192.6
2,000
405.5
69.8
1,000
1,509.7 1,549.0 Education
0
Men Women

Notes:
(1) “Education” includes those in education and those planning to pursue further education.
(2) “Others” include those disabled and those uninterested.

PART 2
Figure 2.15: Population outside the labour force, by sex, reasons for not seeking work, and
urban/rural, 2017
Men Women
2.8 3.7
100.0 % Others
7.6 4.3 3.1 Retired
13.9
90.0
80.0 20.1 12.7
70.0 2.8 5.0

56.9 Housework/
60.0 61.5
Family responsibilities
50.0
40.0
69.5 68.5
30.0
20.0
36.1 31.7 Education
10.0
0.0
The profile of population inside and outside the labour force provides some
insights into the issues pertaining to women’s labour force participation. For
one, Malaysian working-age women are more highly educated than men. But a
large proportion of them are outside the labour force, with many still in
prime ages.
The major reason for this is the disproportionate care responsibilities shouldered
by women in the family. Despite their educational achievement, many women
are hindered from participating in the labour force due to family responsibilities.
Hence, to alleviate women’s challenge to balance family and work, it stands to
reason that a fairer distribution of housework between men and women is
crucial. In fact, if the total number of persons affected by housework was
equally distributed between both sexes in 2017, gender parity in LFPR would
already be achievable (Figure 2.16). However, although recent years have seen
a great reduction in women affected with care responsibilities, there was only
a minimal increase in men who stayed outside the labour force for the same
reason (Figure 2.17). If this is an indicator of the redistribution of housework
between men and women that had happened over the years, clearly there
remains much space for improvement.
PART 2
In sum, the unequal distribution of care responsibilities between men and

women is fundamental in any discussion about women’s economic empowerment,
both in Malaysia and globally. Such gender role conformity represents an
outcome of a confluence of social, religious and economic factors, the
understanding of which is key in the country’s endeavour to empower women
in the economic sphere.
Figure 2.16: Hypothetical LFPR, by sex, 2017

10,000
9,000
8,000
7,000
6,000
64.9% 66.6%
5,000
4,000
In labour force
3,000
2,000
1,000
0
Men Women

PART 2
Figure 2.17: Number and percentage of men and women who stay outside the labour force due
to housework/family responsibilities, 2010 and 2017
2010 2017
Number of Persons (’000) Percentage
3,500 65.9 70%
58.0
3,000 60
2,500 50
2,000 40
1,500 3,037.1 2,563.8

30
1,000 20
500 10
2.1 3.2
40.1 69.8
0 0
Men Women Men Women
Percentage (RHS)
Box 2.1: Understanding the importance of both productive and reproductive labour
Productive work, or market work, has always been the focus of mainstream
economics, often for good reason. Productive work refers to the production
of goods and services that have monetary value and are traded in the market
sphere. As a result, labourers participating in productive work are compensated
in monetary terms. These activities are easily quantified and hence recorded
in countries’ national accounts. Productive roles are mainly assumed by men,
although women are increasingly taking up these roles in most modern
economies.
Reproductive work, on the other hand, comprises both paid and unpaid
activities that are associated with care-giving and domestic work. Such
activities are largely shouldered by women. It is also increasingly known as
“social reproduction” to indicate the broader scope of activities beyond just
biological reproduction28, to include daily activities such as cooking, washing,
care for friends and family members and so on. Among these, the
28 UNDP (2001)

PART 2
unremunerated activities such as unpaid care work has particularly been a

blind spot in most economic paradigms, not least because they happen
within the private sphere and, arguably, do not contribute to the capitalist
processes of production.
The perception of reproductive work as insignificant, however, is increasingly

challenged within the discourse on labour market and economic development
in recent decades, for at least two reasons. Firstly, social reproduction is of
great economic importance as it forms an essential basis of productive work.
Care and domestic services, even if unpaid and officially unrecognised in
national accounts, are indispensable in ensuring the optimal functioning of
labour force participants and an important investment in the nation’s human
capital. Secondly, the day-to-day performance of reproductive work activities
are crucial in preserving the well-being of individuals, families, and
communities, without which the maintenance of healthy family and social
ties would not be possible.
In fact, the intersection between productive and reproductive work has

become especially important in the discussion of gender equality in the
labour market. On one hand, gender role conformity which confines women
within the domestic sphere often restrict women from participating
meaningfully and advancing in the economy. On the other hand, encouraging
women to participate in the economy without offering a sustainable
alternative care management mechanism risks pressuring women unduly as
they assume roles both within and without the home. This highlights the fact
that the strive for gender equalities in the labour market must be accompanied
by equal emphasis on rethinking the care model in the economy. Given the
importance of reproductive work, the way in which society and policymakers
address the tension between care responsibilities—especially the unpaid
ones—and women’s economic participation is consequential for the
sustainability of our economic development.

PART 2
2.1.2 Gender gaps in unemployment, occupational opportunities,

and wage
Gender gaps occur beyond labour force participation. This section shows that,
women are not only less likely to participate in the labour force, but when they
do, they are also (slightly) less likely than their male counterparts to find a job.
For those who are employed, women tend to cluster in occupations that are
different from men which has implications on the kind of economic opportunities
they have access to, and the income they receive. The findings also suggest that
gender inequality within the labour force may not always be an outcome of
outright gender discrimination in the workforce, but simply a result of how
men and women allocate themselves into different occupations.
Unemployment rate disparities between men and women

Women’s unemployment rate in Malaysia has always surpassed men’s. In 2017,
women’s unemployment rate stood at 3.8%, whereas men’s rate at 3.6%. This
represents a gap of 0.2 percentage point, a considerable improvement from the
year before. By international comparison, this gender gap, as well as women’s
unemployment rate, is in fact relatively low (Figure 2.19).
Figure 2.18: Unemployment rate, by sex, 2010 – 2017

4.1 %
3.9
3.9
3.8 3.8
Women
3.7
3.6 3.6
Men
3.5 3.4
3.3
3.3
3.2
3.1
2.9
2.7
2.5
2010 2011 2012 2013 2014 2015 2016 2017

PART 2
Figure 2.19: Women’s unemployment rate and gender gap, by selected country and country
group, 2017
Gender Gap (Percentage points) Women’s Unemployment Rate
4.0
15.0%
3.0
2.0 10.0
1.0
5.0
0.0
0.0
-1.0
-2.0 -5.0
East Asia & Japan Upper United MALAYSIA OECD High India Brazil
Pacific Middle States members Income
Income
Gender Gap (LHS) Women’s unemployment Rate (RHS)
Source: World Development Indicators, Department of Statistics Malaysia, and KRI calculations
Note: Gender gap in unemployment rate is measured as the percentage point difference between women and men’s unemployment
rate, i.e. women’s rate—men’s rate. Hence, a negative gender gap implies that women’s unemployment rate is lower than men’s.
Looking at the statistics by demographic group, women in rural areas face

higher unemployment rate compared to their urban counterparts, but the
reverse is true for men. Notably, in urban areas, women’s unemployment rate
fares better than men’s (Figure 2.20).
Figure 2.20: Unemployment rate, by sex and urban/rural, 2017

5.0 %
4.5
4.0 3.6 3.7 3.7 3.6

3.2
3.0
2.0
1.0
0.0
Total Men Women
Urban Rural

PART 2
Figure 2.21: Unemployment rate, by sex and education level, 2017

5.0 %
4.5
3.9
4.0 3.7
3.5
3.0
2.3
2.0 1.9
2.0
1.5
1.0
0.0
No formal Primary Secondary Tertiary
education
Men Women
For both men and women, unemployment rate is generally higher at higher
education levels, with women’s unemployment rate higher than men’s for those
with no formal education and tertiary education. It is noteworthy that
unemployment gender gap is the largest among tertiary-educated labour force,
standing at 0.6 percentage points in 2017 (Figure 2.21). In other words,
tertiary-educated women find it hardest to get employed relative to men, despite
that almost 60%29 of total graduates from Malaysian tertiary-education
institutions are women, and they often outperform men.
By age group, prime-age men and women show the same unemployment rate
at 2.1%, lower than the overall rate recorded (Figure 2.22). Among them, the
25 – 29 age group experiences the highest unemployment rate at 4.5% for both
men and women.
Apart from that, the 15 – 24 age group record an even higher unemployment
rate and gender gap. At 13.0% and 13.5% for men and women, respectively,
they mark the highest unemployment rate among all age groups—possibly due
to their lack of education and work experience—and also the largest gender gap
at 0.5 percentage point. In general, unemployment rate is higher for men than
women only from age 30 onwards—for the younger age groups, men’s rate is
either lower than or the same as women’s.
29 MOHE (2018)

PART 2
Figure 2.22: Unemployment rate, by age group, 2017

14.0 % 13.5
13.0
12.0
10.0
8.0
6.0
4.5 4.5
4.0
2.1 2.1
2.0 1.7 1.6 1.2 0.9
0.4 0.3
0.0
Prime Age 15-24 25-29 30-39 40-54 55-64
Men Women
Where are the employed women?

When women do get employed, they tend to be engaged in occupations
different from men. Almost half the employed women are service and sales
workers (29.2%) and professionals (19.8%), followed by clerical support
workers (18.0%). Managers, on the other hand, make up only 3.1% of total
employed women, the smallest proportion among all. By contrast, men are
more equally distributed across all occupations, with clerical support workers
making up the smallest share of employed men, at only 4.5% (Figure 2.23).

PART 2
Figure 2.23: Distribution of employed persons across occupations, by sex, 2017

30.0 % 29.2
25.0
19.8
20.0 18.0 18.7
14.6 13.8
15.0 13.6
9.9 10.3
10.0 8.9
7.1 8.5
5.3 5.3 5.6
5.0 3.8 4.5
3.1
0.0
Managers
foresty, lifestock,
and fishery workers
Plant and machine

operators and
assemblers
Elementary
occupations
Craft and related

trades workers
Technicians and
professionals
Clerical support
workers
Professionals
Service and
sales workers
associate
Men Women
Whilst DOS only publishes data on nine occupation categories, the International
Labour Organization (ILO) provides employment data for a more disaggregated
list of occupations, but does not distinguish between Malaysian and non-
Malaysian citizens, and the latest available data is that of 2016. Although not
directly comparable with the remaining analysis, we still use the data to present
a more granular view of the occupational destinations of both men and women.
Figure 2.24 shows the percentage of women employed by each occupation

group, or simply, women’s representation in these jobs. Three key observations
are clear from the figure. First, men outnumbered women in most occupations,
and only two out of 29 occupation categories had a rather balanced share of
both sexes in 2016. Both of which were sales and services jobs.
Second, of the seven occupation categories with proportionally more women

than men, all of them are the typical “feminine” jobs. Almost 80% of health
associate professionals—which include occupations such as nursing and
midwife—are women; 79.5% general and keyboard clerks; 77.1% cleaners and
helpers; and 68.6% teaching professionals. By contrast, the majority of more
senior-level occupations are occupied by men—almost 82% of chief executives,

PART 2
senior officials, and legislators, as well as 80.5% hospitality, retails, and other
services managers are men.
Thirdly, between 2011 and 2016, women had gained higher presence in most
occupations. However, all managerial occupations—those that are supposedly
higher ranked and paid—experienced a deterioration in women’s representation,
with the highest decline as high as 5.4 percentage points for hospitality, retail,
and other services managers, dropping from 24.9% to 19.5%. In other words,
women’s representation at the higher-level positions have shrunk within the past
five years.
This gender divide in occupation corresponds with the “disappearing women”

phenomenon discussed in the previous section. At ages where most senior
positions are due, the relative absence of women would, to a large degree, lead
to lower women’s visibility in those occupations, because the pool of women
candidates available for consideration is limited to begin with. With that, we
would expect that as progress is made over time, women’s representation at the
top would see a corresponding improvement. The fact that it has actually
shrunk in the past five years therefore calls for further research to identify the
presence and root causes of the glass ceiling for women at work.

Figure 2.24: Proportion of women in each occupation, 2011 and 2016
105
Health associate professionals (32) 2016
General and keyboard clerks (41) PART 2
2011
Cleaners and helpers (91)
Teaching professionals (23)

Other Clerical support workers (4)
Health professionals (22)
Customer service clerks (42)
Personal service workers (51)
Sales workers (52)

Other Plant and machine operators and assemblers (8)
Other Professionals (2)

Other Service and sales workers (5)
Business and adminstration associate professionals (33)
Stationary plant and machine operators (81)

Information and communications technology professionals (25)
Other craft and related trades workers (7)
Other Elementary occupations (9)
Adminstrative and commercial managers (12)
Market oriented skilled agricultural workers (61)
Agricultural, forestry and fishery labourers (92)
Hospitality, retail and other services managers (14)
Chief executives, senior officials and legislators (11)
Other Technicians and associate professionals (3)
Subsistence farmers, fishers, hunters and gatherers (63)
Other Managers (1)

Labourers in mining, construction, manufacturing and transport (93)
Electrical and electronic trades workers (74)
Drivers and mobile plant operators (83)
Building and related trades workers, excluding electricians (71)
Source: ILOSTAT and KRI calculations 0% 10 20 30 40 50 60 70 80 90 100

PART 2
By status in employment, in 2010, 77.7% of women in Malaysia worked as

employees, but this proportion has since dropped to 72.8% in 2017 (Figure
2.25). Instead, women own account workers—that is, independent or self-
employed workers—have seen a drastic rise over the period, recording a 5.5
percentage points increase from 12.3% to 17.8%. Men own account workers,
however, did not experience the same rising trend as women did over the years.
Figure 2.25: Status in employment, by sex, 2010 and 2017
Men Women
100.0 % 2.8 2.5 Unpaid family
8.2 7.5
worker
90.0
21.0 20.5 12.3 Own account
17.8
80.0 worker
70.0
60.0
50.0
40.0 70.6 70.9 77.7

72.8 Employee
30.0
20.0
10.0
5.7 6.1 1.8 1.9 Employer
0.0
2010 2017 2010 2017
Recall from the first section that the progress in women’s labour force
participation rate within the same period was prominent. Women’s labour force
increased by 1.2 million between 2010 and 2017. Whilst more than half of this
increase was due to the increase in women employees, another significant one-
third came from the rise in women own account workers (Figure 2.26).
Nationally, among all types of employment, own account workers in Malaysia
grew the most by 30.8%, from 1.8 million to 2.4 million in the same period.
Of this increase, 74.9% are women. Whilst this changing landscape of work
undoubtedly offers new economic opportunities for women, it also raises
concern about the trade-off between job flexibility and security, which is
associated with the lack of guaranteed income and the more traditional form
of work arrangements of independent work30.
30 Further discussion on the implications of the rise of independent work on the landscape of the workforce and workers’
vulnerability can be read from KRI (2017).

PART 2
Figure 2.26: Change of women workers in each status of employment as a percentage of total
change in labour force, 2010 – 2017
60.0 % 55.5
50.0
40.0
33.8
30.0
20.0
10.0
5.1 3.6
2.0
0.0
Employer Employee Own account Unpaid family Unemployed
workers worker
Also notable is the relatively large proportion and number of female unpaid
family workers—classified by the ILO as a form of vulnerable employment—
compared to men. In 2017, there are 366,800 female unpaid family workers,
twice the number of their male counterparts at 183,200 men. Notably, whilst
women account for only about 40% of the labour force, they take up 66.7%
of all unpaid work (Figure 2.27).
Figure 2.27: Percentage of men and women, by status in employment, 2017

100.0 %
80.0 33.3
59.2 63.2
60.0 82.8
40.0
66.7
20.0 40.8 36.8
17.2
0.0
Employer Employee Own account Unpaid family
worker worker
Men Women

PART 2
Are women paid as much as men?

Another crucial topic in the global gender inequality discourse is the issue of
unequal pay. Like virtually everywhere else worldwide, the gender wage gap has
persisted in Malaysia, with women earning less than men throughout time. In
2013, Malaysian women on average earned 8.3% less than men. Four years
later, the gender pay gap stands at 6.2%, where women’s mean monthly
salaries and wages marks RM2,772, and men’s, RM2,954 (Figure 2.28).
Figure 2.28: Malaysian mean monthly salaries and wages (in 2017 prices), by sex, 2013 – 2017
RM3,100
2,954
2,847 Men
2.900
2,714
2,659 Women
2,700
2,772
2,524
2,630
2,500
2,525
2,446
2,300
2,315
2,100
1,900
1,700
1,500
2013 2014 2015 2016 2017
Source: Department of Statistics Malaysia, CEIC, and KRI calculations
Comparing aggregate mean wages between men and women, however, risks
masking the true wage gap—or the lack thereof—that signals pay discrimination
purely on gender basis, as this does not compare like with like. Differences in
remuneration between individuals can be attributed to a host of factors,
including distinction in education, skill, experience, occupation and many more.
It follows that identifying the genuine wage gap demands comparison between
individuals with characteristics that are as similar as possible. Unfortunately,
limitations of data restrict such analysis in this section. Instead, we present the
wage comparison between men and women of similar age group, education
level and occupation separately as a preliminary step towards better understanding
the closer reality of gender pay gap in Malaysia. We find that the disaggregated
comparisons reveal gender pay gaps that are more prominent than the overall
gap, indicating that the headline number obscures the greater disparity
experienced by different groups of men and women.

PART 2
Figure 2.29: Mean monthly salaries and wages and wage differences, by age group and sex, 2017
Salaries and Wages Wage Difference
RM4,500 18 %
4,000 16
3,500 14
3,000 12
2,500 10
2,000 8
1,500 6
1,000 4
500 2
0 0
Prime Age 15-24 25-29 30-39 40-54 55-64 -2
Men Women Wage Difference (RHS)

Note: Wage difference shows the difference between men’s and women’s mean monthly salaries and wages as a percentage
of men’s wages.
We start by investigating gender wage gap by age group. Within prime-age

labour force, women aged 25 to 39 on average earn 0.2 to 0.8% higher wages
than men. Interestingly, this is reversed drastically for those aged 40 to 54,
where women’s mean wages become 6.5% lower than men’s. Amongst all age
groups, those aged 55 and beyond records the largest gender wage gap,
standing at 16.4%.
The dramatic reversal of gender pay gap between those before and after their
40s is something that warrants attention. Is the wage disparity observed among
the older groups a result of certain life events that take place in women’s life
at these ages, or a consequence of their occupational decisions influenced by
generational factors, such as education level and social norms? Given that
wages data are only available from 2012 onwards, synthetic cohort analysis
adopted previously is unfeasible here to disentangle both effects. This calls for
more research to advance understanding on the phenomenon observed.

PART 2
Figure 2.30: Mean monthly salaries and wages and wage differences, by highest certificate
obtained and sex, 2017
RM7,000 30 %
6,000 6,425
25
5,000
4,927 20
4,000
3,877 15
3,000
2,978 3,009
10
2,000 2,159 2,265
1,605 1,784 5
1,000 1,211
0 0
No certificate/ SPM and STPM/ Diploma Degree

Not applicable below Certificate
As for education level, higher education is associated with higher wages for
both men and women. At all levels of education, women are on average paid
a lower wage than men. Gender pay gap ranges from 17.4% for those with
STPM or Certificate, to 24.5% for those without any certificate (Figure 2.30).
Again, despite the fact that women made up a larger proportion of total
graduates in Malaysia, overall, female degree holders are still paid remarkably
lower than their male counterparts—23.3% or RM1,498 to be exact.
Another factor that is of importance in determining wage level is occupation.

This perhaps provides a better comparison of like individuals, since we are
comparing men and women who perform the same job and are therefore likely
to be of similar education level as well. Figure 2.31 shows that within each
occupation, gender pay gap is evident. It ranges from 5.5% for technicians and
associate professionals, to 40.4% for skilled agricultural workers. What is
worth noting here is that occupations with some of the lowest wage gaps are
also those with relatively high women’s representation, such as professionals
(20.6%), technicians and associate professionals (5.5%), and clerical support
workers (15.7%) (Figure 2.31). Managers, on the other hand, is an obvious
outlier. Given the low women’s presence in the occupation (see Figure 2.24),
female managers are still compensated relatively comparably to men amongst

PART 2
all occupations, recording a wage gap of 19.8%. This could possibly be due to
their higher bargaining power associated with their role as decision makers.
The above observation is important in explaining the relatively narrow overall

wage gap in Malaysia. As a high proportion of women are engaged in
occupations with lower wage gap (see Figure 2.23), it is no surprise that wage
gap is narrowed at the aggregated level, and in this case to a substantial extent.
Clearly, focusing on the overall wage gap obscures the much larger wage
disparity faced by different groups of women, the neglection of which would
potentially ill-inform any policy decision.
Figure 2.31: Mean monthly salaries and wages and wage differences, by occupation and sex, 2017
RM9,000 45 %
8,000 40
7,000 35
6,000 30
5,000 25
4,000 20
3,000 15
2,000 10
1,000 5
0 0
Elementary
occupations
Service and
sales workers
machine-operators,
and assemblers
Craft and related

trades workers
forestrylivestock and
fishery workers
Clerical support
workers
Technicians
and associate
professionals
Professionals
Managers
Plant and
LOW-SKILLED SEMI-SKILLED SKILLED

PART 2
Overall, it is worth highlighting from this section that women’s occupational

destinations are still fairly concentrated in the traditional “feminine” jobs, and
women’s representation at senior-level positions remains low throughout the
years. This is especially evident when even within the field of hospitality and
other services—the supposedly “feminine” sector—male managers still
outnumbered female substantially. Such gender segregation by occupation often
implies important underlying distinction in opportunities for women and men31,
which could also potentially affect gender gaps in income—as we have briefly
discussed earlier.
With this, we should be mindful that not all gender inequalities points to
outright gender discrimination within the labour market. More often than not,
social norms, gender stereotypes, and structural constraints that shape women’s
and men’s career decisions play a significant role in producing the gender
inequality patterns observed today. Without advanced understanding of these
nuances and factors at play, efforts to help unlock women’s potential in the
economic realm may be ineffective.
31 ILO (2017)

PART 2
2.1.3 Counting on women: The economic case for women

empowerment
To many, gender equality is but an important cause that matters for fairness
and women’s rights. Whilst this is true and important, equally strong is the
economic case for women’s empowerment. For a country which seeks continued
progress socially and economically, here are some reasons why paying more
attention on empowering women might help.
Including more women in the labour force helps growth

Empirical evidence of the economic and social benefits of women’s empowerment
abound. A large body of international research found that affording women
equal opportunity to education, health and economic advancement not only
benefit women themselves, but also the greater society. Women’s access to
economic opportunities, for example, often lead to better education and health
outcomes for children, especially in developing countries32; closing gender gaps
in employment and education promotes exports diversity, and hence economic
growth33; reducing gender inequalities, too, leads to lower income inequalities
and thus more sustainable growth34.
The greater overall benefits brought about by gender equality is very much
likely to be true in Malaysia. Adopting the methodology of Aguirre et al.
(2012), we find that raising women’s employment level by, say, 30%—a shift
that will narrow but not completely close gender gap in labour force
participation—would raise Malaysia’s GDP by around 7 to 12%.
Indeed, empowering women economically unlocks multitudes of economic

benefits in diverse ways. Particularly, at a time when the future is increasingly
shaped by rapid technological advancement, gender equality is of great
importance as an innovation driver. Box 2.2 discusses this idea in greater detail.
32 See, among others, Duflo (2012) and Swamy (2014).

33 IMF (2016)
34 IMF (2015)

PART 2
Box 2.2: Does gender equality matter for innovation?
“There is no greater indicator of an innovative culture than the

empowerment of women. Fully integrating and empowering women
economically and politically is the most important step that a country…
can take to strengthen its competitiveness.” (14)35
- Alec Ross
Innovation is fundamental for sustained economic development—for countries

of all income classes alike, having an innovation-driven growth is key to
remaining competitive, particularly for a future that is increasingly shaped by
rapid technological advancement36. As such, understanding the determinants
of an innovation-friendly environment is critical for economies seeking to
thrive in the climate of tomorrow. A wealth of literature has documented
the importance of women empowerment for economic growth37, but the
impact of gender inequality on innovation has received limited attention. We
argue that side-lining women from opportunities could significantly undermine
the full potential of a country’s human capital, and impede its ability to
develop and execute new ideas.
Using cross-country data, our analysis provides evidence for the argument.
Two key findings are observed from the results. First, gender inequality is
strongly negatively associated with innovation. In other words, the more
gender unequal a country is, the lower its innovation level. This result holds
even after taking into account structural factors such as country’s development
level and population size, as well as institution and infrastructure development.
Specifically, a smaller gender gap in labour force participation rate and
better women's health outcome are positively associated with higher
innovation. However, equality in educational attainment only matters insofar
as women have equal access to economic opportunities as men. Second,
another factor that stands out in the analysis is institutions38, which shapes
35 Ross (2016)
36 For example, as discussed in ADB (2017).
37 For a comprehensive summary of relevant literatures, see Bandiera and Natraj (2013): Does Gender Inequality
Hinder Development and Economic Growth? Evidence and Policy Implications.
38 Institution is measured with Human Freedom Index by the Cato Institute, the Fraser Institute, and the Friedrich
Naumann Foundation for Freedom. It presents a broad measure of human freedom, understood as the absence of
coercive constraint across various aspects, such as rule of law, security and safety, movement, religion, expression, access
to sound money, freedom to trade internationally etc. For more information, refer to Vasquez and Porcnik (2016).

PART 2
the personal, civil and economic freedom in a country. Results show that a
more open country tends to be more innovative as well. Again, this holds
true after accounting for all other factors, though the association with
innovation is weaker than gender inequality. Detailed explanations on the
analysis can be found in the accompanying Technical Note 2.
Figure 2.32: Relationship between Global Innovation Index and Gender Inequality Index, 2017
The more gender unequal a country is, the lower is its innovation level
70
Switzerland
60
United States
Global Innovation Index (Output Sub-Index)
50
40
Malaysia
30
20
Bangladesh
10
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Gender Inequality Index
Source: Global Innovation Report and United Nations Human Development Report
Evidently, promoting gender equality, especially in the economic and health

domains matters for the cultivation of an innovative environment in the
country. Whilst more in-depth research is required to identify the extent to
which these relationships are causal, the strong negative association between
gender inequality and innovation speaks volumes about the potential
determinants of an innovative culture. In fact, leaving women out of the
development equation is tantamount to squandering the potential, voices,
and ideas of half our population—a resource too large to be overlooked
especially in today’s context. These findings provide valuable insights for
Malaysia as we strive to strengthen our competitiveness in the pursuit to
become a high-income economy.

PART 2
Women’s advancement as a remedy for ageing population

Malaysia is fast becoming an ageing country, resulted by both an increase in
people’s life expectancies and declining fertility rates39. An important implication
of this is the end of the demographic dividend, a situation where the productive
population of the country faces a greater burden to support the needs of the
non-productive population40. This, at the same time, limits the economy’s
growth capacity.
A potential solution to this is to encourage more women participation in the

economy. Figure 2.33 shows the projection results of what we term the non-
labour force population-to-labour force (NLF) ratio—an indicator to measure
the burden of our labour force to provide for the rest of the population41. A
ratio of 150%, for example, implies 150 dependents for every 100 labour force
participants.
Our estimation shows that, if we closed gender gap in participation gradually

in the next 12 years to achieve parity by 2030—following the United Nation’s
Sustainable Development Goals (SDGs)—at the end of the term, the NLF ratio
would be 29.0% lower than what is originally projected. That is, without more
women labour force, there would be 131 dependents for every 100 labour force
participants; the number reduces to 93 dependents if parity is achieved. If this
is all too ambitious, achieving parity by 2050 even, would eventually alleviate
32.5% of the burden. The new NLF would mean 86 dependents, compared
with the original 128.
39 KRI (2016)
40 Ibid
41 The NLF ratio is different from the total dependency ratio, which is the ratio of non-working age population over
working age population. The NLF ratio is used here to capture the effect of increasing working-age women’s
participation in the labour force on the burden of labour force participants to provide for the rest of the population.
Because total dependency ratio uses working-age population (which includes people both in and out of labour force) as
the measure of productive population, it does not capture such effect.

PART 2
Figure 2.33: Non-labour force population-to-labour force (NLF) ratio, 2000 – 2050
170.0 %
160.0
150.0
140.0
131.3
127.5
130.0 Current
trajectory
120.0
110.0
100.0
93.0
90.0 SDG target
86.0 2050 target

80.0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Source: Department of Statistics Malaysia, CEIC, and KRI estimation
Note: Non-labour force population includes the entire population minus those in the labour force.
Discussion
Statistics evidently show that significant progress has been made in recent years
to empower women economically. However, the fact that gender gaps still
largely persist in the labour force, with different groups of women being
affected to different degrees, suggests that more needs to be done to push things
forward.
From our analysis, one of the core reasons underlying the gender inequality
pattern in Malaysia is the disproportionate responsibility for unpaid care work
borne by women. The impact extends beyond labour force participation to
directly or indirectly affect women’s access to different occupational opportunities
and status of employment, as well as the wages they receive. It stands to
reason, therefore, that further effort in economically empowering women would
only be effective if this issue is addressed appropriately.
What can be done to alleviate women’s challenge to balance family and work?
First, recall that a significant proportion of the increase in women’s economic
participation can be explained by the rise in women own account workers. This
implies, among others, that flexibility in work arrangements is instrumental in
enabling women who are willing to join the labour force to do so. This could
PART 2
be offered either through flexible hours or work places, childcare facilities at

work or the like. Second, redistributing family responsibilities between men and
women is as important as any other labour market measures to enable women’s
economic empowerment, and at the same time to ensure the strengthening of
family institutions. This would involve, among others, ensuring policies aimed
at facilitating work-home balance, such as said flexibility arrangement and
parental leave are accessible options not only for women, but for men as well.
As the economy continues to face long-term challenges such as ageing population

and rapid technological advancement, attaining an inclusive and equitable
labour market has become increasingly crucial. It follows that addressing the
tension between care responsibilities and women’s economic participation is of
utmost importance. It matters not only for expanding the capabilities and
opportunities for both women and men to contribute jointly on the professional
and domestic fronts, but also for the sustainability of our growth model by
ensuring the well-being of all is taken care of.

PART 2
2.2 Foreign Workers and the Economy—A Review
Global public discourse on the economic impact of immigration tends to be

negative42, due to concerns of foreign workers replacing native workers and
subsequently suppressing wages. In addition, immigration has the potential for
even broader adverse economic impact over the long term. The availability of
cheap low-skilled foreign labour could discourage businesses from investing and
adopting new technologies. While these worries are not unjustified, economic
studies on this issue tend to find that foreign workers have a limited impact on
wages and employment. The evidence suggests that foreign workers generally
complement rather than replace native workers and generate a higher level of
economic activity.
The same parallel exists in Malaysia. In this section, we attempt to provide an

objective review of the facts that are available on this matter. First, we use the
latest official statistics on foreign workers available to look at how foreign
workers fit into the current labour market in Malaysia43. Secondly, the channels
through which foreign workers could affect economic outcomes are discussed,
supported by a review of existing studies on this topic both globally and for
the case of Malaysia. Finally, we propose three directions of research that could
enrich our understanding on this issue, with emphasis on policy relevance.
42 See, for example, OECD (2014) and Somerville and Sumption (2008)
43 In this section, the LFS is used exclusively unless stated otherwise because of its availability for the years examined.
Also, the breakdown of native and foreign workers by various parameters allows for comparison.

PART 2
2.2.1 Knowing the foreign workers—where are they from, and what
do they do?
Based on official statistics, foreign workers represent around 15% of all

employed persons in Malaysia. The share of foreign workers relative to total
number of employed person peaked in 2013 at 15.7% and hovered at around
15% since. In 2017, the figure was 15.5%. From 2010 to 2013, the number
of foreign workers increased from almost 1.7 million to 2.1 million. From 2013
to 2017, the increase has been smaller in magnitude with the latest figure at
around 2.2 million.
Figure 2.34: Number and percentage of foreign workers in Malaysia, 2010 – 2017
2,500 17.5 %
15.7 15.6 15.5
15.2 15.1
14.1 14.2 15.5
2,000 13.8 2,205 2,235
2,120 2,111 2,127
13.5
1,826
1,500 1,683 1,695 11.5
1,000 9.5
7.5
500
5.5
0 3.5
2010 2011 2012 2013 2014 2015 2016 2017
Number of Foreign worker Share of foreign workers out of total employed persons
In 2000, almost three-quarters of all foreign workers were Indonesians. The

composition of foreign workers has since diversified from a higher participation
of Nepalese and Bangladeshi workers. In 2015, Indonesians remain the
dominant group (39.2%), followed by Nepalese (23.5%), and Bangladeshis
(13.2%). The recent decline in the number of Indonesian workers is partly due
to a ban on labour migration to Malaysia by the Indonesian government from
2009 to 2011 following human rights violations concerns, and more stringent
regulations in place44.
44 International Labour Organization (2016)

PART 2
Figure 2.35: Distribution of foreign workers, by country of origin, 2010 – 2015

100.0 %
5.6 5.6
19.6 25.0 24.1
80.0 19.6 3.0
10.6 13.2
17.6
60.0
13.8 23.5
40.0 74.8 66.7
20.0 43.6 39.2
0.0
2000 2005 2010 2015
Other countries Bangladesh Nepal Indonesia
Source: MOHA (n.d.) and KRI calculations
Almost 70% of all foreign workers work in urban areas. However, in rural
areas, the share of foreign workers out of total employment is larger than in
urban areas, due to high concentration of foreign workers in the agricultural
sector.
Figure 2.38: Share of foreign workers out of total employment,

Figure 2.36: Distribution of foreign workers, Figure 2.37: Share of foreign workers out
by urban/rural, 2010-2017
of
by urban/rural, 2010 – 2017 total employment, by urban/rural, 2010 – 2017
100.0 % 100.0%
28.3 33.4 33.2

80.0 37.5 80.0
60.0 60.0
40.0 40.0
71.7 66.6 66.8
62.5 22.3 22.9
20.0 20.0 17.0 15.8 15.2
12.8 13.5 13.3
0.0 0.0
2010 2013 2016 2017 2010 2013 2016 2017
Rural Urban Rural Urban

PART 2
The agriculture and construction sectors hire foreign worker the most. In 2010,
the agriculture and construction sectors employed 52% of all foreign workers45.
In 2017, this was still the case with the agriculture and construction sectors
employing 40.5% of all foreign workers, although, a sizable part of foreign
workers (35.9%) were employed in services while the remaining 23.0% were
in manufacturing. However, it is important to note that the official statistics
exclude workers in communal housing, therefore, possibly undercounting the
number of foreign workers in agriculture46. Foreign workers constitute a large
share of total employment in agriculture at 37.4%, construction at 23.6% and
20.5% in manufacturing. In contrast, the share of foreign workers in mining
and services is relatively small, at 12.5% and 8.9% respectively.
Figure 2.40: Share of foreign workers out of total employment,
Figure 2.38: Distribution of foreign workers, Figure
by sector, 2.39: Share of foreign workers out of
2010-2017
by sector, 2010 – 2017 total employment, by sector, 2010 – 2017
100.0 % 100.0 %
90.0
80.0 35.7 38.2 36.9 35.9
Foreign worker-
80.0
0.3 0.5 intensive sectors
60.0 0.5 0.2
17.9 70.0
23.0 23.0
23.0
40.0 60.0
14.0
12.7 13.2
17.3 50.0 37.3
20.0 22.2 37.4
32.1 27.2 27.3 40.0
21.0 22.4 21.2
0.0 30.0 24.7 23.6 18.4
23.5 4.9
20.5 9.2
2010 2013 2016 2017 20.0 14.9 9.6
12.5
10.3 8.5 8.9
10.0 6.1 5.7
Services Mining
0.0
Manufacturing Construction
Mining
Services
Construction
Manufacturing
forestry and
Agriculture,
Agriculture, forestry and fishing

fishing
2010 2013 2016 2017
45 Del Carpio et al. (2015)

46 Ibid. Data on foreign workers mainly come from the Ministry of Home Affairs (MOHA) and the Labour Force Survey
(LFS). MOHA data documents foreign workers with Temporary Work Passes living in communal and private housing,
and thus includes only low-skilled workers. LFS data captures both documented and undocumented foreign workers
living in private households, but, would not be able to record data from workers in communal housing, largely the
foreign workers who work in agriculture. Other sources include estimations from the Economic Planning Unit (EPU)
based on remittance payments data from Bank Negara Malaysia, but, is only available for a few sectors. Additionally,
EPU data might include native workers since remittance payments can include transactions of both foreign and native
workers.

PART 2
In 2017, around half of all foreign workers were educated up to the primary
level. However, there is a declining share of foreign workers with primary
education and below, from 60.4% in 2010 to 50.0% in 2017. On the other
hand, the share of foreign workers with secondary education has increased,
from 33.8% in 2010 to 44.3% in 2017. Only 5.6% of all foreign workers had
tertiary education in 2017. Of all the workers educated up to the primary level,
almost 50% were foreign workers in 2017. In comparison, of all the employed
persons with secondary education, 12.3% were foreign workers, and 3.1% of
all tertiary-educated employed persons were of foreign-origin. Over time,
foreign worker intensity for those with an education up to the primary level
has increased. Foreign worker intensity has also increased for those educated
up to the secondary level, but less so than the primary level. This is explained
by the widening gap between the educational attainment of local and foreign
workers, with the former being increasingly secondary and tertiary educated.
Figure 2.40: Distribution of foreign workers, Figure 2.41: Share of foreign workers out of
by education level, 2010 – 2017 total employment, by education level,
2010 – 2017
100.0 % 100.0 %
80.0 80.0
54.2 52.3 50.0
60.4
60.0 60.0
46.9 48.0
38.3 37.3
40.0 40.0
40.6 42.5 44.3

20.0 33.8 20.0
9.8 12.0 12.3
8.6
3.5 2.9 2.9 3.1
5.8 5.2 5.2 5.6 0.0
0.0
2010 2013 2016 2017 2010 2013 2016 2017
Primary and no Secondary Primary and no Secondary

Tertiary Tertiary
formal education education formal education education

PART 2
Low-skilled jobs are dominated by foreign workers. In 2013, 76.7% of low-

skilled employed persons were foreign workers, although this has fallen to
51.0% in 2017. This is an important point—around one in two unskilled
workers are foreign workers, potentially reflecting how foreign workers play a
complementary role to local workers, who are mostly in skilled and semi-skilled
jobs. However, of all the foreign workers, most tend to be in semi-skilled jobs47,
even though they make up less than 20% of all semi-skilled employed persons.
Around 64.5% of foreign workers were in semi-skilled jobs in 2010, but this
share has declined to 52.9% in 2016. Similarly, the share of foreign workers
in skilled jobs has also declined. Only the share of foreign workers working in
low-skilled occupations went up, from about 28.2% in 2010 to 42.3% in 2016.
Figure 2.42: Distribution of foreign workers, Figure 2.43: Share of foreign workers out of
by skill level, 2010 – 2017 total employment, by skill level, 2010 – 2017
100.0% 100.0 %
90.0 90.0
28.2
80.0 40.7 42.9 42.3 80.0 76.7
70.0 70.0
60.0 60.0
51.1 51.0
50.0 50.0
40.0 64.5 40.0
30.0 54.8 53.2 52.9 30.0 25.5
20.0 20.0 17.0 17.3

14.8 13.7
10.0 10.0
2.7 2.7 2.1 2.7
7.3 4.5 3.9 4.7
0.0 0.0
2010 2013 2016 2017 2010 2013 2016 2017
Skilled Semi-skilled Low-skilled Skilled Semi-skilled Low-skilled
47 The classification of occupations by skill level is based on the LFS

PART 2
2.2.2 Changes in labour supply and demand between 2010 and 2017
Looking at the changes in the labour force and number of workers employed
between 2010 and 2017 gives an idea of how the supply and demand of
foreign workers have evolved. Parallels between education and skill level can be
drawn. For instance, it is not unreasonable to generally assume that everyone
can work in low-skilled jobs, while only secondary and tertiary educated
individuals can work in semi-skilled jobs, and most tertiary educated individuals
can work in skilled jobs. The Malaysian labour force was about 10.6 million
strong in 2010 and 12.7 million in 2017, while the foreign labour force stood
at about 1.7 million in 2010 and 2.3 million in 2017. Out of the 10.6 million
Malaysians in the labour force in 2010, 10.2 million were employed, while 12.2
million were employed in 2017. About 1.6 million foreign workers were
employed out of the 1.7 million in 2010, while almost all foreigners in the
labour force were employed in 2017.
From 2010 to 2017, the number of Malaysians in the labour force with tertiary
education increased the most by about 1.3 million. Malaysians with secondary
education in the labour force increased by 1.2 million, while there was a
decrease of about 438,000 Malaysians in the labour force with primary
education. However, in the same period, the number of employed Malaysians
in semi-skilled occupations increased the most by 1.3 million, while those
employed in skilled occupations increased by just 713,000, even though more
than half of all Malaysians in the labour force have tertiary education. This
points to a possible mismatch in labour demand and supply, in that not all
tertiary educated individuals entered skilled occupations. It is likely that some
tertiary educated individuals entered semi-skilled jobs instead.
On the other hand, the number of foreigners in the labour force with secondary
education increased the most by 423,000 from 2010 to 2017, while those with
education up to the primary level increased by 105,000. There was an even
larger increase of 473,000 in the number of foreign workers employed in low-
skilled occupations. Additionally, there was an increase of 96,000 foreign
workers in semi-skilled occupations. This change could be the result of foreign
workers educated up to the secondary level entering low-skilled and semi-skilled
occupations.

PART 2
Overall, the key takeaway from this section is that at the aggregate level,
foreign workers do not occupy the same occupational space as Malaysians.
Foreign workers tend to go into low-skilled jobs, where half of all employed
persons are of foreign-origin, while native workers go into skilled and semi-
skilled occupations. While it is true that there is a large increase of foreign
workers in semi-skilled jobs, this represents less than 20% of semi-skilled
employment. So even as the skills mismatch leaves tertiary educated Malaysians
in semi-skilled jobs, on aggregate they do not face a high likelihood of being
replaced by foreign workers. Malaysians in low-skilled jobs, on the other hand,
could stand to lose.
Figure 2.44: Net change in labour force, by Figure 2.45: Net change in employed persons,
education level, 2010 – 2016 by skill level, 2010 – 2017
Number of Persons (’000) Number of Persons (’000)
2,000 1,600
1,623
1,383
1,500 1,358 1,400
423 96
29
1,200
1,000
1,328 1,000
1,200
500
800 697
105
0 1,286
600
-438 471
-500 400 713
-332
200 473
-1,000
Tertiary Secondary Primary and no 0

-17 -2
education education formal education
-200 Skilled Semi- skilled Low- skilled
Native workers Foreign workers

Native workers Foreign worker

PART 2
2.2.3 How do foreign workers affect the economy?
The most evident way through which foreign workers can affect the economy
is through labour market outcomes, that is, the impact on average wages and
employment of natives. Globally, the broad consensus is that foreign workers
have a small and limited impact on average wages and native employment48.
Three factors can explain the limited effects of foreign workers.
Firstly, most studies find that foreign workers are imperfect substitutes for
native workers. By extension, this means that they do not compete for the same
jobs, even within skill levels as certain industries tend to employ more foreign
workers. Hence, the impact on native employment tends to be limited.
Secondly, immigration can lead to greater economic activity. Following the fact
that foreign workers are imperfect substitutes for native workers, it is likely that
there are certain economic activities that would not have existed had there been
an absence of foreign labour. Furthermore, foreign workers can help firms
reduce production costs, thus increase output, and their presence would mean
an increase in consumption and demand for goods and services overall
Finally, the presence of foreign workers leads to task specialisation49. The ability
of foreign workers to take up low-skilled jobs creates new opportunities for
native workers to be supervisors of these low-skilled workers. Although a minor
portion of low-skilled native workers could be initially displaced by foreign
labour, they are not necessarily worse-off in the long term as they take on
better jobs.
Unlike the impact of immigration on labour market outcomes, the issue of

foreign workers and its effect on productivity and technology upgrading by
firms are less extensively studied. Most have focused on the role of high-skilled
rather than low-skilled foreign workers, and the impact is generally positive50.
48 Ozden and Wagner (2014)

49 This is discussed in in Somerville and Sumption (2008), pp 28-29. As existing literature in this is less extensive, it is
worthwhile to mention an important study on this factor on the US – Peri and Sparber (2009).
50 See, for example, Mitaritonna et al. (2017) for the case of France, and Gauthier-Loiselle and Hunt (2009) as well as
Kaushal and Fix (2006) for the case of the US.

PART 2
For Malaysia, the World Bank’s Immigration in Malaysia: Assessment of its

Economic Effects and a Review of the Policy and System Report is the most
extensive study on the impact of foreign workers in the economy (Del Carpio
et al. 2013), covering the period between 1990 and 201051. This study suggests
that immigration has a favourable impact on Malaysian labour market outcomes
depending on the sector. An increase in foreign workers leads to small increases
in native employment and wages. A 1% increase in foreign workers led to
0.1% increase in full-time employment and 0.3% increase in part-time
employment for Malaysians. This effect manifested strongly in the services,
agriculture and mining sectors, while there was no apparent rise in the
employment of natives in the manufacturing sector. As for wages, a 10%
increase in foreign workers raised the average wage of Malaysians by around
0.15%. This was particularly evident in the agricultural and low-skilled services
sectors.
Further dissection of the data reveals that older, male native workers with
secondary education in low-skilled services, agriculture and mining sectors were
the main beneficiaries of immigration. The large number of unskilled foreign
workers with minimal education fill up jobs that natives are overqualified for.
This frees up natives to take on supervisory roles. On the other hand, the least
educated, lowest-skilled Malaysians—those who compete directly with foreign
workers—were significantly disadvantaged as they experienced job displacement
and wage suppression.
At the firm level, the report found mixed results of immigration on firms’
productivity, suggesting that employment of foreign workers do not necessarily
lead to increased productivity. Particularly, while no statistically significant
impact was found in ICT services and accommodation sectors, firm productivity
in the smaller construction and plantation establishments were clearly lowered.
One possible explanation posited was that foreign workers complement natives
better in some sectors than in others.
51 An older study by the National Economic Action Council (NEAC 2004) was done in 2004 covering the period between
1991 and 2002. This study surveys Malaysian employers, and finds a favourable perception of foreign workers, in that
they keep businesses afloat and complement native workers. On a macroeconomic level, the study finds that foreign
workers contribute about 5% to GDP but have a limited impact on overall wages, and a small negative impact on
overall labour productivity. See also Ozden and Wagner (2014) and World Bank (2015).

PART 2
Other studies on the Malaysian labour market come to similar conclusions

regarding the economic impact of immigration. It is found that immigration has
generally increased economic activity by contributing positively to GDP52, the
scale effect of which outweighed the substitution effect in local labour markets53.
Second, there was a marginal impact on wages, but it was inconclusive whether
this impact is positive or negative—some studies showed marginal benefits for
natives54, while others, focusing only on manufacturing sector, found small
negative effects on overall wages55. Third, there was a lack of evidence on the
impact of immigration on labour productivity. The existing few focused on
different components of labour productivity, but it is unclear whether the effect
is positive or negative overall56.
Overall, the empirical studies on Malaysia are broadly consistent with the
global evidence on the economic impact of foreign workers. The overall effect
on labour market outcomes—wages and employment—are limited, given that
foreign workers are mainly occupying different economic roles in general
compared to natives. Nevertheless, it is important to highlight that the impact
is uneven and not all Malaysians are affected equally. In particular, the lowest-
skilled and least educated native workers are found to be negatively affected by
the presence of foreign workers in our workforce.
52 See Ahsan et al. (2014) and World Bank (2015), for examples.
53 Evidences from Del Carpio et al. (2013), Ozden and Wagner (2014), and World Bank (2015)showed that every 10 new
foreign workers in a given sector-state created around 4 to 6 native employments.
54 See Ozden and Wagner (2014).
55 See Athukorala and Devadason (2012), and Yean and Siang (2014).
56 For example, in terms of labour skill upgrading especially, Devadason (2009) found no impact in manufacturing sector,
while World Bank (2015) suggested that it has occurred based on the overall educational, sectoral, and occupational
distribution of immigrant and Malaysian workers.

PART 2
Table 2.1: Global and Malaysian evidences on the economic impact of immigration
Labour Market Outcomes Productivity
Global (1) Marginal effects on native (1) Limited studies on impact on
evidence on employment and wages, can labour productivity:
economic be positive or negative. • In developed countries,
impact of This is because: high-skilled foreign workers
immigration • Foreign workers are are highly associated with
imperfect substitutes for innovation;
natives;
• Immigration can lead to
more economic activity while
low cost labour
disincentivises firms from
upgrading; and
• Native workers tend to
specialize in skilled jobs.
(2) Distributional effects—some

are better off, some worse off:
• Displaced natives are not
necessarily worse off in the
long term as they take on
better jobs.
Malaysia (1) Positive effects on native (1) Limited and inconclusive
evidence on employment and wages: evidence on labour
economic • Magnitude of employment productivity.
impact of effects vary across studies; Some findings:
immigration • Small positive effect on • Productivity of native
native wages; workers increases while
• National average wages are foreign worker productivity
lowered marginally from decreases;
lower foreign worker wages. • Leading to an overall decline
in productivity;
(2) Distributional effects—not • Firm productivity depends on
everyone benefits: how well foreign workers
• Low-skilled native workers complement native workers;
educated up to the primary and
level are most likely to be • Skills upgrading of native
disadvantaged. workers is encouraged by
task specialisation.

PART 2
Box 2.3: The Economic Impact of Foreign Workers in Malaysia—An Econometric Analysis
Previous comprehensive studies on the impact of foreign workers in Malaysia

were conducted using granular data unavailable to the public. In recent
years, more labour statistics have been released by DOS, which begins to
allow for more formal econometric analysis on the impact of foreign workers
on the economy even without access to granular non-public statistics. This
box outlines our formal statistical analysis on the association between
foreign workers and four relevant economic indicators, two of which are
labour market outcomes, namely native employment and overall average
wages and the other two being overall labour productivity and capital
intensity. The period between 2010 and 2016 is examined across 18
industries. Further details of the estimation, including model specification
and specification tests, are outlined in Technical Note 3.
Results—limited economic impact

Firstly, in terms of labour market outcomes, there was no significant impact
of foreign workers on native employment, that is, there was insufficient
evidence to establish than an increase in foreign worker employment
correlates with lower native employment.
On wages, however, foreign workers seem to have a small negative effect. A

unit increase in the share of foreign workers out of total employment in each
sector and year leads to a 3.8% decrease in overall average wages. This is
unsurprising given that foreign workers are primarily employed in low-skilled
jobs which tend to have lower wages. This does not necessarily mean that
the supply of foreign workers suppressed overall wages as native wages have
grown in the same period. Once industry-specific effects are controlled for,
the share of foreign workers out of total employment no longer has a
significant effect on wages.
There was also no significant impact on labour productivity. This should not
be surprising given that most studies are often inconclusive about the impact
of foreign workers on labour productivity. There is also no meaningful
impact on capital intensity.

PART 2
Overall, these findings are consistent with the existing body of studies on
this topic in Malaysia. The influx of foreign workers in the country is likely
to generate only marginal impact, if any at all, on both labour market
outcomes and productivity in the shorter horizon.
2.2.4 Discussion
Despite almost universal acknowledgement of the public and policy-makers on

the significance of foreign workers to the Malaysian economy, research and
understanding on the matter remain fragmentary. This is largely due to the
confluence of two inter-related limitations—the lack of sufficiently comprehensive
micro-level statistics on documented foreign workers, and the absence of reliable
information on undocumented foreign workers which could well have non-
trivial effects on the labour market and wider economy. As such, policy
research on this matter is vital—because many areas are not studied adequately.
Here, we identify three research directions going forward that are particularly
important for policies.
Firstly, it will be useful to see the effect of foreign workers on different

segments of the Malaysian workforce. Not all Malaysians are affected equally
by the large presence of foreign workers in the country. Some Malaysian
workers may be negatively affected depending on their education and skill
levels. As highlighted in the World Bank study (Del Carpio et al., 2013), the
least educated, lowest-skilled Malaysians were significantly disadvantaged as
they experience job displacement and wage suppression. Based on the latest
available statistics, close to one million Malaysians are in this category, many
of them in the rural areas. This is not a small number. An in-depth understanding
of how they are affected is key for informed policy interventions.
Secondly, future research should analyse how foreign workers affect Malaysia’s
development beyond the labour market. DOS official statistics show that there
are currently more foreign workers than Malaysian-Indians. Going by EPU’s
estimates, which include undocumented foreign workers, shows a number
which is even larger than the entire Malaysian-Chinese working population. It
is important to emphasise again that even though the foreign population is
significant, systematic understanding of the lives and welfare of the two million
documented and many more undocumented foreign workers in Malaysia is next
PART 2
to non-existent. For instance, are foreign workers leading decent and dignified
lives, and if not, should a policy be in place to support them? How is the large
presence of migrants affecting the development of our society, and the utilisation
of public spaces, goods and services? Studies on these topics are likely to be
more tractable and with results that are more meaningful for policies when
done at the micro-level, focussing on specific geographical locations or economic
sectors.
Finally, how foreign workers affect the structural transformation of the

Malaysian economy is a highly consequential research question. While often not
explicitly mentioned, existing empirical studies almost always focus on the
short-term impact of foreign workers on the economy, even when the discussion
is on the impact of productivity. As far as we know, there are no studies
investigating the long-term impact of foreign workers on the choice of production
technology of the country and the growth potential on the Malaysian economy
more generally. Specifically, suppose an economy has a selection of feasible
production technologies to choose from, and it will optimise based on what it
has in relative abundance. Adoption of low-skill based technologies, given our
dependence on foreign workers may possibly be slowing down our convergence
to advanced economies. This is not a trivial question—the state of economic
well-being for future generations of Malaysian households’ hinges crucially on
how the country overcome some of the structural challenges that it has—
including in relation to the labour market—and transition towards becoming an
advanced economy. This is the topic that we will explore in the last part of
this report.

PART 2
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158

PART
03
MALAYSIA’S DEVELOPMENT
JOURNEY: PAST, PRESENT
AND FUTURE 139
3.1 Development in the past:
How has the economy
changed? 140
3.2 Malaysia in the middle:
Where are we now? 152
3.3 Challenges of the future:
Where do we go from here? 183
References 193
PART 3
MALAYSIA’S DEVELOPMENT JOURNEY:
PAST, PRESENT AND FUTURE
Viewed from a long-term perspective, Malaysian households have undoubtedly

experienced remarkable improvements in their economic prospects, livelihoods
and quality of life. Importantly, these improvements did not happen in isolation,
but rather occurred on the back of strong economic growth since Independence.
Malaysia’s economic development, with the active participation of its citizens,
was underpinned by the transformation of Malaysia’s economic structure,
enabling it to evolve and adapt according to needs of the time and Malaysia’s
comparative advantages relative to the world economy. Structural transformation
of Malaysia’s economy has led to sustained economic growth through the
decades and has provided the bedrock for much of the improvements in the
state of households we see today. Malaysians’ welfare is inextricably linked to
the economic development, and thus the structural transformation of the
economy. Therefore, this is a fundamental issue if Malaysia is to secure the
welfare of its people in the long run.
This chapter explores the Malaysian development journey through three

different time frames. First, Malaysia’s economic progress and the improvement
in the welfare of Malaysian households since Independence. Second, where
Malaysia stands today relative to other nations, specifically through the lens of
the defining features of an advanced economy. And finally, a reflection on the
key elements to securing our future—all the while being mindful of the
uncertainty this country and the world will face in the days to come.

PART 3
MALAYSIA’S DEVELOPMENT JOURNEY: PAST, PRESENT AND FUTURE
3.1 Development in the Past: How Has the Economy Changed?
This section explores the history of Malaysia’s economic development, and

illustrates how household incomes are closely linked to the structure of the
national economy. The overall well-being of households in terms of health,
education and access to basic facilities have also improved over the years.
3.1.1 Households’ livelihoods are deeply linked to the economic

progress of the nation
When Malaysia emerged from its colonial roots to form a fully-fledged

independent nation, the country was essentially rural, traditional and relatively
poor57. The country started off with a generally efficient administrative system
and bureaucracy to support an economy dedicated to specialised rent-seeking
resource productions of tin and rubber—legacies from the days of British
colonial rule58,59 . Yet, even in its earliest days, the roots of a massive,
nationwide structural change had already begun. After the post-war years and
subsequent reconstruction period, Malaysia began experiencing a relative decline
in agriculture’s share and a relative increase in the industrial sectors’ share of
the national GDP, in fact this began as early as 195560.
Changes in the structure of the economy have a profound effect on the

livelihoods of households. For many Malaysian households, employment is an
important source of income, and structural changes in the sectors they work in
will generally be reflected in the changing fortunes of Malaysian households. In
the few years following Independence, the agricultural sector made up a lion’s
share of total employment in Malaysia, amounting to almost 60% of all
employment in the country (Figure 3.1). However, as noted earlier, agriculture’s
share in employment was already declining before 1957. The decline was part
of a wider decades-long trend, and by the 1970s, this trend picked up speed
and truly went into full force. This marked the beginning of Malaysia’s era of
industrialisation61.
57 Lafaye de Micheaux (2017)

58 Sultan Nazrin Shah (2017)
59 Drabble (2000)
60 Ibid
61 Ibid

PART 3
Figure 3.1: Share of employment by economic sectors, 1960 – 2015

% Share of Total Employment
100.0 %
Industrialisation
90.0
Services (61%)
80.0
70.0
60.0
50.0
Construction (9%)
40.0
More than half Mining (1%)
30.0 of all employment
was in agriculture
Manufacturing (17%)
20.0
10.0 Agriculture (12%)
0.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Sources: KRI (2017)
From the 1970s to the early 2000s, more and more Malaysians started to work
in the rapidly growing industrial sectors. At the same time, the proportion of
Malaysians working in the services sector also grew, as new swathes of services
were now in demand to service the industrial sectors of the economy. In the
midst of these rapid increments in industrial and services employment shares,
the proportion of Malaysians working in the agricultural sector began to shrink
from 52.8% in 1970 to 16.7% in 2000. This downward trend continued all
the way to 2015, where agricultural sector’s employment share stood at 12.5%.
Since 2000, the growth in employment share of the industrial sector appears to
have halted, whereas employment share of the services sector has kept on
growing until today, pointing towards increased diversification and an emergent
services industry at the turn of the century.
A natural consequence of general employment patterns mirroring the nation’s

economic structure is that household incomes mirror national income. Figure
3.2 illustrates the co-movements in real GDP growth with annual real median
household incomes.

Figure 3.2: Real GDP and real annual median household income, 1960 – 2016
Real GDP (RM million) Real annual median household income (RM, in 2010 prices)
1,200,000 60,000
Commodity-based economy and the Export-oriented Diversification and deindustrialisation

beginning of Malaysia’s industrialisation: manufacturing economy:
1,000,000 • Average growth rate*: 5.6% 50,000

• Average growth rate*: 7.1% • Average growth rate*: 8.3% • Average inflation rate†: 2.4%
• Average inflation rate†: 3.6% • Average inflation rate†: 2.9% • Average unemployment rate: 3.3%
• Average unemployment rate‡: 6.4% • Average unemployment
rate: 4.9%
800,000 40,000
600,000 30,000
400,000 20,000
200,000 10,000
0 0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Real Median Annual Household Income Real GDP
Sources: World Bank World Development Indicators, Economic Planning Unit, Department of Statistics Malaysia
Note: The passage of the Promotion of Investments Act in 1986 is used as the marker for the beginning of the export-oriented manufacturing era.
* Growth rates for the years of 1985, 1998 and 2009 are removed due to the skewing effect of economic downturns.
† 2010 prices are used as the base prices.
‡ Average unemployment rates for the years 1960, 1965, 1970, 1975, 1980 and 1985.

142
PART 3
PART 3
Nominal median monthly household incomes saw a dramatic rise throughout

the industrialisation phase, rising from RM166 in 1970 to RM2,049 in 2002.
This continued well into 2016, where nominal median monthly household
incomes reached RM5,228—a larger than 30-fold increase from 1970 levels.
When measured in 2010 prices, real monthly median household income
registered a three-fold increase from 1970 to 2002 and a six-fold increase from
1970 to 2016; from a real monthly median household income of RM711 in
1970 to RM2,466 in 2002 to RM4,538 in 201662. As Malaysian households
experienced higher incomes throughout the years, so did Malaysia’s GDP.
Malaysia’s real GDP (measured in 2010 prices) grew by almost eight-fold, from
RM69b in 1970 to RM555b in 2002, and nearly 16-fold to RM1.1tr in 2016.
Figure 3.2 also shows economic growth experienced by Malaysia under different
time periods. The varying degrees of economic growth points to the structural
transformation of the Malaysian economy that took place during those periods,
adapting to the conditions, circumstances and demands of the era. These
transformations can be loosely clustered into three time-periods, based on the
dominant economic activity of the time63:
• 1960 – 1985: A primary, resource-based economy that slowly began to

modernise and industrialise. The first process of industrialisation was
primarily import-substitution which kickstarted the capital-intensive character
of many pioneer industrial companies in Malaysia. This then evolved into
the beginnings of Malaysia’s export-oriented industrialisation.
62 DOS, KRI staff calculations

63 Adapted from Drabble (2000) and Yusof and Bhattasali (2008)

PART 3
• 1986 – 1998: A manufacturing-based economy geared for a trade-centred

growth. Here, export-oriented industrialisation had taken off, and its effects
had materialised in full force. The passage of the Promotion of Investments
Act of 1986 further bolstered Malaysia’s position in the economic world by
capturing a golden opportunity created from global economic conditions
following the Plaza Accord of 198564—an agreement that reduced Japan’s
trade competitiveness—and reaffirming Malaysia’s position as an attractive
location for overseas investments. This in turn allowed industrial sectors to
thrive and dominate, allowing industries such as electrical and electronic
(E&E), chemicals, and palm oil products to take a foothold in the Malaysian
economic landscape.
• 1998 – Present day: Weathering through two major economic crises, the
Asian and Global Financial Crises, the economy underwent major reforms
to increase the resilience and robustness of its existing sectors. During this
period, growth in the industrial sectors have tapered off, and the economy
has begun deindustrialising65. Malaysia’s economy has started to diversify,
marked by an increasing share of employment in the services sector.
The immediate feature that one can then observe from Malaysia’s development
journey is how tightly linked the income of its citizens to the ebbs and flows
of the overall economy. This underscores the fact that improvements in the
state of Malaysian households over the decades has not occurred in isolation
to the rest of the country, but rather is intrinsically tied to the economic
development and transformation of the nation.
64 Chua et al. (1999)

65 Menon and Ng (2015)

PART 3
3.1.2 Households’ wellbeing over the years
While economic growth is important, a holistic view of development provides

a more realistic reflection of improvements in the nation and its people. A
holistic perspective entails looking beyond increasing GDP or rising household
incomes. Instead, it combines a multifaceted perspective of the enrichment of
people’s lives, such as improvements in material living standards, health,
education, personal activities, political voice, social relationships and security.
Beyond subjective well-being, the concept of development is also tied to the
concept of capabilities, in which people are free to pursue and realise their
ambitions, per their values and beliefs66.
Assessments of well-being are vital to understanding how much better-off

individuals are in a country. These can be measured through objective measures—
such as assessing life expectancy and morbidity rates to understand the general
state of health in a country—or subjective measures—such as rating individuals’
perception of happiness and sense of security to comprehend the socioemotional
wellbeing of citizens67.
This segment, however, focuses on the tangible measures of development,

encapsulating the notion of development from a rural and traditional economy
to an upper-middle income country on the cusp of high-income nationhood. In
this regard, improvements of Malaysians’ well-being over the years have been
remarkable.
66 Stiglitz et al. (2008)

67 Ibid

PART 3
Figure 3.3: Average life expectancy and Figure 3.4: Maternal, toddler and infant
average mortality rates, 1960 – 2015 mortality rates, 1960 – 2013
Years Infant Maternal/ toddlers
80 30%
8.0% 1.0%
28
Life expectancy (years)
75 26 Toddlers 0.8
6.0
24
0.6
70 22
4.0
20 0.4
Maternal Infant
65 18
2.0
0.2
Mortality rate (%) 16
60 14
0.0 0.0
12
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
55 10
Source: DOSM
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Note: Maternal death refers to death due to complications

Source: World Bank of pregnancy, childbirth and the puerperium. Toddler refers
Note: Life expectancy is the number of years a newborn is to children between the age of 1-4, infant refers to children
expected to live given mortality patterns. Mortality rate is below 1 year old.
the probability of dying between the ages of 15 and 60.
Figure 3.5: Population access to sanitation Figure 3.6: Primary and secondary gross
facility, water source, electricity, 1990 – 2014 enrolment rates, 1975 – 2015
100.0 % Primary
100 %
96.0 Electricity
Water
80
Sanitation Secondary
92.0
60
88.0
40
84.0
20
80.0
0
1990
1992
1994
1996
1998
2000
2004
2006
2008
2010
2012
2014
2002
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
Source: DOSM
Note: Improved sanitation include flush/pour flush and Source: DOSM
ventilated improved pit latrine facility. Improved water Note: Ratio of total enrolment (regardless of age) to
source includes piped water on premise, public taps, population of corresponding age group. For primary school,
protected springs and rainwater collection. missing data for 1976, 1986 and 1997 replaced with
average rate pre- and post- year.

PART 3
The first important observation that can be inferred from these datasets is that
health outcomes have greatly improved over the years. Malaysians today have
much longer life expectancies. In the 1960, the average life expectancy was 59
years, whereas by 2015, life expectancy had increased to 75 years. Average
mortality rates have also declined from 27% in 1960 to 12% in 2015 (see
Figure 3.3). Figure 3.4 shows how improvements in health outcomes have
occurred via the reduction of mortality incidence among infants, toddlers and
mothers due to better care for the young and higher immunisation rates against
diseases, such as measles and hepatitis among children68.
Malaysians have also enjoyed near universal access to important utilities. Figure
3.5 shows household access to electricity, clean water and improved sanitation
facilities reached near universal levels; in 2014, 100%, 98% and 96% of the
population had access to electricity, clean water and sanitation facilities
respectively. Rural households experienced the largest access growth, from
85.5% improved water source and 95.9% improved sanitation facilities access
in 1990, to 93% and 96% population access in 2014, respectively69. In our
modern world, access to these basic necessities are essential for households to
participate in society and live out meaningful lives. What is also important is
that households today live in far more comfortable conditions, made possible
by the use of modern machines and appliances that utilise these resources.
Malaysians have also become increasingly educated. In terms of schooling, most

Malaysians today attend primary and secondary schools, providing a foundation
for many to develop their human capital (see Figure 3.6). Schooling matters
because an educated society is the foundation of a successful society: one with
better health and a more productive workforce in the modern economy.
68 World Bank (1990 and 2016) reported an increase of immunization rates increase for Hepatitis (85% in 1990 to 98%
in 2016, among one-year-olds) and measles (70% in 1990 to 96% in 2016 among children aged 12-23 months)
69 DOS (1990 and 2014)

PART 3
Box 3.1: The Wealth of the Malaysian Economy
National income, typically measured by GDP, is commonly used as a

measure economic progress. However, the income component alone does not
provide a complete picture of the country’s economic development. Just as
businesses assess their performance through cashflow statements and balance
sheets and individuals’ creditworthiness can be identified from their incomes
and net assets, a comprehensive assessment of a country’s economy should
include its income component, measured by GDP, as well as its wealth
component, measured by the total assets and liabilities in the economy70.
Why should one look into wealth? Wealth matters because it indicates
whether incomes can be sustained in the long run. This is essentially the
basic financial definition of an asset’s value: the stream of discounted future
incomes that can be generated from the asset. From this angle, a country
whose streams of income comes primarily from extraction of natural
resources may have large streams of income in the short run. During times
of high commodity prices, this would be reflected as impressive GDP figures.
However, if it does not save and reinvests proceeds from these activities into
alternative sources of incomes, the country is at danger of depleting its
natural wealth and deprive incomes of future generations.
An important source of information on the wealth of economies globally is

the World Bank’s The Changing Wealth of Nations reports71. These reports
provide estimates of national wealth clustered into four groups: produced
capital, natural capital, human capital and net foreign assets. Some of the
example of assets falling under these asset groupings are as follows:
70 Lange et al. (2018)

71 Ibid.

PART 3
Table 3.1 : The components of national wealth and its calculation

Component Asset types
Produced capital and Machines, buildings, equipment, residential and non-residential
urban land urban land at market prices
Natural capital Energy, minerals, agricultural land, forests, protected area,
valued at discounted sum of rents generated over lifetime of
asset
Human capital Value of skills and experience, disaggregated by gender and
employment status. Using regression earnings, expected
earnings is calculated and the discounted value of lifetime
earning is estimated
Net foreign assets The sum external assets and liabilities including portfolio
equity, debt security, foreign direct investment and other
financial capital held in other countries.
Figure 3.7 shows the estimated per capita wealth of the Malaysian economy
between 1995 and 2014. Between the two years, estimated wealth per capita
has risen by 1.8 times the level in 1995. In contextualise these figures, the
Malaysian GDP per capita in 2014 is 1.6 times per capita GDP in 1995,
indicating that our wealth has increased by more than our income between
this period. Most of Malaysia’s wealth also comes in the form of human
capital, which expanded by 13% between the two years.

PART 3
Figure 3.7: Malaysia’s wealth, 1995 – 2014

USD Per Capita
300,000
250,000 $239,203
12%
200,000 1.8x 13
150,000 $129,605
23%
100,000
17 76
50,000
63
0
-2 0
-50,000
1995 2014
Human capital Produced capital Natural capital Net foreign assets
Source: World Development Indicators

Note: Constant 2014 USD
Figure 3.8: Wealth of Malaysia and selected countries, 2014

Thailand 54%
MALAYSIA 76%
Singapore 60%
China 59%
Japan 64%
South Korea 69%
Brazil 65%
Chile 59%
Mexico 54%
Norway 60%
High-income OECD 70%
USD Per Capita

0 500,000 1,000,000 1,500,000 2,000,000
Human capital Produced capital Natural capital Net foreign assets

Note: Constant 2014 USD

PART 3
Relative to other countries, Malaysian wealth per capita—standing at

USD239,202—is only one third of the OECD average of USD708,389.
Malaysia’s level of wealth is also below countries like Norway and South
Korea. While the concentration of our wealth in the form of human capital
is higher than other countries, our level and proportion of produced capital
from total wealth is lower.
Beyond measures of national wealth, the World Bank report also estimates
adjusted net savings (ANS), defined as a country’s gross national savings, net
of depreciation of produced capital, depletion of subsoil assets and
deforestation, air pollution damage to health and credited for education
expenditures. In other words, total wealth indicates the stock of accumulated
assets in the economy, whereas ANS is a measure that tracks the flow of
assets and how the wealth of nations changes over time. Typically measured
as a percentage of gross national income (GNI), a positive ANS is deemed
desirable as it indicates an increment in a nation’s wealth.
Figure 3.9 shows the ANS trend for Malaysia since 1985. Historically, it has
always been positive. However, Malaysia’s ANS has experienced a downward
trend since 2011. If this decline continues, ANS could potentially threaten
the sustainability of Malaysia’s development.
Figure 3.9: Malaysia’s adjusted net savings, 1985 – 2015

% of GNI
25.0
20.0
15.0
10.0
5.0
0.0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

PART 3
To piece together the larger picture, the economic development of a country

should also include the level of wealth in the economy, in addition to
national and household incomes. The wealth of a nation provides a bearing
for the direction of future income streams and highlights the long-run
sustainability of a nation’s income stream. It reveals the core of a nation’s
economy and provides citizens a way to understand the economic well-being
of the present and the future.
3.2 Malaysia in the Middle: Where Are We Now?
The previous section highlights the fact that Malaysia has come a long way
from a rural, traditional and relatively poor country to a relatively prosperous
economy in the 21st century. As a result, Malaysian households have benefitted
greatly both in monetary and non-monetary terms. The cumulative effects of
these structural changes over the years have led us to the Malaysia we know
today: a relatively affluent upper-middle income country.
In 1989, the World Bank began categorising countries as low, lower middle,
upper middle and high-income nations based on their per capita gross national
income (GNI). Malaysia was categorised as a lower middle-income country
during the first five years from 1987 to 1991. The country then progressed to
become an upper middle-income country in 1994 and has remained in that
category ever since. While the World Bank has reported that Malaysia is
expected to reach the high-income threshold sometime between 2020 and
202472 , how has Malaysia really fared in relation to other peer nations, in
terms of economic indicators and fundamental factors important to most high-
income economies?
3.2.1 Malaysia as a middle-income country
A study by the ADB estimated that Malaysia has been a middle-income country
for 55 years between 1960 to 201773. This poses a difficult question Malaysia
must ask itself: how can we move beyond being a middle-income country?
72 World Bank (2017)

73 Estrada et al. (2017)

PART 3
As seen in Figure 3.10, stagnating in a middle-income status is not an unfamiliar

phenomenon among many developing countries, and it encapsulates the
difficulty of sustaining rapid growth once a country has progressed past its low-
income status into middle-income status.
Figure 3.10: Income group classification and length of middle-income status, Malaysia and
selected countries. 1960 – 2016
Developing Asia Years as middle-income country
China 19
Hong Kong 24
Indonesia 22
MALAYSIA 55
Philippines 44
Singapore 27
South Korea 26
Taiwan 25
Thailand 41
Latin America
Argentina 56
Brazil 56
Chile 52
Colombia 57
Mexico 57
Uruguay 51
1960s 1970s 1980s 1990s 2000s 2010s
Low income Middle income Lower-middle

country country income country
Upper-middle High income

income country country
Sources: World Bank, Asian Development Bank

Note: Country income classification before 1987 follows classification used in Estrada et al. (2017), which classifies country
income levels using purchasing power parity in constant 2011 dollars from Penn World Tables 9.0. Country income groups
post-1987 uses the World Bank classifications. Numbers on the right-hand side of the table represents the number of years
classified as a middle-income country and bolded numbers indicate that the country has reached a high-income status.

PART 3
However, within each country's World Bank income group exists a heterogenous
cluster of countries. Figure 3.11 shows how countries have fared in relation to
the high-income threshold. Countries such as South Korea and Chile have
managed to transition from upper-middle income status to high-income status
in 1993 and 2011, respectively, while Malaysia appears to slowly approach the
threshold. Interestingly, this comparative analysis indicates that Malaysia more
closely resembles Latin American economies such as Brazil, Chile and Mexico,
rather than Southeast or East Asian economies.
Figure 3.11: Distance to high-income threshold. 1987 – 2016

1.4
Ratio of GNI per capita to high-income GNI per capita threshold
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
MALAYSIA Thailand Indonesia Mexico
Chile Brazil China South Korea
Each country’s income group can also be identified based on non-income

measures. High-income countries are characterised by having an older population,
where the share of individuals aged 65 and above is close to 12%. 2016 data
for Malaysia indicates that the proportion of individuals aged 65 and above
stands at half that value (Figure 3.12). Individuals in high-income nations also
stay in schools longer, four times the average of individuals in a low-income

PART 3
nation. Malaysia’s population has close to a high-income country’s average

years of schooling. (Figure 3.13). However, on infrastructural matters, high-
income countries lead the pack by a large margin. High-income nations tend to
have more paved roads, a generic indicator of infrastructure provision to
support economic activities and linkages. While the state of infrastructure in
Malaysia is better than the middle-income and low-income average, the country
has more room for infrastructural expansion to reach the level of high-income
countries (Figure 3.14).
Figure 3.12: Share of population age 65 and Figure 3.13: Years of schooling for Malaysia
above in population, Malaysia (2016) and (2015) and other income groups
other income groups
75-percentile Years 75-percentile

50-percentile 50-percentile
16.0%
25-percentile 12 25-percentile
8.8 years
12.0
8
8.0 6.1%
4
4.0
0.0 0
Low Middle High MALAYSIA Low Middle High MALAYSIA
Income Income Income Income Income Income
Figure 3.14: Paved roads in km/thousand workers for Malaysia (2015) and other income groups
km/th worker 75-percentile
50-percentile
25-percentile
30
20
10.3km per
thousand workers
10
0
Low Middle High MALAYSIA
Income Income Income
Source: Estrada et al. (2017), Department of Statistics Malaysia, KRI staff calculations

PART 3
Essentially, there are heterogeneities in demographic, human capital and

infrastructure characteristics among different income groups. These differences
indicate that societies living in different countries face different socioeconomic
circumstances and resources. Transitioning from one group to another therefore
requires significant changes in these conditions as well.
3.2.2 Common features of modern high-income economies
Malaysia’s development occurred on the back of strong economic growth.

However, growth that powers a country’s development from a low-income
economy to a middle-income economy might not necessarily enable a country
to develop a high-income economy.
The road towards strong, sustained economic growth is not a well-defined path.
Different countries, under different set of circumstances, will need develop their
own unique paths. There are, however, several common characteristics between
countries’ developmental journeys. In the Growth report, produced by the
Commission on Growth and Development, these characteristics are countries
that leverage on the world economy, have stable macroeconomic environments,
are future oriented in their economic outlooks, possess well-functioning markets,
and have leadership and governance structures74. In 2010, Malaysia’s National
Economic Advisory Council published the New Economic Model for Malaysia
which address the strategic policy directions Malaysia needs to undertake in
order to achieve a sustainable, inclusive, high-income economy75.
These perspectives have put a great emphasis onto the economic strength of a
country. Whilst necessary, that alone is not sufficient. A more comprehensive
notion of development for instance is the Vision 2020. It introduced an ideal
of development unique to Malaysia, not restricted only in the economic sense,
but developed along multiple dimensions: politically, socially, spiritually,
psychologically and culturally. As laid out by the fourth and seventh Prime
Minister, Tun Dr Mahathir Mohamad, this ideal entails a vision of a developed
Malaysia “in terms of national unity and social cohesion, in terms of our
economy, in terms of social justice, political stability, system of government,
quality of life, social and spiritual values, national pride and confidence”76 .
74 Commission on Growth and Development (2008)
75 National Economic Advisory Council (2010)
76 Tun Dr Mahathir Mohamad (1991)

PART 3
This report supplements this discussion by providing some updates to this issue
based on some of the reports published by ADB77, the World Bank78 and Bank
Negara Malaysia79. From these reports, several common themes thread different
development journeys of advanced economies—noted here as a having well-
developed institutions and state capability, a robust knowledge-based economy,
high-quality human capital and a modern infrastructure—and are synthesised in
Figure 3.15. This section illustrates where Malaysia currently stands in relation
to these features with other nations, highlighting the country’s progress and
areas for further development.
Figure 3.15: Common features of advanced economies
Well-developed Knowledge-based High-quality Modern

institutions economy human capital infrastructures
Adapted from various sources.
3.2.3 Malaysia in context: Institutions and state capability
It has long been recognised that economic growth is closely linked to the
amount of human capital, physical capital, and technology that workers and
firms in that country have access to. But an equally important element of a
nation’s development is recognising the fact these endowments do not magically
turn themselves into economic output; that it is the men and women utilising
these endowments that ultimately produces welfare enhancing economic activity
and how society, on a macro level, organises itself to induce these behaviours
from the men and women of this country. Ultimately, how a society generates
wealth depends on the amount of endowment a society has and how that
society organises itself to use these endowments productively.
To adequately address the age old question of what drives a country’s

development, the question of how a society organises itself should be taken
seriously. In this regard, institutions—and by extension, the government or the
77 ADB (2017)
78 Lange et al. (2018), Cirera and Maloney (2017) and World Bank (2018)
79 Bank Negara Malaysia (2010)

PART 3
state in general—play an exceptionally important role in a country’s development:

they shape incentive structures within society which consequently determine the
actions and behaviours of agents under different circumstances80. These in turn
produces the outcomes we observe in the economy and our everyday life.
Institutions are essentially the rules of the game in a society.
Institutions therefore hold a lot of weight in determining the trajectory of a

country’s development. Hence, it is crucial that society have a strong say in the
direction of its institutions and how they govern over the societies they are
meant to serve. Since a society’s own future is at stake, important pillars such
as freedom of expression, accountability and curbing corruption are all integral
parts of a society’s ability to maintain a strong check-and-balance system over
institutions. In the case of Malaysia, these pillars have worsened over the past
decade compared to the decade before it, as seen in Figures 3.16 and 3.17.
These figures reflect an erosion of society’s trust over the check-and-balance
systems in place over the country’s institutions over the past decade.
Figure 3.16: Comparison of average ‘Voice and Accountability’ score of Malaysia between
1996 – 2006 and 2006 – 2016 against other country income groups over the same time period
'Voice and Accountability' score ranges from -2.5 (weak) to 2.5
(strong governance performance)
1.5
1.19 1.14
1.0
0.52 0.43
0.5
0.0
-0.09 -0.09
-0.5 -0.36
-0.53 -0.51 -0.46
-1.0 -0.86 -0.82

1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
High Income: High Income: Upper middle Lower middle Low Income MALAYSIA
Non OECD OECD income income
Source: World Governance Indicators

Note: ‘Voice and Accountability’ score reflects perceptions of the extent to which a country's citizens are able to participate
in selecting their government, as well as freedom of expression, freedom of association, and a free media.
80 Acemoglu and Robinson (2008)

PART 3
Figure 3.17: Comparison of average ‘Control of Corruption’ score of Malaysia between

1996 – 2006 and 2006 – 2016 against other country income groups over the same time period
'Control of Corruption' score ranges from -2.5 (weak)
to 2.5 (strong) governance performance)
1.5 1.32 1.27
1.0 0.86 0.88
0.5 0.32
0.16
0.0
-0.3 -0.32
-0.5
-0.58 -0.59
-1.0 -0.85 -0.88
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
1996-2006
2006-2016
High Income: High Income: Upper middle Lower middle Low Income MALAYSIA
Non OECD OECD income income
Source: World Governance Indicators

Note: ‘Control of Corruption’ score reflects perceptions of the extent to which public power is exercised for private gain,
including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.
These figures add an important dimension to Malaysia’s development progress,

in which our democratic principles desperately needs to be built upon.
Institutions do not function in a vacuum. Institutions can only function within
societies that bestow them the mandate for their existence, which they in turn
exercise their powers over society.
Another dimension of institutional strength is its capability and effectiveness in

carrying out its functions, solving society’s problems and providing society’s
needs. Indeed economists have noted that Malaysia is “stuck” in low-levels of
state capability and experiencing stagnant growth state capability levels over the
decades. Table 3.2 maps out Malaysia position relative to other developing
nations in developing its state capability.

PART 3
Table 3.2: The level and growth of state capability of Malaysia relative to 101 other historically
developing countries
Growth in state capability

Rapid negative Slow negative Slow positive Rapid positive
growth growth growth growth
the Bahamas, Chile, Qatar, United Arab
Strong
Bahrain, Brunei Singapore, South Emirates

Korea
Argentina, Costa Brazil, China, Cuba, Albania, Algeria,
Rica, Guyana, Iran, Egypt, India, Israel, Armenia,
Moldova, Jamaica, Jordan, Botswana,
Mongolia, Kuwait, Lebanon, Colombia, Croatia,
Middle
Morocco, Namibia, MALAYSIA Ghana, Indonesia,

the Philippines, Mexico, Oman, Kazakhstan,
South Africa, Sri Panama, Peru, Russia, Saudi
State capability levels
Lanka, Thailand, Suriname, Tunisia, Arabia, Ukraine,

Trinidad and Vietnam Uruguay, Turkey
Tobago
Belarus, Dominican Azerbaijan, Bolivia, Angola,
Republic, Gambia, Cameroon, Bangladesh,
Guatemala, Guinea, Ecuador, Gabon, Ethiopia, Tanzania,
Kenya, Libya, Malawi, Mali, Uganda, Zambia
Weak
Madagascar, Mozambique,
Nicaragua, Papua Pakistan
New Guinea,
Paraguay, Senegal,
Syria, Venezuela
Ivory Coast, Haiti, Nigeria, Democratic Guinea-Bissau,
Very Weak
Yemen, Zimbabwe North Korea, Republic of the Liberia, Niger

Somalia, Togo Congo, Iraq,
Sudan, Sierra
Leone
Source: Adapted from table 1.1 of Andrews, Pritchett and Woolcock (2017)
Note: The table is obtained from Andrews, Pritchett and Woolcock (2017), which is a composite index based on the average
rescaled indicators of state capability from Quality of Government, Failed State Index and World Governance Indicators.

PART 3
From Table 3.2, we can observe that Malaysia is not alone in facing this
difficult problem. In tackling this problem, the real challenge lies in developing
real state capability. Economists have noted that efforts to improve state
capability across developing countries have often yielded little results. They have
largely been hollow, such as reforms yielding little material change, or failed,
due to implementation stress under excess pressures to execute “best practice”
policies81. Sustainable, long-term centric solutions requires iterative improvements
for local problems with local solutions, and creating a safe environment across
the institution encouraging experimentation and positive advances. This iterative
process over time builds state capability, allowing it to tackle even greater
problems than before.
This ties back to the original ethos behind Tun Dr Mahathir’s vision that whilst
Malaysia ought to aspire to be amongst the league of developed nations, simply
importing solutions—often custom-made for another country’s problems—is not
the only way to develop a nation82. It is important that Malaysians strike a
balance between learning from the experience of others as well as producing to
our own solutions to solve our own unique circumstances.
3.2.4 Malaysia in context: Knowledge-based economy
Diversification and industrialisation played an important role in Malaysia’s

development from a low-income to a middle-income country in the past. At this
stage of development, national income improvements were driven mainly by
high investments, leading capital flows into the country and bringing in frontier
production technologies to run the country’s industrial sectors. This enabled
Malaysia’s industrialisation phase, with an emphasis on export-oriented
manufacturing activities.
Driven by innovation, advanced countries are primarily knowledge-based, where

countries intensively produce, distribute and use knowledge and information.
Consequently, progress is underpinned by high-technological investments and
industries, as well as large productivity gains83. The economy also exhibits less
81 Andrews et al. (2017) labelled these situations as isomorphic mimicry and premature load bearing.
82 Tun Dr Mahathir Mohamad (1991)
83 OECD, 2016

PART 3
reliance on physical inputs and natural resources, and are greatly influenced by
intellectual capabilities84.
Transitioning from a middle to high-income economy means that the country

would need to move beyond its role as a hub of production to become a hub
of creation. The nature of growth during this transition would shift from
investment-led growth, centred on capital accumulation and technology
adoption, to innovation-led growth, centred on productivity enhancements and
new value creation85. As Malaysia progresses towards the economic frontier, the
country needs to pay closer attention to these sources of growth.
The capacity to innovate and create a knowledge-based economy relies on

various factors, which revolves on whether the economy is diversified and
intensively knowledge-based, through active research and development activities,
motivated entrepreneurs and high economic complexity.
Research and Development (R&D)

Generally, emerging economies would plug themselves into the global value
chains and adopt technologies created by economies at the technological
frontier. This was the case of Malaysia during the past few decades. As
economies continue to develop, they too reach the technological frontier. The
primary dimension of long-term growth then shifts from price competition to
innovation, fuelling growth-enhancing activities and the associated societal spill
overs86. Innovation therefore plays a central role in future economic growth,
and R&D becomes a key indicator of knowledge creation and investment in
innovative activities.
Following this logic, funding for R&D is an important element for innovation.
Malaysia’s R&D expenditure in 2015 stands at 1.1% of GDP, less than the
levels seen in high-income nations such as Japan and South Korea or the OECD
average (Figure 3.18). Additionally, almost two thirds of R&D activities in
Malaysia are done by businesses. It is more common amongst large firms,
especially exporters and producers of chemical products87.
84 Powell and Snellman (2004)

85 Aghion and Bircan (2017)
86 OECD (2012)
87 World Enterprise Survey, 2015

PART 3
Figure 3.18: Gross expenditure on R&D, total and by businesses, selected countries, 2015
% of GDP
5.0
4.3
4.0 3.6
3.0
2.0 2.0 1.9

2.0
3.4
1.1 2.8
0.9
1.0
0.4 1.2 1.6 0.4 0.5 1.2
0.7 0.6
0.0 0.2 0.1 0.2
Thailand MALAYSIA Singapore China Japan South Chile Mexico World OECD
Korea
Public Sector Private Sector

Source: Global Innovation Index
In terms of number of researchers per population, while the gap between the
Malaysia and high-income economies have narrowed over the years, the gap is
still a significant one (Figure 3.19). As of 2010, high-income economies have
more than double the number of researchers per population compared to
Malaysia.
Figure 3.19: Researchers per million population, Malaysia and selected averages,
2000 and 2010
Researchers per million population
5,000
4,000 3,846
3,349
3,125
3,000 2,722
2,000
1,458
1,000
274
0
MALAYSIA OECD High-income
2000 2010
Source: World Bank (2000 and 2010)

PART 3
Those inputs have translated an output of 12.6 journal articles per billion PPP$
GDP in 2016 (Figure 3.20). Another lens of R&D output are patent applications,
which indicates the ability to transform research ideas into marketable outputs.
Patent applications in Malaysia are higher to other comparable peer nations,
but greatly lags behind high-income nations. For an active participant of the
global supply and value chains, Malaysia’s resident-based patenting capacity is
limited in comparison to countries at the research frontier end of these chains,
such as South Korea and Japan (Figure 3.21). These indicators show that whilst
Malaysia has made great strides in R&D, there remains a significant amount
of work that needs to be done in this area.
Figure 3.20: Number of scientific and technical journal articles per billion PPP$ GDP, selected
countries, 2016
Articles per billion $PPP GDP
45
40 38.8
35
29.7
30
26.1
25
20
17
15
15 13.9
12.6 12.2
10
6.2
5.5
5
0
Thailand MALAYSIA Singapore China Japan South Mexico Brazil Chile OECD
Korea

PART 3
Figure 3.21: Resident and non-resident patent applications per million population, selected
countries, 2016
4,000
3,500
3,000
2,500
2,000 3,189
286 2,049
1,500
1,000
1,673
655
500 874
36 886
16 10 25 22
458 414
0 98 196 97 110 126 141
Thailand MALAYSIA Singapore China South Japan Brazil Mexico Chile OECD
Korea
Non-resident patent application Resident patent application
The variables covered here are only an overview of R&D inputs and outputs
and provide a rough gauge of Malaysia’s research capabilities relative to peer
and advanced economies. A comprehensive picture of R&D in Malaysia should
include other vital features such as policies, institutions, technology transfers
and other vehicles for technological upgrading88. Nonetheless, from the
indicators seen earlier, R&D activities and its associated outcomes are one of
the areas Malaysia lags remains behind advanced economies.
88 Lai and Yap (2004)

PART 3
Entrepreneurship
The experience of Malaysia’s economic development shows that when Malaysia’s
economic structure fundamentally changes and evolves, the livelihoods of
households changes significantly as well. This is no different when a developing
country transforms into a developed one. Structural change, the types of
transformation that creates advanced economies, are essentially driven by
entrepreneurs89. Why is this the case? Generally, entrepreneurs are driven by
necessity or opportunities. In countries where employment is scarce or the
quality or remuneration from work is unsatisfactory, entrepreneurs are likely to
be necessity-driven entrepreneurs. On the other hand, opportunity-driven
entrepreneurship are mostly voluntary entrepreneurs who seek for improvement-
driven opportunities90. Therefore, entrepreneurs—when driven by opportunity
rather than necessity—invest resources into business ideas, take on risks, expand
existing or create new demand, compete and in the process, change the structure
of an economy91.
Entrepreneurship is another facet of a knowledge-based economy as it is the

medium of how ideas are transformed into an economic activity. In advanced
countries, it is a regular feature of the economy and highly encouraged and
supported by the government92. Where does Malaysia fare then, with respect to
entrepreneurship?
Over the years, bureaucratic burden of starting a business has gradually fallen.
Time taken to set up a business are now shorter—in 2010, it takes an average
13 days and nine procedures to start a business in Malaysia, but these have
declined to 5.5 days and three procedures in 201693. Meanwhile, the cost of
business start-up procedures, seen in Figure 3.22, has dropped over the years.
While Malaysia is generally on par with peer countries such as Thailand and
Vietnam, Malaysia still lags behind other developing and developed nations
such as Brazil, Chile, China and Singapore.
89 Altenburg et al. (2016)

90 Global Entrepreneurship Monitor (2018)
91 Altenburg, et al. (2016)
92 Ibid.
93 Global Competitiveness Index (2007 and 2016)

PART 3
Figure 3.22: Cost of business start-up procedures as a percentage of income per capita, 2005 – 2017
30 %
25
20
15
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
MALAYSIA Thailand Vietnam Singapore
Chile Brazil Mexico China
Source: World Bank Doing Business Database

Note: The World Bank Doing Business database defines the cost of business start-up procedures includes all official fees and
fees for legal or professional services if such services are required by law or commonly used in practice. Fees for purchasing
and legalising company books are included if these transactions are required by law.
Entrepreneurial attitude is another determinant to the creation of new businesses.

To understand the behaviour of potential entrepreneurs, the Global
Entrepreneurship Monitor (GEM) surveys individuals between the age of 18
and 64 years old on entrepreneurial intentions94 and perceived opportunities95
to start a business. Between 2010 and 2016, both these measures dropped from
5.1% to 4.9%, and 40.1% to 25.4%96 respectively. Using these datasets, ADB
has reported that high-income countries have a much higher entrepreneurial
94 Defined as the percentage of 18-64 population (individuals involved in any stage of entrepreneurial activity excluded)
who are latent entrepreneurs and intend to start a business within three years. Definition from Global Entrepreneurship
Monitor (2018).
95 Defined as the percentage of 18-64 population who see good opportunities to start a firm in the area where they live.
Definition from ibid.
96 Global Entrepreneurship Monitor database

PART 3
motivational index97 and nearly doubles the ratio for middle-income countries98.
In Malaysia, the average percentage of opportunity-driven firms is five times the

average percentage of necessity-driven firms, higher than other advanced
economies. However, the survey also revealed that new businesses in this
country do not innovate. From 2011 to 2017, only 16% of new businesses
introduce new products amounting roughly half of those reported for advanced
countries such as the United States and the United Kingdom. This represents an
area for Malaysians to look into and explore potential new opportunities based
on businesses that drive innovation.
Figure 3.23: Average motivational index, Figure 3.24: Average innovation in new
selected countries, 2010 – 2017 businesses, selected countries, 2011 – 2017
Motivational
index
40.0 % 35.4
6.0 5.3
5.0 31.7
4.4 4.2 30.0
4.0 21.8 21.6 22.4 22.1
3.3 20.1
2.7 2.9 20.0 16.3
2.0 1.5 9.6
1.1 10.0
0.0 0.0
MALAYSIA
Thailand
Singapore
Japan
China
Brazil
Mexico
UK
US
Thailand
MALAYSIA
Singapore
China
Japan
Brazil
Mexico
UK
US
Source: Global Entrepreneurship Monitor database
Entrepreneurship, if leveraged on properly, could play an important role in

transforming the nation into an advanced knowledge-based economy. Whilst it
is difficult for the state to fully anticipate the direction of change99, the state
could facilitate and support entrepreneurial activities through efforts such as
financial support, overcoming coordination and information failures and even
efforts to reduce the costs and societal stigma of failure. These efforts would
enable Malaysia to harmonise the developmental gains of entrepreneurship with
the broader objective of inducing structural upgrading of the economy.
97 An index constructed from surveys of nascent entrepreneurs or owner-manager of new businesses and is made up of
the ratio of percentages of individuals who seek improvement-driven opportunities to the percentage of individuals who
are motivated by the need to be employed. Definition from Global Entrepreneurship Monitor (2018).
98 ADB (2017)
99 Altenburg et al. (2016)

PART 3
Economic complexity
Structural upgrading of an economy would often entail a production of more
complex goods and services. This ties in well with the concept of a knowledge-
based economy; extensive technical know-hows combined with the capability of
combining different inputs to form new, higher value products leads to creation
of knowledge-intensive, complex economic ecosystem. Economic complexity is
therefore a gauge of the country’s structural progress and a progression from
simpler economies to more complex ones entails a structural upgrading along
the value chain.
Following this line of thinking, the Economic Complexity Index (ECI), developed
by Hausmann et al. (2014), is an attempt to measure and capture this
complexity. The ECI utilises a country’s international trade data and with it,
attempts to underpin the inherent trade-off between diversity and ubiquity
within a country’s production structure geared for trade; how many different
types of goods does a country produce and how common these goods are
produced globally100. Essentially, a complex economy is one that produces and
sells a diverse mix of products which are less common relative to the world,
indicating a country’s ability to leverage on its various specialised knowledge to
drive the economy.
Malaysia’s ECI has seen steady increases over the years, albeit not to the levels
of nations such as Japan and South Korea. As seen in Figure 3.25, the trend
of rising ECI for Malaysia was prominent in the years before 1998. From the
early 2000s onwards, this trend become more modest and muted101. This ties
with observations made earlier in this chapter; rising ECI coincided with
Malaysia’s industrialisation years and a greater emphasis on exports. This
industrialisation phase meant that the country upgraded its economic activities
and produced goods that are complex, resulting in an overall higher level of
economic complexity. After 1998, the restrained ECI growth coincided with
deindustrialisation in Malaysia.
100 Hausmann et al. (2014)

101 Economic Planning Unit (2014)

PART 3
Figure 3.25: Economic complexity index (ECI), selected countries, 1964 – 2016
ECI
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
MALAYSIA Thailand China
South Korea Singapore
Source: Observatory of Economic Complexity

Note: Economic complexity index (ECI) is an index that measures the complexity of a country’s economy based on the
diversity and ubiquity of the products they export relative to the world market. For instance, countries with a range of
high-value skills and technical know-how are able to produce a great range of complex products, indicating the level
sophistication of a country’s economy.
ECI—which captures only the complexity of a country’s international trade in

goods—is only one of many various lenses one could use to measure complexity.
That said, the ECI tells a lot about the country’s economy and in general,
economic complexity has been found to have a positive effect on national
income levels102. Given Malaysia’s situation seen in Figure 3.25, the economy’s
complexity is deemed insufficient to drive the economy towards high income
status by 2020103. Without economic complexity, the production structure of
the economy may not be agile enough to adapt to various changes in the global
environment, potentially inhibiting growth in the long-run.
102 Hausmann et al. (2014)

103 Cheah and Shuhaimen (2018)

PART 3
3.2.5 Malaysia in context: High-quality human capital and modern

infrastructures
The creation of a knowledge-intensive economy requires two other important

complements: high-quality human capital and modern infrastructures. For
advanced economies, economic growth largely stems from productivity. The
quality of human capital employed ensures productivity growth, which in turn
is largely tied the quality of knowledge acquired. It would be difficult for a
country to create or capture value without a competent labour force and
investment in knowledge and innovation. A highly productive and creative
society lies at the heart of advanced economies and their capabilities are only
enabled by the existence of modern infrastructure systems. These infrastructure
systems are the catalyst which allows modern economic activities to be possible.
The next section provides an overview of the state of Malaysia’s education and
infrastructure, to contextualise the nation’s position in comparison to advanced
economies.
High-quality human capital

The need for education from an economic developmental perspective stems
from the need to have agents of sufficient proficiency and competency to
absorb, operate and adapt production technologies that spur industrialisation
and growth. However, the transition towards a high-income economy requires
human capital levels that enables agents to catalyse technological advancements
for the purposes of value creation and productivity improvements104. This
provides the foundation of a knowledge-based economy, which can only be
made possible if workers are educated and highly skilled. Moreover, as
discussed in Box 3.1, advanced economies also have distinctively high levels of
human capital wealth, which captures the importance of high-quality human
capital in the economic wealth of a country.
104 ADB (2017)

PART 3
Figure 3.26: Malaysia’s total government expenditure and government expenditure on

education, 1970 – 2016
RM Million
300,000
Total government expenditure
250,000
200,000
150,000
100,000
Total government
expenditure on education
50,000
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: Bank Negara Malaysia
Figure 3.26 shows the Malaysian levels of public expenditure on education and
this figure has been growing steadily from RM0.5 billion in 1970 to RM55.6
billion in 2016. Throughout this period, education spending has consistently
made up between 18% to 26% of total current government expenditure.
Nonetheless, compared to other countries, Malaysian government spending on
education when normalised by the number of students is still relatively low,
registering at USD2,525 (Figure 3.27). This amount is still small relative to the
spending in advanced economies such as South Korea USD6,508 and Japan
USD10,397, but higher than Singapore USD9,357.

PART 3
Figure 3.27: Government spending on education per total number of secondary school students, 2016
12,000 USD
10,397
10,000 9,357
8,000 7,412
6,058
6,000
4,000
2,525 2,423 2,773
2,271
2,000 1,638
1,216
355 251
0
Mexico
World
Thailand
Indonesia
Philippines
Singapore
MALAYSIA
Hong Kong
South Korea
Japan
Chile
Brazil
ASEAN East Asia Latin America Average
Malaysians are also staying longer in schools; the mean number of schooling
years rose from seven years in 1992 to 10 years in 2014105. However, the
longer schooling years is only meaningful the quality associated to each year of
schooling is sufficiently high to raise cognitive abilities and promote economic
growth106. One way to assess education quality is to adjust actual schooling
years to learning outcomes indicated by a country’s performance in internationally-
comparable test scores, such as the Trends in International Mathematics and
Science Study (TIMSS). The comparison between Malaysia and other countries
for actual and quality-adjusted schooling years is shown in Figure 3.28.
It indicates potential deficiency in the Malaysian education system,
where students have three years of schooling that do not contribute to
their educational achievement.
105 Human Development Index, UN

106 ADB (2017)

PART 3
Figure 3.28: Schooling years and the gap from quality-adjusted schooling years, 2015
Years
16 0.4 0.0 0.6 2.3 2.2 0.8

3.1 2.4 2.2 3.7
12 3.2
0
South Korea
Singapore
Hong Kong
United States
United Kingdom
Japan
MALAYSIA
Sweden
Australia
Chile
Thailand
Actual years of schooling Quality-adjusted years of schooling
Source: Adapted from World Bank (2018)

Note: Number on top of the bar is the difference between actual and quality-adjusted schooling. Using the ratio of country’s
average TIMSS Math score to Singapore’s average score (highest Math score in 2015), the average year of schooling (from
Barro and Lee, 2013) is adjusted. Gap is 0 for Singapore because Singapore is used as the base score. This method assumes
a linear relationship between an additional schooling year and learning quality.
Moreover, concerns in the quality of Malaysia’s education system in becomes

evident in the performances of Malaysian students in another internationally-
comparable test, the Programme for International Student Assessment (PISA). In
Figure 3.29, PISA in 2015 indicates that the mean reading score for Malaysia
is only at the 25th percentile for the OECD average score, while Mathematics
score for Malaysia is only slightly above the 25th percentile of the OECD
average score. This observation indicates that the learning outcomes of the
education system in this country lags the outcome of advanced countries. If
Malaysia is to embark on the journey to be an advanced nation, it is essential
to develop an education system that guarantees high-quality human capital
development.

PART 3
Figure 3.29: Median PISA Reading score, Figure 3.30: Median PISA Mathematics score,
selected countries, 2015 selected countries, 2015
Score Percentile of the OECD average Score
600 600
75th
500 50th 500
435.2 446.6
25th
400 400
300 300
200 200
100 100
0 0
Singapore
South Korea
China
Vietnam
MALAYSIA
Mexico
Thailand
Brazil
Singapore
South Korea
China
Vietnam
MALAYSIA
Mexico
Thailand
Brazil
Source: Adapted from World Development Report (World Bank, 2018).

Note: PISA defines baseline proficiency reading score at 407 for reading and 420 for Mathematics. PISA evaluates students
who are above 15-years old and have undergone through 9 years of formal education. Therefore, the age and level of
education at which students are evaluated are different across different countries.
Beyond the attainment of content knowledge and performance in test scores,

learning also encompass the ability to utilise knowledge. Skill development is
an essential element of learning, where various types of skills such as cognitive,
socioemotional and technical skills interact to enhance one’s utilisation of
knowledge. For instance, to solve a problem, one must assess all the available
information about the problem (cognitive skill), interact with other individuals
related to the problem (socioemotional skill) and implement a solution to solve
the problem (technical skill) (Figure 3.31).

PART 3
Figure 3.31: Concept diagram of interaction between different skills in skill development and learning
Cognitive
Foundational skills
(literacy and numeracy),
Decision-making, general and higher-order Mid- level technical, high- level technical
communication, grit, self-control cognitive abilities
Problem-solving,
organizational skills
Socioemotional Community-based projects,
self-awareness, digital marketing
self-management, Technical
social awareness, Entrepreneurial and
relationship skills. digital skills
Source: Adapted from World Bank (2018)
One of the ways to encourage skill development is through workplace training.

However, based on a survey of 1,000 Malaysian firms conducted in 2015 by
the World Bank, less than half of firms offer formal training for its workers,
as compared to 79.2% in China107.
Given the rapid pace of technological advancement and changing nature of

work, education and learning requires continuous and adaptive individual
commitment. Malaysians must be encouraged and supported to continuously
learn and relearn throughout their lives. This requires a culture that appreciates,
encourages and cultivates this habit, supported by enabling policies that are
accessible to Malaysians from all walks of life108. Therefore, a major shift in
the way our society thinks about education and learning is necessary to ensure
high-level of human capital development to support economic advancement.
107 World Enterprise Survey for Malaysia (2015) and various years for other countries.
108 "The Times They Are A-Changin", KRI

PART 3
Modern infrastructures
Infrastructure refers to the network of facilities that enables the linkage and
movement of the various factors of production. In the economic literature,
studies found that infrastructure and development outcomes have strong positive
correlations109. Aside from connectivity, sufficiently large investments in
advanced infrastructures enables the creation of knowledge externality and
product diversification, further supporting the development towards high-
income status110.
The nature of infrastructures required by a country evolves along its path of

development. Poorer countries require basic infrastructure that provide electricity,
water supply and sanitation facilities to assist economic activities. Indeed, by
2014, population access to these facilities is high in Malaysia and very close to
the access level in high-income nations (Figure 3.32).
Figure 3.32: Access to electricity, improved water source and improved sanitation facility,
Malaysia and other countries average, 2014
100 100 98 100 99
100 % 96
89 91
80
67
60
40
20
Electricity Water Sanitation
Malaysia World High Income
At the firm-level, conducive infrastructural support has also been provided such
that most firms did not experience constraints in terms of electricity and
transportation. As reported by World Enterprise Survey (WES) in 2015, only
9% of firms identify electricity as a major business constraint, while 14% of
firms identify transportation as a major business constraint. In context, the
average response among OECD countries surveyed between 2006 and 2016
109 Straub (2008)
110 Agénor and Canuto (2015)

PART 3
was 20% for electricity constraint and 11% for transport constraint111.
However, middle-income countries that aspire to be a high-income nation,

including Malaysia, must focus on a different set of infrastructures. More
advanced economic activities will require greater electricity utilisation and
power-generating facilities. Moreover, advanced nations need high levels and
quality of infrastructure for internet and communication technology (ICT) to
complement their knowledge-based economic activities.
In Malaysia, consumption of electricity has increased by steadily from 1989 to

2016, mostly driven by industrial activities112. Therefore, infrastructure to
provide sufficient electricity output is important to complement these industries
and subsequently, economic growth. However, compared to other countries,
electrical output in Malaysia is only half of the average for OECD countries
and other high-income advanced Asian economies (Figure 3.33).
Figure 3.33: Access to electricity, improved water source and improved sanitation facility,
Malaysia and other countries average, 2014
kWh per capita
12,000
10,725
10,000 9,641
8,882
8,020
8,000
6,000
4,655 4,297
3,998
4,000
2,852
2,473 2,508
2,000
0
Thailand MALAYSIA Singapore China Japan South Mexico Brazil Chile OECD
Korea
In terms of communication technology, the greater use on cellular phones

indicate that flow of information is increasingly mobile and flexible in Malaysia.
The percentage of internet use in Malaysia has greatly risen, from about 2% in
1997 to 79% in 2016. The rising internet use coincides with the rise of
111 WES (various years)
112 DOS (various years)

PART 3
broadband access per 100 household, as shown in Figure 3.34, experiencing a

five-fold increment from 2006 to 2011 and continued growth to this day. The
growth of broadband subscription in Malaysia was mainly driven by the
increasing use of smartphones, intense competition in the telecommunication
market and wider coverage for 3G and 4G113.
Figure 3.34: Internet use (% population) and broadband (per 100 households), Malaysia, 2006 – 2015
% / per 100 households
100
80
60
40
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Internet use (% population) Broadband per 100 household
Source: World Bank
However, when compared with other countries, access to internet in Malaysia

is still limited. Figure 3.35 and Figure 3.36 show fixed and mobile broadband
subscription for selected countries, normalised to population size. Internet access
for many Malaysians relative to its middle-income peers is higher but is behind
the access levels in high-income countries. A potential explanation to this
observation is the differences in relative Internet speed to cost in this country.
For instance, Malaysia’s internet cost is relatively similar to Japan114, but our
bandwidth speed per user is only half of Japan’s115.
113 Malaysian Communications and Multimedia Commission (2016)

114 Numbeo (n.d.) survey for cost of living in different countries.
115 Global Competitive Index (2016)

PART 3
Figure 3.35: Fixed broadband access, selected Figure 3.36: Mobile broadband access,
countries, 2015 selected countries, 2015
Per 100 population Per 100 population
50.0 160.0
142.2
40.2
40.0 126.4
120.0 109.7
30.5 31.8
30.0 26.5 89.9 88.6 83.1
80.0 75.3
20.0 18.6 56.0 57.6
15.2 50.4
11.6 12.2
9.0 9.2 40.0
10.0
0.0 0.0
MALAYSIA
Thailand
Singapore
China
Japan
South Korea
Mexico
Brazil
Chile
OECD
Thailand
MALAYSIA
Singapore
China
South Korea
Japan
Mexico
Brazil
Chile
OECD
Moreover, advanced and modern infrastructure includes the development of

digital services. The ability of internet to connect businesses and consumers at
a faster pace and more reliably have led to the revolution in how we utilise
various services in our daily lives. In many developed nations, the utilisation of
digital services in the private sector is also extended to the most important
service provider of all—the government’s public service116.
Due to the sheer size of government services, alongside the limitation of

resources, the delivery of government services is often inefficient. Digital services
potentially enhance the delivery of public services on multiple fronts—reducing
bureaucratic processes, the seamless transfer of information and data between
different departments and increase citizen’s access and satisfaction to various
public services. In Malaysia, the digitalisation of government service is currently
implemented by the Malaysian Administrative Modernisation and Management
Planning Unit (MAMPU), resulting in the creation of MyGovernment. This
portal gives access to information and government services based on individual’s
life events, encompassing family institution, formal education, retirement and
access to welfare and health facilities117.
116 Examples include the UK’s Digital Government Service, the US Digital Service and Estonia’s e-governance.
117 www.malaysia.gov.my

PART 3
For international comparison, e-Government Development Index is an indicator

that measures the provision of online services, telecommunication connectivity
and human capacity in a county to indicate the performance of digital
government services118. Meanwhile, the e-Participation Index measures how
online services are used in the interaction between government and citizens as
well as among citizens. In 2016, Malaysia ranked 60 out of 163 countries.
When compared with other advanced nations, Malaysia’s provision and
engagement of digital services requires significant improvements (Figure 3.37).
Figure 3.37: E-Government Development index and rank and E-Participation index, selected
countries, 2016
Index
1.0
1
4 3
0.8 11
0.6
42
0.4
51
59
60
0.2 63
77
0.0
Thailand MALAYSIA Singapore China Japan South Mexico Brazil Chile United
Korea Kingdom
E-Government E-Participation Rank
Source: UN E-Government Knowledge Database
Digital government service is not merely replacing paper forms to e-forms

whenever citizens apply for a specific government service. Rather, it requires a
review of the bureaucratic processes in the public services. Governments ought
to reconsider potential innocuous policy or regulation that complicates service
delivery, as well as prioritise citizens’ experience at the receiving end of the
public service 119. Successful delivery services also rely on the ability of
e-government platforms to provide efficient service while maintaining the safety,
flexibility and integrability of the system as a whole120.
118 UN
119 O’Reilly (2017)
120 e-estonia.com

PART 3
3.2.5 Discussion
While Malaysia has generally performed relatively well when compared to

middle-income peers such as Thailand, Brazil and Mexico, there remains plenty
to do in terms of developing Malaysia’s capabilities in these key characteristics
of advanced economies discussed earlier. In an annual review of the state of
innovation for different countries in the world, the Global Innovation Index
ranked Malaysia 35th for innovation, 34th for human capital and 43rd for
infrastructure (Figure 3.38). Whilst the country’s growth in the past has been
impressive, transforming into a high-income economy entails significant
structural improvements in the knowledge-intensiveness and its applications in
the economy, better quality in our human capital development efforts and
enhancing and modernising the capacity of our infrastructure system.
Figure 3.38: Global Innovation Index rankings in innovation, human capital and infrastructure,
selected countries, 2016
Rank
1 3
0 7
2
9 13
6 25
20 11
16 34
29 38
35
40 52
36 44 53
43 59
60 60 61
62 68
70 69 67
80
Singapore South Japan China MALAYSIA Chile Thailand Brazil Mexico
Korea
Global Innovation Index Human capital and research Infrastructure

PART 3
3.3 Challenges of the Future: Where Do We Go From Here?
3.3.2 Future trends and challenges—globally and domestically
Through the lens discussed in previous sections, those characteristics provide an

anchor on the main issues Malaysia should now focus on in its journey towards
becoming an advanced economy. However, these issues should not be taken in
isolation as we venture into an increasingly uncertain future. Various global and
domestic trends—ranging from technological disruptions, changes in the global
economic landscape and biosphere to demographic changes in the Malaysian
society and lower returns from past growth strategies (Figure 3.39)—pose a
challenge to Malaysia’s economy and the well-being of its people.
This section discusses some of these key trends that Malaysia is set to face in
the near future.
Figure 3.39: Several of the global and domestic trends we face today
Technological Winner-take-
Disruption all markets
Changing tides
of trade
Global Changes in A new era

Challenges The Economic of geopolitics
Landscape
Rapid
urbanisation
Changes to Climate
our Biosphere change
Demographic Ageing
changes population
Domestic
Challenge
Lower returns
$
Rethinking from past
growth strategies growth strategies

PART 3
Technological disruption
It has been said often that we live now live in the information age. The
ubiquity of data and information has radically transformed how we live our
lives. This change is now set to radically change our economy as well.
The first trend Malaysia ought to be aware of is automation. Whilst it has

tremendous potential to improve productivity, it has an equally enormous
potential to make whole classes of jobs obsolete.
Secondly, the emergence of a dominant technology industry worldwide gives

rise to “winner-take-all” markets. Whilst some industries experience healthy
competition, the technology industry over the past decade have generally
consolidated towards a handful of monopolistic players. An often-cited reason
for this phenomenon is that technology firms thrive on what is known as the
network effect: an effect that occurs when the value of a product or service
goes up with the number of people using.
Faced with dominant established technology players from the US, Japan and
South Korea as well as emerging ones such as China, Malaysia needs to be
aware and adapt towards the changing circumstances and nature of any
industries in the future. The potential disruption caused by revolutionary
technological advances could be severe if handled poorly; mass unemployment
with severely crippled economic foundation could be averted if the nation and
its people stay ahead of the game and adapt to the changes of the new
economic order of the era.
Changes in the economic landscape

The old global international trading landscape is changing—creation of new
global value chains have plateaued, new technologies are disrupting supply
chains and developed markets are increasingly turning towards protectionist
policies. This radically new economic environment has been compounded with
a radically new geopolitical landscape. The emergence of China as a new global
superpower will have major implications on the future of Malaysia and the
region.
China’s use of economic development to pursue foreign policy agendas continues

through their Belt and Road Initiative (BRI). The BRI is an ambitious project

PART 3
seeking to rebuild the lost trans-continent trade routes. The BRI has potential
to reshape the global trading order by allowing many countries, including
Malaysia, to follow an alternate economic development path. It would stimulate
development by leveraging on greater access to Asian markets and anchoring
growth to an increasingly consumption-driven China.
However, critics argue that the BRI is fraught with potentially insidious foreign
policy agendas. By potentially overwhelming countries with FDIs that must be
repaid, this strategy has the danger of burdening countries into debt-ridden
relations with China. These debt-traps give China significant future geo-political
leverage in the region, as seen in the case of Sri Lanka and their loss of
sovereignty over Port of Hambantota121.
Malaysia will undoubtedly stand to gain from maintaining good relations with
China. However, it is important to assess these investments thoroughly to
ensure that they result in beneficial outcomes for the country. In further
relations with China, it is important to ensure that we continue to receive
mutually equitable trade deals and be fully aware of the potential socio- and
geo-political repercussions of over-reliance on any country, be it China or any
other major powers in the region or the world.
The other major economic trend is the trend of rapid urbanisation. As of 2017,
an estimated 76% of Malaysians live in urban areas and this projected to
further increase by another 10% by 2050 (Figure 3.40).
121 Ali-Habib (2018)

PART 3
Figure 3.40: Estimates and projections of Malaysia’s urban population as a percentage of total
population, 1960 – 2050
Urban population as a % of total population
100
86% of the Malaysian population is
90
projected to live in urban areas in 2050
80
70
60
50
40
30
20
10
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
2024
2028
2032
2036
2040
2044
2048
Source: World Bank Population Estimates and Projections
Malaysia has the fourth-largest amount of built-up land in East Asia as of

2010. The country grew at an average annual rate of 1.5% from 2000 to 2010,
enlarging its urban land from roughly 3,900 square kilometres to 4,600 square
kilometres between that time period122. As these trends persists, urban centres
are becoming a central component of the nation’s economy and thus, critical
to its success in the future. Saturated urban areas, whose inhabitants move there
in part due to economic opportunities available, will impose severe strains onto
cities’ resources and facilities. If mismanaged, ill-equipped cities and urban areas
could erase these gains that are vital for a country’s growth and the well-being
of its people.
Changes to our biosphere

Climate change and its potential costly consequences are a major, global trend
facing developing economies. The problem of climate change presents a threat
to Malaysia on multiple fronts. For starters, most of Malaysia’s coastal regions
are low-lying areas that are less than 0.5 metres above the highest tide or are
within 100 metres inland of the high-water mark123. These areas are particularly
122 Deuskar et al. (2015)

123 World Health Organization (2007)

PART 3
vulnerable to rises in sea levels, geological consequence in which climate change

plays a significant role in shaping.
These threats also manifest in the form of climate-sensitive diseases, which

include heat-related diseases, vector-borne diseases, waterborne diseases, diseases
from urban air pollution, and diseases related to extreme weather conditions
such as floods, droughts, windstorms and fires. Common communicable diseases
sensitive to climate and endemic in Malaysia such as cholera and malaria,
meningococcal meningitis, dengue, Japanese encephalitis, leptospirosis and
rickettsial infections will severely affect Malaysians’ welfare and well-being124.
What is perhaps most noticeable in our every day-to-day life is life in an

increasingly warmer world. Observing average annual temperatures in Malaysia
(Figure 3.41), data suggests that climate change is well underway, with
temperatures heading towards greater extremes.
Figure 3.41: Average annual temperatures in Malaysia, 1901 – 2015

Temperature (oc)
26.5
Average temperatures in Malaysia
have gone up by 1.0 oc since 1957
26.0
25.5
25.0
24.5
24.0
1901
1904
1907
1910
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Source: World Bank Climate Change Knowledge Portal
124 Ibid

PART 3
The extremely hot temperature, heat waves and heavy precipitation events will
contribute to become more frequent. Increases in mean surface temperatures
coupled with greater intensity of rainfalls will impose severe burdens to society,
both in monetary and non-monetary terms.
Demographic changes
Malaysia is currently at the demographic ageing crossroads. The proportion of
Malaysian population aged 65 years and above is steadily rising (Figure 3.42);
the trends are similar for elderly dependency ratios in the country (Figure 3.43).
Figure 3.42: Estimates and projections of Figure 3.43: Estimates and projections of
Malaysian population aged 65 years and elderly dependency ratio as a percentage of
above as a percentage of total population, the working age population, 1960 – 2050
1960 – 2050
% of total population Elderly dependency ratio, %
30 30
Malaysia Elderly will make up a quarter
25 becomes an 25 of dependents† in 2050
aged* society
20 by 2030s 20
15 15
10 10
5 5
0 0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Source: World Bank Population Estimates and Projections

* A society is considered relatively old when the fraction of the population aged 65 and over exceeds 8—10%. Definition
from Gavrilov and Heuveline (2003).
† Age dependency ratio is the ratio of older dependents—people older than 64—to the working-age population—those ages
15-64. Data are shown as the proportion of dependents per 100 working-age population.
An ageing population presents a potentially major problem for Malaysia in the

future. This entails greater costs associated with a larger elderly population,
most notably costs relating to healthcare and general care services. Incidence of
this burden would then rest upon the working age population of the future. At
the same time, a smaller proportion working age population would mean a
smaller proportion of the population that is potentially economically productive
members of the society. Therefore, on a national scale, the greater costs of
elderly care are not being matched with greater economic activity and value
creation.

PART 3
3.3.1 Facing an uncertain future, the best strategy is to build and

develop our core fundamentals
Given the fact that is difficult to precisely predict what the future holds, rather
than reacting to events as they unfold, the best strategy for Malaysia is instead
to build and develop on our core fundamentals. These fundamentals—broadly
identified as openness, human capital, economic agility, inclusive growth and
macro stability—are essential in ensuring economic security for Malaysians
through both good and trying times.
Figure 3.44: Core fundamentals Malaysia should build and focus on
Openness
Macro Stability Human Capital
Institutions & Governance
Inclusive Growth Economic Agility
Adapted from Ali-Yrkkö et al. (2017), Lin (2012) and Commission on Growth and Development (2008).
Macro stability
Macroeconomic volatility and unpredictability damage private sector investment,
consumption, and consequently, growth. Therefore, steps must be taken to
stabilise the economy during periods of sharp swings, both booms and
recessions. Ample policy space in macroeconomic demand management during

PART 3
challenging times are needed to ensure the proper functioning of markets in any
circumstances.
Openness
A small open economy like Malaysia has grown and benefitted greatly from
globalisation via catering to a wider global market and participation of global
value chains. Nonetheless, guided efforts towards ensuring an effective and
equitable growth derived from tapping into global markets should be an
important principle to adhere to.
The importance of openness becomes more potent when compared to the

counterfactual strategy. Inward-looking growth strategies generally falter quickly
as domestic demand is no substitute for the expansive global market, which
provides a large pool of relatively stable market for developing countries.
Additionally, the pattern of domestic spending may not correspond well to the
strengths of domestic supply. What home consumers want to buy may not
match what home producers are best at making. Since specialisation is limited
by the extent of the market, focussing solely on home markets give an economy
less scope to specialise in its areas of comparative advantage.
Economic agility
A country’s comparative advantage will evolve over time. In any period of fast
growth, capital, and especially, labour moves rapidly from sector to sector,
industry to industry. Governments play a role the provision of institutional
capacity to support the flow of resources, which in turn follows the ebbs and
flows of market forces. A structurally agile economy, which include agile
industries as well as labour force—backed by strong human capital foundations—
are vital in the survival of an economy in the long run.
Flexibility to adapt, adjust and respond to changes in economic conditions will

be important in the future. This calls for policies that promote a dynamic
business environment with plenty of entry opportunity, intense selection among
entrants, and the possibility to scale promising activities. Frictionless flow of
resources, with minimal transactional costs are all part and parcel will of a
structurally agile economy.

PART 3
Inclusive growth
Economies do not grow smoothly and evenly, maintaining their shape as they
increase their size. Instead, fast-growing economies go through a tumultuous
process of creative destruction, breaking into new industries even as they
abandon their traditional industrial strongholds. The challenge therefore faced
by this country was how to shield its people from the worst of this tumult,
without stunting the economy in the process.
The unpredictability, suddenness and volatility of change in a world with

globalisation and technological advancement adds to the vulnerability faced by
the country. Fundamental buffers would require actions that stimulate labour
supply and strong protection mechanisms for individuals from demand shocks
from the wider global economy.
Human capital
At its core, people are the ones who ultimately make up the economy. As
highlighted in earlier sections, the basis of a knowledge-based economy, one
that is ultimately resilient and able to leverage on any circumstances in global
and local economic conditions, is build by people capable of creating, adapting
and utilising the resources around them. A strong human capital base can also
be argued as a strong complement to the constant technological change and
global competition seen in today’s world. Beyond improvements to the existing
economy, human capital is the essential ingredient in bringing about the new
opportunities in technology capacity as well as a dynamic business environment.
These capabilities are rooted in a country’s human capital development. Focus
on human capital development is therefore regarded as a key policy ingredients
of any country’s growth strategy.
Institutions and governance

“Institutions are the fundamental cause of economic growth and development
differences across countries” (Acemoglu and Robinson 2008). They are the
structures that define the options available and the incentives for making one
choice over another. For example, economic institutions such as property rights,
rule of law, market and state support and access to education all provide both
the foundation as well as the incentives for economic progress.

PART 3
What is key however, is that economic policies alone cannot promise long term
sustainability. Policies are determined by each incumbent government, and if the
distribution of political power is left unconstrained, policies will breakdown
over time to serve the class and political interests of the incumbents.
Therefore, implementation of economic institutions have to be considered

alongside political institutions and the distribution of political power within
them. Ultimately, successful development requires the state legitimacy and
centralisation to enforce economic institutions, as well as a broad distribution
of political power to serve as a check and balance against the state’s absolute
monopoly over power.
3.4 Conclusion
This State of Households report begins with a quote by the first Prime Minister
of Malaysia, Tunku Abdul Rahman Putra Al-Haj. In his speech detailing the
First Malaysia Plan, the speech where this quote was taken from, he called
upon his countrymen and women to not rest on their laurels but instead, to
ensure progress and accomplishments achieved by the country today carries on
to greater heights in the future125.
The overall development journey of Malaysia since Independence is one of

significant progress and success in which millions of Malaysians now live better
lives compared to the generations before them. This however, is no guarantee
for security and well-being of Malaysians in the days to come, especially when
one factors in the uncertainty that hangs over the future. There remains much
more to be done and developing our core fundamentals are essential in ensuring
progress and security for Malaysians through both good and trying times.

125 Tunku Abdul Rahman Putra Al-Haj (1965)

PART 3
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THE STATE OF HOUSEHOLDS 2018

Perpustakaan Negara Malaysia

THE STATE OF HOUSEHOLDS 2018: Different Realities. – 3rd Edition.

Publication orders may be placed through our website www.KRInstitute.org

Cover photo by Hafiz Ismail

It was approved by the editorial committee comprising of Datuk Hisham

It was authorised for publication by Datuk Hisham Hamdan.

In writing this book, we have benefitted tremendously from the contributions

EXECUTIVE SUMMARY PART 2

Part Two—The Malaysian 2.1 Women in the Workforce—

1.3 Household Expenses 32 3.3 Challenges of the future:

Tunku Abdul Rahman Putra Al-Haj

The publication is divided into three parts;

Part One—State of Households: Different Realities

1 KHAZANAH RESEARCH INSTITUTE

A firm understanding of the reasons underpinning the diversity in household

In 2016, households with income below RM2,000 spent 94.8% of their

We end this part of the publication by providing a long-term perspective of the

KHAZANAH RESEARCH INSTITUTE 2

Part Two—The Malaysian Workforce: A Changing Landscape

In summary, much needs to be done to empower women economically. We

3 KHAZANAH RESEARCH INSTITUTE

On the economic impact of foreign workers employment, most empirical studies

This section is also accompanied by a technical paper which presents the

Part Three—Malaysia’s Development Journey:

KHAZANAH RESEARCH INSTITUTE 4

To map the country’s potential to be a knowledge-based economy, an overview

To complement the knowledge-based economy, the state of human capital

5 KHAZANAH RESEARCH INSTITUTE

online services infrastructure is vital for a growing internet user base in

However, these issues should not be taken in isolation as we venture into an

We have not provided detailed policy recommendations, but through our

KHAZANAH RESEARCH INSTITUTE 6

Since the publication of our first State of Households in 2014, by outlining

KHAZANAH RESEARCH INSTITUTE 8

1.1 Introduction—Households in Malaysia

7.0 0.6 7.0

5.0 5.0 1.9

Malaysians Non- Malaysians Urban Rural

Source: DOSM Source: DOSM

We begin with an introduction to the basic characteristics of households in

Nearly 78% of households in Malaysia in 2016 were in urban areas, increasing

9 KHAZANAH RESEARCH INSTITUTE

Figure 1.3: Number of households, by district, 2016

Number of Household (’000)

Source: Department of Statistics Malaysia

Figure 1.4: Average household size, Malaysia, 1980 – 2016

Source: CEIC (n.d.)

KHAZANAH RESEARCH INSTITUTE 10

1.2 Household Incomes

1.2.1 The national ‘average’

Median household income Mean household income

Source: Department of Statistics Malaysia and KRI Calculations

11 KHAZANAH RESEARCH INSTITUTE

Figure 1.6a: Head of household sources of income, 2012 – 2016

Source: Department of Statistics Malaysia and KRI Calculations

Paid-employment, followed by self-employment were the two most important

KHAZANAH RESEARCH INSTITUTE 12

Figure 1.6b: Sources of income, contribution to growth, 2012 – 2016

7.0 35.2 Current transfers received