Published by the United Nations Development Programme (UNDP), Malaysia. © UNDP. All rights reserved. First published December 2007. Second Print January 2008. ISBN 978-983-3904-05-1 United Nations Development Programme Wisma UN, Block C, Kompleks Pejabat Damansara, Jalan Dungun, Damansara Heights, 50490 Kuala Lumpur, Malaysia. www.undp.org.my A catalogue record for this book is available from the library of UNDP. The contents may be freely reproduced for non-commercial purposes with attribution to the copyright holders. Design : A Del Design & Craft Printed in Malaysia MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY FOREWORD In the last quarter of the twentieth century, Malaysia’s economic transformation was little short of spectacular. At the time of independence in 1957, Malaysia was a low-income, predominantly agricultural and rural economy. Around half of the country’s households were living below the national poverty line, with very little changed up to 1970, at which time 49 per cent of households were poor. In the following three and a half decades, rapid economic growth and structural change have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of the century, Malaysia’s poverty rate had fallen below 10 per cent, and in 2007 to less than 5 per cent. The nation has attained high human development. Malaysia’s economic transformation owes much to its human and its natural resources. It also owes much to the sound economic, social, and commercial policies pursued, as well as political stability and national unity. Two broad features of the post-1970s have helped to reduce poverty: the country’s enviable economic growth record and the national commitment to a more equitable distribution of income. At the beginning of the 1970s, the Malaysian economy relied largely on the production of primary products (natural rubber, tin, and palm oil) for world markets. Successive commercial policies gradually dismantled barriers to trade so that the country is today one of the world’s most globalized economies. Manufacturing, rather than agriculture, has been primarily responsible for the country’s export successes in recent decades. Exports of manufactured goods, particularly of electrical and electronic products, have been the key factor in sustained rapid economic growth. Malaysia has also enjoyed macroeconomic stability. Liberal commercial policies and bold fi nancial management have been important factors behind Malaysia’s strong and sustained growth record. Some economists have argued that economic growth, with its correlate of increased modern sector employment, is an essential pre-condition for poverty reduction: Malaysia provides an excellent illustration. Malaysian governments have also aimed for a more equitable distribution of income and this is the second feature of the post 1970 period that has contributed to poverty reduction. Rural development programmes helped to raise the incomes of impoverished agricultural communities. The New Economic Policy (NEP), formulated in 1970, sought to lessen the association of race with economic function. Policies were motivated by the idea that all communities should share in the country’s growing prosperity. Successive fi ve-year plans have sought to achieve ‘growth with distribution’. This open commitment to economic prosperity for all has been an important ingredient in Malaysia impressive poverty record. ii FOREWORD While the national poverty rate is extremely low by historical standards, there are still substantial spatial and community variations. Thus, for example, there remain relatively large numbers of poor households living in poverty in rural Sabah and Sarawak, as well as in the rural areas of Terengganu, Kelantan, and Kedah. The overwhelming majority of the country’s remaining poor are Bumiputera; especially prominent are the indigenous communities in Sabah and Sarawak. Malaysia aims to improve on the poverty targets set through the Millennium Development Goals (MDGs). The Ninth Malaysia Plan, 2006–2010, repeated the commitment to achieve growth with distribution and set targets of reducing the overall poverty rate to 2.8 per cent and eradicating hard-core poverty by 2010. It also set ambitious targets to narrow income disparities and improve equity. In order to help achieve these targets, it is essential for policymakers to work with refi ned and disaggregated measures of poverty and inequality. This monograph describes and illustrates a range of useful approaches that can be used to measure and monitor poverty and income inequality. We would like to thank members of the Project Team (listed on page xi of this monograph) from the Distribution Section of the Economic Planning Unit (EPU), the Department of Statistics (DOS) Malaysia, and UNDP for their excellent collaboration in putting this monograph together, under the able technical leadership of Mr David Demery of the University of Bristol with close support from Dr Chung Tsung Ping. We are confi dent that the publication will be of considerable value to all those interested in measuring and monitoring poverty and income inequality. We hope that it will also prove to be a useful tool for policymakers and practitioners in other developing countries and serve as a technical tool in South–South Cooperation for the achievement of the MDGs. Dato' Sri Dr Sulaiman Mahbob Dr Richard Leete Director General UNDP Resident Representative Economic Planning Unit Malaysia, Singapore and Brunei Darussalam iii MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY CONTENTS Foreword ii List of Tables viii List of Figures ix List of Abbreviations x Project Team xi 1 INTRODUCTION 1 The Dimensions of Poverty 1 Composite Poverty Measures 2 International PLIs 3 Approaches to Defi ning Poverty 6 The Welfarist Approach 6 Non-Welfarist Approaches 7 Absolute versus Relative Poverty 8 Absolute Poverty 9 Relative Poverty 12 Subjective Poverty Lines 13 Food Share and Poverty 14 Key Issues for Poverty Measurement 15 Income versus Consumption Data 15 Surveys or National Accounts 17 Household versus Individual Data 18 Snapshot or Time Line 19 The Micawber Problem 19 2 MALAYSIA’S POVERTY LINE INCOME 21 1977 PLI Methodology 21 2005 PLI Methodology 23 The Food PLI 23 The Non-Food PLI 27 PLI for the Representative Household 33 v MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY 3 MEASURING POVERTY 37 Axioms of Poverty Measures 37 Pα : A Key Class of Poverty Measure 38 Calculation of Pα 41 The Watts Index 43 Graphical Devices 45 CDF Diagrams 45 Pen’s Parade 53 TIP Diagrams 54 4 MONITORING POVERTY: MALAYSIA, 1995–2004 59 The Household Income Survey (HIS) 59 Household Incomes and PLIs 60 Indices of Poverty 62 Poverty Incidence 63 Poverty Intensity and Severity 65 Time Out of Poverty 66 Individual and Child Poverty 67 Child and Individual Poverty Using Equivalence Scales 68 Relative Poverty in Malaysia 69 Net versus Gross Income 70 Poverty Profi les 71 Extreme Poverty 73 Multivariate Analysis 74 Graphical Analysis: Malaysia, 1995–2004 76 Pen’s Parade 76 TIP Diagram 77 Summary of Results 78 vi MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY 5 MEASURING INCOME INEQUALITY: MALAYSIA, 1995–2004 81 Income Distribution Graphs 81 Lorenz Curve 84 Gini Coeffi cient 87 The Robin Hood Index 89 Generalized Lorenz Curve 89 Inequality Indices 90 Axioms of Inequality Measures 91 Coeffi cient of Variation 91 Percentile Ratios 92 The Atkinson and Generalized Entropy Indices 93 Decomposing Indices 96 Sen Index 97 Overall Income Inequality in Malaysia, 1995–2004 97 Inequality by Subgroups 99 Concluding Comments 103 Appendix: Derivation of the Atkinson Index 105 Bibliography 107 vii MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY TABLES 1.1 International and National PLIs 5 1.2 Poverty Rates by International and National Standards 6 2.1 Poverty Line Incomes, 1990–2004 22 2.2 Recommended Daily Energy Requirements for Malaysians 24 2.3 Alternative Malaysian Food Baskets 25 2.4 Household Expenditure Survey: Selected Food Items 26 2.5 Price per 100 Calorie in 2004 27 2.6 Non-Food PLI Parameters 29 2.7 Relative Non-Food Prices by State and Stratum, 2004 32 2.8 2005-based PLIs for the 'Model Household' by State and Stratum, 2004 33 3.1 Hypothetical Pα Indices & Time Out of Poverty 42 4.1 Mean Household Income: Malaysia, 1995–2004 60 4.2 Mean PLIs and Mean Household Size: Malaysia, 2004 61 4.3 Consumer Price Indices: Selected Years 62 4.4 Indices of Poverty: Malaysia, 1995–2004 64 4.5 Confi dence Intervals for Incidence (P0) and Depth of Poverty (P1) 65 p 4.6 The Average Time Out of Poverty t (␥): Malaysia, Penang, and Sabah 66 4.7 Household, Individual, and Child Poverty Rates 68 4.8 Relative Poverty: Malaysia, 1995–2004 70 4.9 Household Poverty Using Gross and Net Income: Malaysia, 1995–2004 71 4.10 Poverty Profi les: Malaysia, 2004 72 4.11 Extreme Poverty Rates: Malaysia, 1995–2004 73 4.12 Probability of Poverty by Household Characteristics 75 5.1 Hypothetical Lorenz Curve Calculations 85 5.2 Calculation of the Gini 88 5.3 Summary Statistics: Malaysia, 1995–2004 92 5.4 Calculation of the A and I Indices 95 5.5 Inequality Indices: Malaysia, 1995–2004 98 5.6 Inequality Decomposition by Stratum: Malaysia, 1995–2004 99 5.7 Inequality by State: Malaysia, 2004 100 5.8 Inequality by Ethnicity: Malaysia, 1995 & 2004 101 5.9 Inequality Decompositions: Malaysia, 2004 102 viii MALAYSIA MEASURING AND MONITORING POVERTY AND INEQUALITY FIGURES 1.1 Food Energy Intake PLI 10 1.2 Food Share: Malaysia, 2004 16 3.1 Cumulative Distribution