Malaysia Household Income And Expenditure Trends Economics Essay

This section will discuss the background of the study, which explained the economic activities and economic growth by sector and by employment share, Malaysia household income and expenditure trends. This study also mentioned the concept of sustainable development and growth. This study chooses energy consumption in order to identify the factor of environment. From energy consumption, this study will observe the effect of energy consumption on environment. Next, the problem statement will cover the issues and objective, significant, scope and limitation of the study.

Background of the study

Malaysia is the third wealthiest country in Southeast Asia after Singapore and Brunei Darussalam based on GDP at purchasing power parity (PPP) per capita are shown in Table 1.1. It had a population of around 26 million people in 2007. According to the United Nations Development Programme, the population of Malaysia is estimated to grow to 29.8 millions by the year 2020. Most Malaysian is active economically and independently. The start of a sustainable recovery cycle was seen in 2002 but the activity slackened in 2005: GDP growth rate was 7.2% in 2004 and 5.2% in 2005 as shown in Table 1.2. Domestic demand and export dynamism are two major growth factors. Malaysia is characterized by its economy’s large openness and favourable behaviour towards foreign investments. During the New Economic Policy 1971 – 1990, a number of policies could be identified to explain the pattern of income. The promotion of export-oriented industrialisation driven primarily by foreign direct investment has seen a need for labour, thus lowering unemployment and raising household incomes. The most dynamic activity sector is electronics, given that the country is one of the world’s major exporters of semi-conductors and electronic components in the 1990s.

Table 1.1: Countries of Southeast Asia sorted by their gross domestic product (GDP) at purchasing power parity (PPP) per capita in US$

Southeast Asia Country

Rank

International Monetary Fund (2009)[+]

World Bank (2008)[++]

CIA World Factbook[+++]

Singapore

1

50,523

49,321

50,300

 Brunei

2

49,110

–

50,100

 Malaysia

3

13,769

14,215

14,800

 Thailand

4

8,060

8,086

8,100

 Indonesia

5

4,157

3,994

4,000

 Philippines

6

3,521

3,513

3,300

 Vietnam

7

2,942

2,787

2,900

 Cambodia

8

2,015

1,951

1,900

Source: +Data refer to the year 2009. World Economic Outlook Database-April 2010, International Monetary Fund. ++Data refer to the year 2008. World Development Indicators database, World Bank.Note: Per capita values were obtained by dividing the PPP GDP data by the Population data. +++GDP – per capita (PPP), The World Factbook 2010, Central Intelligence Agency.

The economic activity has been much reliant on electrical and electronic sector and the country must find new growth-generating activities, especially in the face of the soaring competition between countries of this region. Besides, Malaysia is classified among the world’s largest producers in the agriculture sector, particularly of palm oil, cocoa and rubber.

Table 1.2: Malaysia’s Economic Growth from 2006 to 2009

Economic Indicator

 

2006

2007

2008

2009(f)

GDP

$million

125,051

132,988

139,159

139,174

Growth of GDP

%

6.0

6.0

5.0

-3.1

Inflation (CPI)

%

4.0

2.0

5.0

1.1

Unemployment

%

3.0

3.0

3.7

4.5

Foreign direct investment

% of GDP

4.0

5.0

3.0

4

Export growth

%

7.0

4.0

1.5

(16.6)

Import growth

%

9.0

5.0

2.2

(14.9)

Current account balance

$million

26,200

29,243

38,914

21,053

Sources: The World Bank, World Development Indicators 2010 for 2006-2008,

Economic Planning Units Forecasting for 2009.

The country is also the leading exporter of tropical woods. The United States, Singapore and Japan are Malaysia’s major trade partners. The country imports mainly manufactured products, machine tools and vehicles. Nevertheless the economic growth of Malaysia has wide implications for structural change in the economy (from agriculture sector to industrialisation), growth of employment opportunities increase in personal income and change in consumption pattern. It has also effected the environment through a variety of techniques such as pollution; natural resources overexpolitation; degradation and wildlife habitat disappeared, and changes in weather. The result of the larger consumption levels in the environmental problem as proven in the declining in the fisheries haul, increasing in threatehned and endangered flora and founa, destroyed of wilflife natural resources, polution and purposely exotic killing, (Khalid, 2007)

Environmental policies usually take into consideration the value of natural resources in contributing to processes of biological particularly in controlling flood levels, climate change rules, production of oxygen and absorption of carbon dioxide in the open areas as well as protection of flora and fauna. Environmental degradation is not accurately measured by GDP because the economic growth of the nation depend on natural resources but the strength of the economy must include the condition and sustainability of natural resources. This situation is not happening in Malaysia but those concerned about the protection of wildlife believe good treatment needs to be given to the erosion impact of economic growth on wildlife. Recently, environmental concerns have grown among the community and society, policy maker and government through the sustainable development, despite environmental problem never won against the mega development project, for instance Bakun dam project. The main objective among the developing countries is economic growth through the natural resources exploitation.

1.3 Overview of Malaysia economy

Malaysia is the one of the developing countries have transformed itself from 1970s to 1990s from raw materials producer to the multi-sector economy particularly manufacturing and services sector. This transformation was induced by positive economy growth which almost exclusively driven by export of electrical and electronics components. Consequently, global economic crisis and the slump in the information technology (IT) sector in 2001 and 2002 have affected Malaysia economy. However, Malaysia economy grew 5.7 percent in 2003 despite at first half very difficult to sustain due to external pressures such as Severe Acute Respiratory Syndrome (SARS) and the Iraq war to be concerned among business society. In 2004, growth peaked 7 percent and 5 percent in 2005-2006 and 4.6 percent in 2009.

The economic growth thereafter was not as remarkable as before, though some recovery took place in 1987. This was the time when the manufacturing sector for intermediate goods started to expand, which subsequently drove the Malaysian economy forward. This established a new structural change from merely producing primary commodities to process manufacturing and advanced manufacturing, including electronic semiconductors and components of electrical products. In the middle of 1997, the economy faced another economic disaster, the Asian financial crisis that began in Thailand and later spread to all over the ASEAN countries including Malaysia. In fact the exchange rate badly affected most of the ASEAN countries. ASEAN countries had no other choice but to liquidate their current assets in order to offset their losses resulting from the currency devaluation. Slightly more than one year later, the Malaysian economy recovered. All these events have changed the structure of the Malaysian economy to what it is today.

It has become a tradition at the dawn of each decade to predict the path or direction and magnitude of economic growth within the context of the challenges and prospects for the next 10 years or more. The 1980s were an enormously difficult and turbulent decade for the global economy. In fact in the 1990s, though expected by some to be somewhat less turbulent and difficult, the struggle should be quite different for Malaysia in its quest to become a newly-industrialised economy. Given the diverse structures of the economy, it has its own internal problems, with its strengths and weaknesses.

Malaysia has benefited from higher world energy prices although at the time the cost of domestic gasoline and diesel rising and it has forced the government to reduce the subsidies as well as contributed the higher inflation. Malaysia has reduces the risk of financial crisis throughout the strong foreign exchanges reverse and a small external debt. However, Malaysia economy is still depend on continued growth in the US, China and Japan as a top exporting countries and main sources of foreign investment. All these plans are stated in Ninth Malaysia Plan for its five years national development agenda. The plans targets the development of higher value added manufacturing and an expansion of the service sector stated in Tenth Malaysia Plan.

1.3.1 Economic growth by sector and employment share

Malaysia’s gross domestic product (GDP) grew from RM10 billion in 1970 to about RM37 billion in 1980. It increased further to RM119 billion in 1990 and RM222 billion in 1995. In 2005 and 2009, it increased from RM449 billion to RM528 billion. These figures represent a GDP growth rate of 11% between 1970 and 2009 as shown in Table 1.3. The manufacturing sector expanded from 15% of GDP the in 1970 to 19, 24, 26, 33 and 27 % in 1980, 1990, 1995, 2000 and 2009, respectively and declined to 31% in 2005, while the share of agriculture in the GDP declined from 28 % in 1970 to 25, 15, 13 and 10 % in 1980, 1990, 1995 and 2005 respectively. The services sector declined from 42 % in 1970 to 39 in 1980. This sector increases to 46 % and 51 % in 1990 and 1995 respectively but declined to 47 % in 2005, indicating the growing government role and common enhancement in the services condition. All the sectors also changed during the last two decades, particularly in agriculture and mining sectors. In the mining sector, tin production has declined subsequently crude petroleum became the majot contributor to the Malaysia economy growth.

The manufacturing sector transformed from agriculture based products to the manufactured of electrical and electronic components, petroleum products and palm oil products. the export was significant contributor to growth particularly on manufactured goods which has contributed 74.8 percent of total export in 2007. (sources:MITI, Vol.18, date 30 Otc.2008). the electrical and electronic products became the major export of manufactured product, followed by chemical products, machinery, metal, wood products and scientific equipment.

Table 1.3: Malaysian gross domestic products by industry, 1970-2005

(RM million in 2000 prices)

Source: Economic Report, various issues, Ministry of Finance, Kuala Lumpur

The unemployment rate has been relatively decline with a increase in the employment situation for manufacturing and services sector but decrease in agriculture and mining sectors. The services sector has absorbed 52 percent in 2009 compared to 32 percent in 1970. Figure 1.1 shows the contribution to the GDP by the main sectors in Malaysia for year 2009. The services sector became the largest contributor to the GDP compared with the manufacturing sector. This sector includes electricity, water, transportation, wholesale, health, education, hotel and restaurant.

Source: Economic Planning Unit, 2009

Figure 1.1: Contribution to the GDP by sector, Malaysia, 2009

In 1970, employment share of the primary sector (agriculture and mining) accounted for 53 % of the total employment. In 1980 and 1990, it declined to 41.4 and 26.6 % respectively as shown in Table 1.4. Employment in the primary sector declined further to 15.2 % and 12 % in 2000 and 2009, respectively. On the other hand, the secondary (manufacturing and construction) sector absorbed about 35.0 % of the workforce in 2009, compared with 26.2, 21.3 and 11.4 % in 1990, 1980 and 1970 respectively.

Table 1.4: Gross domestic product and employment share by industry

(In 2000 prices)

GDP Share (Employment Share)

1970

1980

1990

2000

2005

2009

Primary Sector

 

 

 

 

Agriculture, forestry, livestock and fishing

28 (53.5)

25 (39.7)

15 (26.0)

9

(15.2)

10

(12)

7

(12)

Mining and quarrying

7

(2.6)

10 (1.7)

12

(0.6)

11

(0.4)

13

(0.4)

8

(0.4)

Secondary sector

Manufacturing

15

(8.7)

19

(15.7)

24 (19.9)

33 (27.6)

31

(28.6)

26

(28.4)

Construction

4

(2.7)

4 (5.6)

4

(6.3)

4

(8.1)

3

(7.0)

3

(6.6)

Services sector

42 (32.5)

39 (37.3)

46 (57.2)

48 (48.7)

47

(51.0)

56

(52.6)

Total

100

100

100

100

100

100

(Unemployment):%

7.4

5.7

5.1

3.1

3.2

4.5

Per capita GDP (RM)

1,932

3,038

4,426

8,899

16,497

18,838

Source: Economic Report, various issues, Economic Planning Unit

The GDP per capita increased from about RM1,932 in 1970 to about RM3,038, RM4,426 and RM18,838 in 1980, 1990 and 2009 respectively. The employment share in the primary sector decreased from 56.1% to 12% while that of the industrial and services sectors increased from 8.7 % and 32.5 to 28 % and 52.6 % respectively over the thirty-year period from 1970 to 2009 (shown in Table 1.4). With the rise in the employment opportunities, the unemployment rate contracted, except for the mid-1980s, from 7.4 % in 1970 to 3.2 % in 2005 but has since then risen slightly to 4.5% by 2009. The labour market became so tight in the 1990s that some sub-sectors had to resort to imported labour from abroad. (EADN, 2006).

Since the 1970s, Malaysia has transformed itself from an economy dependent on raw materials production with a largely poor population to a multisector economy with a middle-income population. These changes have affected the Malaysian household through employment opportunities especially when the Malaysian economy has undergone major structural changes since 20 years ago consequence, the quality of life improved due to the strong growth in the manufacturing and services sector. The Malaysian household has benefited through on increase in its income as well as an improvement in its standard of living and change in expenditure pattern.

1.3.2 The Malaysian household income and expenditure trends

Since Malaysia has experienced a remarkable change from an agriculture country to an industrialized country, its GDP has grown from RM37 billion in 1980 to RM528 billion in 2009. As Sanne (1998) pointed out that there is closely relationship between expenditure and income because expenditure patterns tend to change when incomes increase. However, expenditure or consumption plays an important role in generating GDP after export. Figure 1.2 shows a comparison of the GDP per capita between Malaysia, Asia and the world. During 1991 to 2006, Malaysia’s GDP per capita rapidly increased twice compared with Asia and World. Mean that’s, the income of every Malaysian household has increased from time to time except for 1997 when Malaysia suffered from the economic crisis, but the Malaysian economy was still under control compared with other developing countries.

Source: Earth Trends Country Profiles, Malaysia

Figure 1.2: GDP per capita, 1991-2006

Figure 1.3 shows the Malaysian mean annual household income between 1985 and 2007. Households benefited from the continued increase in disposable incomes arising from high export earnings and positive economic growth which also generated full-employment and income-earning opportunities among the Malaysians. Moreover, the competitive credit provided further support to more household spending. The growth and structural transformation of the Malaysian economy has wide implication on the growth of employment opportunities as well as the distribution of labor force by sectors.

Source: Economic Asian Development Network, Economic Reports (Various Issues)

Table 1.3: Malaysian mean annually gross household income (RM)

1985-2007

As income level increased, the monthly consumption expenditure per household grew from RM731 in 1980 to RM1, 935 in 2005 (Department of Statistic, 1980-2005). With this quantitative rise in spending came a shift in the type of goods and services under demand. Income grew at an average rate 4 % during 1997 to 2007. According to the Economic Planning Unit, household income in 2004 was around RM38,988. This suggests that the average Malaysian household was quite capable of managing its finances and avoiding overspending. In 1980/82, the average household spending amounted to RM732 monthly, compared with RM412 in 1973. The rise in household expenditure during the period 1994 -1999 was not due to price increases only that households were consuming more, indicating an increase in their income and purchasing power, corresponding to the many years of healthy economic growth. After adjusting for inflation, households recorded a 3.4 % growth in expenditure, in real terms, during the period of 1994-1999. The higher household spending in 1999 was accompanied by the increase in the bundle of goods bought by households, not just because of higher prices.

1.4 Sustainable development and population

The basic issue between economic development and environment is the concept of sustainable development. The concept of sustainable development is a broad view of human wellbeing, a long term perspective about the consequences of present activities and full participation of civil society to reach possible resolutions. There are many predecessors (see, for example, Barry, 1977; Page, 1977), the most popular formulation given by the World Commission on Environment and Development on the subject of the sustainable development basic concept:

“development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs” (WCED, 1987, p43).

In terms of economic, the concept of sustainable development implies the important relationship between economic growth and environmental protection in conducting economic activities and utilizing natural resources to fulfill human needs. In Malaysia, sustainable development cannot be achieved if economic growth, social development and environmental protection work separately. Hence, the policy on the environmental has been developed to take into consideration the incorporation of these three actions. Through the sustainable development, Malaysian government plans at continued in enhancing the economic performance, social and quality of life of its people (National policy on environment, 2002).

The issue of environmental is crucial for policy-makers in their effort to appear “green”, in terms of global warming, destruction of the ozone layer, deforestation and population pressure. A number of competing issues and possible solutions to threats ranging from air to water, ground, noise pollution, radioactivity, toxic wastes, pesticides, and endangered species have been implemented (Khalid, 2007).

Most of the important goals of sustainable development such as providing a high quality of life for present and future generations were achieved but the economic and social problems are still exist. The economic and social problems faced by Malaysia were mostly from the lack of development and insufficient infrastructure in its early period of industrialization. The rapidly economic development through urbanization, industrialization and other land-use activities since 1980s later gave rise to water, air and land pollution, which have remained as serious environmental problems in Malaysia (Khalid,2007). This problems related to the lack of development in Malaysia gave rise to environment imparts due to inadequate hygienic facilities and lack of proper housing particularly in the rural area. This is the same arise to urban settlement where the unchecked sprawling growth resulted in crowded condition and pollution of rivers by human being. Figure 1.4 shows that quality of life index performed better from 1992 to 2002, while environment index not performed well due to economic and social problem. Environment index grew at -4.3 percent from 1990 to 2007 and this sturcutre should be taken into consideration. In generally, human being is need the clean water and hygienic services because it is very important to ensure good health and proper living.

Source: Malaysia Quality of Life, 2004, Economic Planning Unit (EPU),Malaysia

Figure 1.4: Malaysia quality of life index and environment index, 1990-2000

Moreover, environmental problems are also closely related to industrialization activities directly and indirectly by households. Economists’ view on the purpose of production is to feed consumption or household demand. Evaluation of the environmental and social impacts of households need to account for both the direct impacts of the household, such as disposal of household wastes and the emission arising from fuel combustion in a household, and the indirect impacts which are caused during the production of the goods and the delivery of the services to the household.

In Malaysia, three factors that influence the intensity of environmental pollution are population size, economic activities and production activities. From these factors, production activities are the most responsible for worsening industrial pollution in Malaysia (Khalid, 2007). Some studies suggest that population growth is one of the major factors causing CO2 emissions (York et al., 2003; Shi, 2003; Cole and Neumeyer, 2004), but the growth of population in Malaysia can also contributed to the worsening of natural resources or system of biological life support. As population increases, the symptom of ecological pressures and scarcity of natural resources will be occurred including deforestation, soil erosion, overfishing and overcrowding as well as economic stress is indicated through lower output, inflation and unemployment, and social problems.

Due to the increasing population, pressure builds up for increased production from land use, hence the results from these activities will raise the soil erosion and degradation. These activities are not limited to the destroyed of land but also a declined in the flow of rivers, increased flood levels and silting of reservoir and dam. (Khalid, 2007). A growing population also leads to increase in energy consumption especially electricity, to meet the increased demand and to service the new development areas. Motor vehicle ownership is also increased with a growing population that becomes more affluent, and consequently contributing to greater pollution, particularly in generating CO2 emissions.

Sources: United Nation Statistic Division, IMF/2005

Figure 1.5: The total number of newly registered motor vehicles and energy consumption per capita, 1980-2004

From 1980 to 2004, a general increase in CO2 emission was experienced by Malaysia. Only in 1998/1999 was a decline to about 17.6 % seen Figure 1.5. At this time, there was also a drop in the number newly registered private motor vehicles and energy consumption as shown in Figure 1.5. This indicates that a reduction in the use or ownership of motor vehicles will reduce energy consumption (of petroleum) and thereby the generation of CO2. Figure 1.6 shows the total of CO2 emissions in Malaysia. Therefore, household expenditure continues to shift away from food towards transports particularly in fuel consumption even though spending on motor vehicles fall. Fuels consumption continues to rise with worsening in public transport system have declined from 11 % to 6 % and it grew at -4.1 % between 1999 and 2005 (DOS).

Sources: United Nation Statistic Division, IMF

Figure 1.6: The Carbon dioxide emissions (CO2), Malaysia

In order to reduce the CO2 emissions, many policy-makers have implemented various pollution control policies, for example by improving the public transportation system and increasing the oil price. However, the best way to reduce CO2 emission is to reduce energy consumption by household direct and indirectly.

1.5 Total primary energy supply and final consumption in Malaysia

The rapid economic growth in Malaysia has largely impact the energy supply and consumption. The annual growth rate of GDP and total households energy primary use are 5.7 and 7.4 respectively in the 1990s as shown in Table 1.5. However, the economic growth slowed down from 1996 to 2000 due to economic crisis of 1997 in Asian region. The annual average total primary energy supply (TPES) growth increases much from 1991 to 2000 due to major investments particularly in the transportation and industrial sectors, 41.8% and 37.7% respectively.

The trends in energy use of Malaysia are relatively same to the trends found in many developing countries such as study done by Park (2007) for Korea and Pachauri (2002) for India. The total primary energy supply (TPES) in Malaysia increased from 5-10 Mtoe between 1991 and 2006.

Table 1.5: Income and energy supply and consumption in Malaysia

 

Annual growth rates in %

1991

2000

2008

1991-2000

2000-2008

1991-2008

GDP in Ringgit Malaysia at 2000 constant prices (Million)

205,312

356,401

476,182

5.7

2.94

8.78

Total primary energy supply (Ktoe)

26,335

50,710

69,846

6.8

3.25

10.25

(Per capita TPES in Ktoe)

1.39

2.17

2.59

4.6

1.77

6.41

Total household primary energy use (Ktoe)

13,961

28,705

42,901

7.5

4.10

11.88

(Per capita total household energy in Ktoe)

0.74

1.23

1.59

5.2

2.59

7.94

Direct household primary energy use (Ktoe)

843

1,650

2,565

6.9

4.51

11.77

(Per capita direct household energy in Ktoe)

0.04

0.07

0.10

4.7

3.10

9.04

Sources: Department of Statistic Malaysia and own calculation

The enormous growth rates of Asian economy give a large impact to the energy consumption. In the 1990’s, the petroleum production and consumption increased tremendously as well as an increase of hydroelectric and coal in generating the electricity for the nation. The demand and consumption of energy increased tremendously from 1991-1997 as shown in figure 1.7. A large amount of investment on electrical infrastructure and automobile has caused primary energy consumption reached at approximately 27.23 million tones and electricity generation almost 6 Mtoe in 2000 and will continue to rise.

Source: Malaysia Energy Centre, 2000

Figure 1.7: The total energy consumption and GDP in Malaysia from 1991 to 2006.

The future economic growth for any country is hard to forecast but to generate an exactly estimation, firstly must account for the physical and economic growth of the nation. Malaysia projected to grow at 5.7% % annually and will continue at this rate for many years. With increasing rate of urbanization, total primary energy demand is set to increase by nearly 7 % annually. Moreover, political stability and development will continue to drive the economy forward. The Malaysian Ministry of Energy suggest that to provide for its citizen’s energy demands, RM 4.86 billion dollars will be required over the next 10-15 years: 60% allotted to energy generation and the remainder to transmission and distribution of energy.

Such enormous economic growth and increasing infrastructure and demand will likely send the total energy use to well over 100 Mtoe in the year 2020. The growth rate of urbanization shows that the industrial sector of the economy, the sector remains unchanged to require large portions of the total amount of energy used in the nation. The industrial sector could increase to upwards of 50% of the nation’s economy in continuing competition. The switch towards public transportation in urban areas will potentially cause a decline in the percentage of the economy occupied by the transportation sector. The energy use of residential and commercial sector remains relatively constant occupying only 13%-14% of the total energy use.

Vision 2020 sets goals and standards for the nation’s future as a whole. Malaysia is become a totally developed and united country by the year 2020. In line with to this, Malaysia targets to raise the living standard of rural and urban peoples as well as reducing poverty, finally leading to an increase in the total household primary energy consumption all over the nation. The annual growth rate of total household primary energy consumption is 7.5% and direct household primary energy consumption about 6.9% from 1996 to 2000. Since households income and consumption expenditure increased, the household energy requirement increased too as shown in Figure 1.6. The total primary energy supply of 50,710 Ktoe in 2000 was for an income of RM 356,401million economy very high compared to 1991.

1.6 The effect of energy consumption on the environment

Energy use contributes to a range of environmental pressures and is a major source of greenhouse and acid gases. The most polluting fuel, in terms of CO2, SO2, NOx and particulate emissions, is coal, followed by oil. Natural gas burns much more cleanly, can be used more efficiently in domestic boilers, and produces as much CO2 per unit of energy. Disposal of electronic waste such as dry batteries presents serious risks associated with carcinogenic substances, which can be leached to soil and groundwater over the medium and long term. Uncontrolled land filling also releases contaminants, with a time lag. Incineration or co-incineration of electronic equipment waste with neithe