Category: Economics

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Economics

[2858] Household income growth and Malaysian unhappiness

Some opposition politicians and supporters are prone to exaggerate when it comes to economic matters. Malaysia is bankrupt, there is no income growth, etc.

Those exaggerations make it easy for the Barisan Nasional government to disprove those allegations. But in its eagerness to do so, the government oftentimes denies that any problem even exists. This is unfortunate because the exaggerations are based on real worries on the ground. And the worries are based on real problems.

This is true when it comes to income growth of Malaysian households.

The Department of Statistics recently published its 2016 Household Income Survey, showing Malaysian households experienced average yearly income growth of 6.8% in 2015 and 2016.[1]

Minister at the Economic Planning Unit, Abdul Rahman Dahlan, pounced on the fact there was income growth and that the growth was faster than the inflation rate. He said “this debunks the popular notion that income in Malaysia is stagnant or income increment does not match the rising price of goods and services.”[2]

While he is right about income growth, he does not quite address the cause that made so many Malaysians ready to believe in the opposition’s allegation. And that cause is decelerating income growth.

Yes, income rose. But it did not rise as fast as it used to be. This I think is one of the sources of Malaysian unhappiness.

While household income grew 6.8% yearly on average in the 2015-2016 period, this is dramatically lower than the 12.4% average yearly expansion experienced in 2013 and 2014. Indeed, it is lower than growth in 2010-2012:

The drop was felt by Malaysians regardless of exaggerations. GDP growth was not doing well either in 2015 and 2016.

I drew the chart based on 15 household income surveys conducted by the Department of Statistics since 1979. There were earlier surveys but it covered Peninsular Malaysia only. Sabah and Sarawak were covered beginning 1976. I chose 1979 as the starting point because I had trouble getting CPI data up to 1976.

(I have to add for clarity, in the 1980-1984 period for instance, it means nominal household income grew more than 10% on average yearly, not that income grew more than 10% between 1980 and 1984. Huge difference between the two.)

As a side note, this chart probably explains why Abdullah Ahmad Badawi became so deeply unpopular, despite starting out so well. Abdullah was the Prime Minister from 2003 to 2009 and income growth during his years was terrible by Malaysian standards. And 1997-1999 were years of unrest in Malaysia, coinciding with the Asian Financial Crisis.

I am not going into the debate whether the 2010-2014 growth and subsequent 2015-2016 slowdown were due to the government or external factors. But the stark slowdown is real and it goes a long way explaining why Malaysians are so unhappy now. Well, partly, because there are other factors out there that include among others, the GST and those private accounts at Ambank.

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[1] — The Department of Statistics actually reported the average growth as 6.6% yearly, not 6.8%. The 6.6% is calculated by using natural log. Given the context of the publication, I find the use of natural log as inappropriate and prefer to use compounded growth formula instead, which gives out 6.8% growth. What is the context? Percentage growth. Malaysian household income grew to MYR5,228 in 2016 from MYR4,585 in 2014. Using 6.6% as the growth rate in this context (MYR4,585*[1+0.66]^2) will not get you MYR5,228. But 6.8% will. The 6.6% figure would be right, if the Department had stated it was measuring the log difference, instead of percentage growth. Yet, the context is percentage growth, not log difference. I see the press keep on using the 6.6% in the wrong context.

[2] — “In terms of real value, median monthly household income grew at 4.4 percent, which means the Malaysian household income grew faster than the inflation rate of 2.1 percent for the past two years. This debunks the popular notion that income in Malaysia is stagnant or income increment does not match the rising price of goods and services,” he added. Abdul Rahman said for the overall incidence of poverty, it had improved from 0.6 percent in 2014 to 0.4 percent in 2016. [Bernama. Minister: Household income statistics show strong GDP benefits people. Malaysiakini. October 10 2017]

Categories
Economics

[2857] Bruce Gale is wrong on GST, income tax and tax avoidance

Bruce Gale wrote a piece in the Straits Times defending Najib’s economic policy recently.

While I do agree with on points like subsidy removal, I have several issues with the article. The one I take the most exception is his claim that the goods and services tax (GST) was needed because Malaysians were avoiding income tax, and went on to cite a figure, which context he did not quite understand, as a proof.

In his own words, the “GST, this was necessary in order to force the middle class to share the tax burden. Tax avoidance in Malaysia is a serious problem. Only one in 10 people actually pays income tax. This is significantly lower than in many other middle-income countries, and far lower than in the high-income economies Malaysia says it wants to emulate.”[1]

I do not oppose the GST and in fact I think it is a necessary tax reform. Malaysia needed to diversify its sources of government revenue and the recent collapse of energy prices proved that. But Gale is wrong when he linked tax avoidance with the fact that only one in 10 people paid income tax.

He is wrong because a majority of Malaysians do not pay income tax due to a different factor altogether.

First, his statistics are possibly outdated. The one in 10 persons figure was true at some point but by 2015, the figure was closer to two in ten. The head of the Internal Revenue Board was reported in June 2017 stating “18% of the population paid taxes” in 2015.[2]  I tried to find the actual figure from a primary source instead of through newspaper reports. But even the annual report of the Internal Revenue Board does not share the total number of individual income taxpayers. It is a difficult number to pin down.

Second and more importantly, the reason behind the low ratio is not tax avoidance. Rather, it is due to the high income taxability threshold relative to the Malaysian median income. Malaysians do not make enough to qualify into the lowest income tax bracket.

The 2014 Household Income and Basic Amenities Survey published by the Department of Statistics shows the median household income in 2014 was MYR4,585 per month. With an average two breadwinners in a household, that would translate into a median of MYR2,293 per person. That means half of all Malaysian income earners earned less than MYR2,293 per month.

Couple that with the fact Malaysians would only be eligible to pay income tax in that year once they made at least MYR2,500 per month.

We can be more exact than that. Based on the same survey, I estimate about 55% of Malaysian income earners were no eligible to pay income tax in 2014. It is an estimate because the survey expressed its results on household basis and I would have to convert various figures into individual terms. I can show you the estimated individual income distribution by brackets (groups in red were not eligible to pay income tax that year):

The large share of those who did not qualify to pay income tax in 2014 could probably be seen better in the following cumulative function chart:

And this is before the typical tax breaks provided by the government: all Malaysians get an automatic MYR8,000 annual relief, or MYR667 monthly. This alone meant about 60%-65% of total Malaysian income earners did not have to pay income tax in 2014. That tax break has since been raised to MYR9,000. There were other typical breaks — books, medicine and even the Islamic tithe — granted by the Malaysian government that raised the number of those who did not have to pay that year to very possibly close to 80% if not higher.

Tax avoidance is a problem in Malaysia. But it is not the top reason why only one in ten (or the updated 2015 figure, two in ten) pay income tax. Other factors pale in comparison to eligibility concerns.

And even if they did not pay income tax, the same majority already paid sales and services tax prior to the introduction of the GST. To say the majority avoided tax when only a minority did so is not only wrong, it is insulting to every honest working Malaysians.

And do you know who do not pay tax? Those benefiting from donation.

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[1] — Bruce Gale. Najibnomics has been good for Malaysia’s economy. The Straits Times. September 1 2017

[2] — Sabin said that based on 2015 figures, 18% of the population paid taxes in Malaysia. He said the threshold of taxability was generally quite high, therefore a significant number of the population falls outside the tax bracket. [Jagdev Singh Sidhu. Higher revenue for IRB. The Star. June 5 2017]

Categories
Economics

[2853] Bank Negara versus everybody else’s 40% housing loan approval rate

Bank Negara Malaysia is having none of it. They are tired of people blaming them (too much) for the generally weak residential property market in the country.

In its 1Q17 Quarterly Statistical Bulletin, BNM wrote housing loan approval rate over the past few years had not fallen, citing statistics that 74.2% of all applications were approved in the first quarter, and this number almost matches the 2012-2016 average. This is in contrast to the 40% approval rate often cited in the media, which originates from developers and other players in the private sector. With this as a proof, the central bank calls the 40% rate a myth.[1]

Except, BNM may have been too hasty in passing a conclusion and they may have overlooked an alternative method to calculate the approval rate.

The central bank calculates the ratio by taking the number of housing loan applications approved by all banks in Malaysia to the number of housing loan applications received by the banks during the same period.

But the 40% rate is calculated based on total value of all housing loans approved, to the total value of application in the banking system. Some analysts calculate it differently by lagging the value of approved loans by a month in an attempt to capture the fact that banks take several weeks to process and deliberate on any application. The lagging would change the number, but the overall trend would be pretty much the same.

You can see the rates under the value-approach here:

Housing loan approval rate among Malaysian banks, value-approach. Source: Bank Negara Malaysia

The 40%, in fact, comes from a database maintained by BNM. Specifically, you can get the 40% rate by taking the value of residential property found file 1.10 and divide it by the corresponding value found in file 1.12.[2]

So, the 40% it is not a myth. That particular rate has not been picked out of thin air. It is just that BNM may have overlooked the fact that there is a different way to calculate the rate. Instead of volume-approach, there is a value-approach alternative.

Which method is more appropriate, now, that is a different and a much more interesting  discussion altogether.

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[1] The overall housing loan approval rate remains high at 74.2% (average 2012-2016: 74.1%). The approval rate is the ratio of the number of housing loan applications approved by all banks in Malaysia to the number of housing loan applications received by the banks during the same period. In 1Q 2017, banks approved a total of RM22.3 billion of house fi nancing to 90,137 borrowers. Of these, more than half was for buyers of affordable housing units priced below RM500,000. [Lim Le Sze. Debunking the Myth: Property Measures Have Led to Higher Loan Rejection Rates. BNM Quarterly Bulletin. Bank Negara Malaysia. Accessed May 26 2017]

[2] See the BNM Monthly Statistical Bulletin.

Categories
Economics WDYT

[2851] Guess the 1Q17 Malaysian GDP growth

The first quarter 2017 Malaysian GDP figures will be out on May 19. So…

Industrial production in 1Q17 did not grow as strongly as it did in the previous quarter. Nevertheless, manufacturing had swell of a time. Trade figures were very good, with both goods exports and imports grew double digits, which indicates both the external and the domestic demands are somewhat healthy. But in terms of net exports, I do not think it would contribute much to the GDP growth since import growth was stronger than export expansion.

Talking about the domestic market, the unemployment rate seems to have finally responded to the better economic environment. Eyeballing, the seasonally-adjusted UE for the quarter is about 0.2 percentage points lower than what seems to be the average for 2016. Core inflation is slightly up, also showing domestic demand is recovering, assuming this core inflation calculation by the Department of Statistics completely isolates cost-push inflation.

By the way, the 4Q16 GDP grew 4.5% YoY.

How fast do you think did the Malaysian economy expand in 1Q17 from a year ago?

  • 3.5% or slower (0%, 0 Votes)
  • 3.6%-4.0% (0%, 0 Votes)
  • 4.1%-4.5% (29%, 2 Votes)
  • 4.6%-5.0% (29%, 2 Votes)
  • 5.1%-5.5% (14%, 1 Votes)
  • Faster than 5.5% (29%, 2 Votes)

Total Voters: 7

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Categories
Economics

[2850] The arbitrariness and the superficiality of Malaysia’s $15,000 high-income nation benchmark

In the past week or so, there were several news reports stating that Malaysia was regressing backward relative to the high-income country GNI benchmark of $15,000 per person by 2020. The Economic Planning Unit showed the figure fell to $9,291 in 2015 and to $8,821 in 2016, from $10,677 in 2014.[1]

From the figures alone, it is plain to see that the gap between current level and the $15,000 per capita has increased. The 2020 target was set by the government as the benchmark Malaysia needed to hit to in order to declare the country as a “high-income nation.”[2] Pemandu’s whole reason for existence is predicated on this.

But such conclusion (and the target itself) is superficial and largely a non-issue as far as economic growth is concerned. What is more important in terms of development is the levels of welfare, which is better represented by the purchasing power parity calculation, instead of the Atlas method used to calculate the GNI per capita figures in the US dollar.

There are three reasons why I claim the conclusion is superficial.

First, the $15,000 GNI per capita by 2020 target is susceptible to foreign exchange rate fluctuation. This is despite the Atlas method is designed to minimize the same fluctuation. The ringgit depreciation relative to the US dollar in 2015 and 2016 was just too big for the method to handle. Its inability to control for the fluctuation makes its output less reliable that it normally is. You can see why it does a bad job within the context of 2015 and 2016: the Atlas method controls the forex rate variation by averaging the latest three years of the relevant rates (the method does include inflation differential between countries but it is not nearly as good as the PPP). But even under normal circumstance, the Atlas method is inferior to the purchasing power parity just because the former does not adjust for domestic living costs properly. The PPP may have its own failings but its failings are considerably less serious than the Atlas method.

To understand this point further, we have to realize that for most Malaysians, earning and spending are carried out in the local currency, the ringgit. Only a small minority earn in ringgit but spend in foreign currency, among them the US dollar. So for most Malaysians, it is unclear why the size of the economy translated through the Atlas method into the US dollar is meaningful in determining the state of a country’s development level or its population welfare, apart from the fact that the World Bank uses it and that Pemandu was just following suit.

The World Bank states it is using the Atlas method for operational purposes,[3] which makes sense because the organization lends money to national governments mostly in major currencies and that the repayments are susceptible to the forex fluctuation due to currency mismatch. They need to take the forex fluctuation into account.

Meanwhile, Pemandu and Malaysia use it as a target… because the World Bank uses it for its global lending purposes done largely in US dollar. You can see the problem here. The World Bank’s and Malaysia’s purposes for using the Atlas method are vastly different. It fits the World Bank’s goal better than Malaysia’s. PPP, on the underhand, fits Malaysia’s purpose better than the World Bank’s. It is a case of using the wrong tool.

Second, even if we accept the target and the Atlas method wholly, the actual benchmark for high-income is likely lower than the $15,000 barrier. The $15,000 benchmark itself did not come from the World Bank but projected into the future by Pemandu based on figures from the international body. The latest 2017 high-income benchmark actually used by the World Bank is $12,476.[4] Pemandu had projected the figure from 2010 (if I am not mistaken), assuming the 2010-2020 growth rate of high-income countries to average 2.0% yearly. The reality is that the 2010-2017 average is only 0.2% yearly so far. At the current actual growth rate, the benchmark will be $12,563 per capita by 2020 assuming everything else remains the same. It is still a widening gap, but not as bad as when the $15,000 per capita is the target.

Third, the implications of the conclusion are outrageous, if the Atlas method completely addresses concerns over forex fluctuation: either Malaysia had run into a two-year long recession, or we had an extraordinary population boom during the same period.

But we did not have a recession. We did have a growth slowdown however. The Malaysian economy grew by 5.0% in 2015 and 4.2% in 2016. But no recession, which is a contraction of the GDP by two consecutive quarters.

And we did not have a population boom either during the two years. The size of the Malaysian population in 2015 and 2016 grew 1.4%-1.6% yearly, lower than in the previous years.

Since both did not happen (with inflation was not big enough to matter: Malaysia’s 2%-3% and in the US, 0%-1%), we must question the validity of the Atlas method in measuring the well-being of Malaysians. And by extension, it questions the ability of the Atlas method to determine the status of Malaysia as a high-income nation. The one factor that changed was the forex rate.

But ultimately, the term high-income nation itself is fluffy. There are attempts to give it concrete meaning but would crossing the not too distance line suddenly transform Malaysia into a rich country? It is never as clear as that. While Malaysia has done well compared to a lot of countries in the world, entrance to “first world” is actually harder then merely cross the line defined by the World Bank or Pemandu. Just cross over to Singapore, or visit Japan, or Australia or any of the generally recognized high-income countries. Would Malaysia crossing the GNI per capita $12,475 line suddenly make the us like those countries? Maybe someday, but the barrier will be way above the World Bank’s line.

You know a high-income country when you see one: some classifications are looser than others and many of them are arbitrary. This is the limits of mathematics and economics. So, be careful of turning a soft arbitrary line in the sand as your true north. Managing a country’s development is not like running a business.

But coming back to the original point, no, we have not regressed in terms of economic development. We have regressed in other aspects, like our institutions, but the economy has grown, contrary to what the imperfect Atlas method tells us. If you really want to make an international comparison, the purchasing power parity model is far superior than the Atlas method, especially at a time when forex fluctuation is great.

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[1] — Page 5.The Malaysian Economy in Figures 2016. Economic Planning Unit

[2] — Page 59. Economic Transformation Programme: A Roadmap for Malaysia. October 26 2010

[3] — The income groupings use GNI per capita (in U.S. dollars, converted from local currency using the Atlas method) since they follow the same methodology used by the World Bank when determining its operational lending policy. While it is understood that GNI per capita does not completely summarize a country’s level of development or measure welfare, it has proved to be a useful and easily available indicator that is closely correlated with other, nonmonetary measures of the quality of life, such as life expectancy at birth, mortality rates of children, and enrollment rates in school. [Why use GNI per capita to classify economies into income groupings? The World Bank. Accessed March 23 2017]

[4] — For the current 2017 fiscal year, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,025 or less in 2015; lower middle-income economies are those with a GNI per capita between $1,026 and $4,035; upper middle-income economies are those with a GNI per capita between $4,036 and $12,475; high-income economies are those with a GNI per capita of $12,476 or more. [World Bank Country and Lending Groups The World Bank. Accessed March 24 2017]