Many people within Malaysia see a major disconnect between the reality on the ground and economic indicators. There are far too many anecdotal stories about hardship just to brush off. This brings up the question, just how accurate are Malaysia’s major economic indicators? And how are these indicators compiled? The answers to these questions have a major impact upon the quality of government decision making, planning, which have a major effect on the people and the private sector.
Back in 2006, a brave economic historian Dr Lim Teck Ghee claimed that the Bumiputera equity target of 30 percent set out in the 1971 New Economic Policy had been surpassed. This was based upon a study he led by the Centre for Policy Studies (CPPS) and the Asian Strategy and Leadership Institute (ASLI). The study results showed that Bumiputera equity had far exceeded 30 percent. The government was embarrassed after being caught out. This created an outcry leading to Dr Lim’s resignation, where he went onto continue working in the United States.
Today, there are a number of weaknesses in the methodologies, calculation, and determination of national aggregate economic indicators in Malaysia, leading to doubts about their accuracy. Many professionals have such thoughts about the aggregate economic indicators, but don’t say anything, out of the fear of ridicule.
The Department of Statistics Malaysia claims they calculate GDP using three methods – production, expenditure, and income approaches. Thus, the department gathers data on production, expenditure, and income. Much of the data making up the GDP tabulations comes from surveys the department makes. We have little information about the size and skew of these sampling exercises and really know little about how representative sampling data is of the the aggregate economy.
The task of calculating aggregate GDP is made more difficult with the size of the informal sector in Malaysia being between 30-50 percent, depending on how the informal sector is defined and who is measuring this aspect of the economy. The Malaysian economy has the 6th largest informal sector in the world, after Uzbekistan, Cyprus, Greece, Botswana, and Costa Rica. Just how well this can be measured is questionable. Very few economists even mention the informal sector in public discussions, even though it is a major part of the economy.
Bank Negara Malaysia (BNM), Malaysia’s central bank is mandated to make economic forecasts. BNM uses Department of Statistic information, and supplements this with other information, which would include bank and credit agency reports. In addition, BNM makes subjective risk analysis in forecasting. These risk assessments tend to be on the optimistic side. Thus, any BNM forecast is almost as subjective as any other bank or credit agency forecasts. Often these forecasts feed off each other. One forecast influences the others and vice versa.
The financial community is relatively ‘close-knit’, where there is certainly some confirmation bias in forecasting. Such forecasts are influential when it comes to the BNM board making decisions about bank statutory holding levels and interest rates.
Foreign Direct Investment (FDI) has become an index the government is promoting as an important KPI, i.e., how many new investments the government has attracted to Malaysia? However, FDI is a much more complex calculation.
FDI is part of the balance of payments (BOP) equation, which includes net inflows and outflows of investment by non-residents to acquire equity, property or investment. Much of the information needed to calculate FDI is sampled, rather than based on actual confirmed records. The prime data used to calculate investments is the sum of approved investment projects by the Malaysian Industrial Development Authority (MIDA). The MIDA figures only indicate approved projects by the authority. Many of them are projects on paper that may never eventuate. Thus, FDI may be over-estimated each year.
Of late the government has only been highlighting incoming investments, which should actually take into account capital outflows. This figure shows a completely different picture.
Net capital outflow is a very difficult figure to find in the public domain. According to IMF reports, capital outflows in Malaysia were USD 115.1 billion by mid-January 2024. MIDA reported FDI was USD 85.4 billion in 2024. There are various issues involved in comparing such numbers, but the reality requires much further exploration, than accepting these and similar figures at face-value.
Government spending figures can be taken out from the budget, while private investment and consumption figures are mere estimates based on surveys. Any differences will depend upon how the government keeps to the budget and whether tax collection is on par with estimates. There is a great time lapse in being able to access this information, long after the event.
The Consumer Price Index is calculated on a basket of 528 goods and services, measured by the cost of these items relative to a base period. The basket of goods is weighted according to usage and region. This basket is updated from time to time. Fuel subsides and price controls help dampen CPI increases, as the basket my not account for ‘market of goods’ sold outside these price controls, i.e., cooking oil that is not subsidized. For example, prices of cooking oil under subsidy may have not gone up but cooking oil packages outside the subsidy programs may have risen substantially. These price rises may not be taken into account in the CPI calculation.
The GINI Index is a measure of income inequality, calculated by using household income data from the Household Income and Expenditure Survey (HIES), conducted by the Department of Statistics Malaysia (DOSM). Thus, perfect equality would give an index score of “0” and total inequality would give an index score of “100”.
The GINI Index was at 49.1 back in 1997 and has slipped down to 40.7 by 2021. Its very difficult to find up to date information on the current GINI Index from Malaysian sources. Based on the Statista forecast the GINI coefficient to be 0.39 in 2024. This infers the gap between the highest salary earners is widening from the rest, where wage growth has been minimal.
Supplementary indexes are commonly used as a bellwether indicator to gauge economic conditions. However, diffusion indexes measuring consumer and business confidence, run by think tanks such as MIER are losing their quality, due to limited resources on the part of the think tanks. Such reviews are important to see if they align with aggregate data. BNM and the Department of Statistics are now reverting to other measures such as Tenaga Nasional billings and sales tax receipts.
Obtaining current GINI Index figures is extremely difficult.
Another figure difficult to obtain accurate up to date figures is the incidence of poverty. The government has changed definitions of ‘hardcore’ and relative poverty, ‘hardcore’ poverty being an index only used in Malaysia. More recently, the government has focused on B40, the bottom 40 percent income group. The government also uses the term ‘absolute poverty’ defined as a household’s inability to meet basic needs (food and non-food). In 2022 this was calculated as 6.2 percent of the population. In the 11th Malaysia Plan (2016-2020) the Multidimensional Poverty Index (MPI), aligning with the UNDP’s MPI framework. In 2016, Malaysian estimates calculated that 0.86 percent of households were multidimensionally poor, while a World Bank calculation reported that 19.2 percent of the population could be considered multidimensionally poor.
Statistics helping government policy makers understand the real scope of the poverty problem are a problem in Malaysia.
This raises questions over the accuracy of aggregate economic indicators. Malaysia may feel like it is in a recession, yet GDP figures show growth. This can certainly be the case when the public sector through government linked companies amounts to between 25-26 percent of Bursa Malaysia in 2023. Other estimates put this as high as 42 percent. The government has much influence with government spending over 20 percent of GDP.
With the government using heuristic measurements in many cases, important decisions such as interest rate changes, and government fiscal decisions could be based upon inaccurate information to some degree. This has an important bearing on government policy and planning. Government planners might be getting incorrect information too late.
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Malaysia's major economic indicators are about as accurate as those that they correlate to.