Malaysia Economic Monitor, December 2014 : Towards a Middle-Class Society

Abstract

Malaysia has in many ways become a success story in shared prosperity. Shared prosperity means that all households experience income growth, but growth is higher for those households at the bottom of the distribution, a pattern that leads to lower inequality. In the past 40 years, Malaysia drew on its natural resources to nearly eradicate absolute poverty, from 49 percent in 1970 to 1 percent in 2014. The number of Malaysians vulnerable to falling into absolute poverty has also declined in this period. To accelerate Malaysia s transformation into a middle-class society, Malaysia may consider prioritizing reforms that: (i) close the educational achievement gaps at the post-secondary levels by compensating for family background, including pursuing universal pre-primary enrolment and otherpolicies to boost the quality of the poorest performing schools; (ii) provide more demand-driven post-secondary skills training for those already in the labor markets; (iii) create an integrated social safety net including both social insurance mechanisms to protect households against shocks and old age (for example by introducing unemployment insurance and redirecting subsidy savings to matching contributions to retirement accounts), and higher levels of social transfers (by consolidating, improving targeting, and increasing benefits of existing programs); and (iv) this safety net may be financed through more progressive tax policy (for example by reviewing the top marginal personal income tax rate and expanding the number of taxpayers).