GOVERNMENTS have long prioritized creating a robust middle class due to its pivotal role in driving economic development. A strong middle class can shift aggregate demand from basic to high-end goods and services, foster entrepreneurship and innovation, and contribute significantly to poverty reduction, laying the foundation for sustained economic growth. From a collective standpoint, it enhances perceptions of upward social mobility, offering hope to people in poverty.

Developing countries grapple with the dual challenge of crafting policies to create and nurture the middle class while eradicating absolute poverty. In Malaysia, though policies for supporting the poor are generally developed at the local level to account for the heterogeneity of prevailing circumstances, the allocation of funding for these initiatives would necessitate ballpark figures to be estimated and administered at the national/federal level. Hence, accurately classifying households into poor or middle-class categories is crucial for effective government planning and resource allocation.

KRI’s latest working paper “Searching for the ‘poor’ and ‘middle class’ in Malaysia” represents an update to the Expenditure-Space model we published earlier in 2019. This was based on earlier works by Hausmann and Klinger (2006), Hidalgo et al. (2007), and Hidalgo and Hausmann (2009). The model is designed to generate new classifications of households based on actual expenditure patterns, revealing the underlying structure of household expenditure, from basic needs to complex goods and services. By applying this model to Malaysia, we identify significant deviations from the existing Bottom 40 (B40), Middle 40 (M40), and Top 20 (T20) classifications, thus offering a new perspective on economic stratification. Our analysis reveals that the current classification does not accurately represent the true economic stratification of Malaysian households.

The findings raise an important question on the validity of the current household demarcation of B40, M40 and T20 adopted by the government of Malaysia. Malaysia has consistently followed the World Bank’s demarcation of B40/M40/T20 from the Ninth Malaysia Plan (9MP) to the Eleventh Malaysia Plan (11MP) for almost 15 years from 2006-2020. Most policies equate B40 to poor households and the M40 to middle-class households or ‘aspirational households’. These demarcations might not be as accurate since the groups of households within the allotted ranges do not possess similar characteristics of consumption.

The consumption pattern of the group in-between the B20 and the T30, what we term as the M50, appears to be relatively homogenous – in that households and are still experiencing trade-offs in their consumption of necessities and the more aspirational products. These households demonstrated minor differences from the B20 group. Some households could eat out, and some started to send their children for tuition classes or could spend more on household furniture. This middle M50 is not the middle class and is still vulnerable.

Consequently, it would be more accurate to claim that only the Top 30% of the total households are in the Middle-Class or aspirational class rather than the original misconception of 60% (i.e. M40 plus T20 = Top 60)

Hence, our findings challenge the existing B40, M40 and T20 classification that reveals discrepancies between income demarcations and actual expenditure patterns:

• Bottom 20% (B20): Households that are focused on meeting basic needs such as food, housing and clothing.
• Middle 50% (M50): Economically unstable households navigating trade-offs between essential and aspirational goods.
• Top 30% (T30): Households demonstrating aspirational consumption patterns indicative of the middle class, but not necessarily “wealthy” by global standards.

Bearing all this in mind, then, the usefulness of the demarcations becomes more apparent. For example, in a (poor) country, the most affluent can still be considered ‘poor’ if situated in another (rich) country but would nevertheless be considered the most well-off in their own (poor) country within household demarcations. These demarcations are not a proxy for distinguishing between the wealthy and the poor, the haves and have-nots. They are merely intended as a guide to show the differences that exist within a given society. In other words, the demarcations do not differentiate between the rich and the poor, but rather simply who is richer and who is poorer; and it is a relative comparison. So, if we understand the limitations of what the demarcations can tell us, then it may prove useful in determining policies to implement to attend to the problems associated with specific groups and their corresponding brackets.

The working paper is authored by Gregory Ho, Research Associate and Suraya Ismail, Director of Research at KRI. Ths workings paper can be downloaded at www.KRInstitute.org.


* The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.