Previously, the government sorted Malaysian households into the low income (B40), middle income (M40) and high income (T20) groups. But this metric had its flaws, especially when it came to determining who was actually most in need of socio-economic help.
So what’s the new and improved classification?
The Cost of Decent Living
Enter Basic Expenditure of Decent Living (PAKW)
This new measurement, which essentially refers to the basic expenditure of decent living, was launched today. And PAKW’s biggest draw, unlike the previous B40/M40/T20 system, is its tailor-made rather than one-size-fits-all approach.
The previous system was based on gross household income, or how much a household’s members collectively made. But every household has a different cost of living, even if they have the same gross income, and hence every household has different needs.
These differences must be addressed for economic growth and development to be truly inclusive.
Under PAKW, the Madani government uses data to determine how much it costs for Malaysian households to afford three main things: essentials such as food, desires such as entertainment and participation in communal activities.
When a household can afford all of the above, it is considered to have a decent standard of living.
Making lives better
But what’s the big deal about being able to afford a decent standard of living? And why does it matter that PAKW focuses on this, rather than gross income or even poverty?
For one, focusing on income as in the old B40/M40/T20 system doesn’t quite capture the everyday economic realities people face.
An RM8,000-a-month income for an M40 household may seem relatively high but the family may not enjoy a comfortable life after spending on food, housing, childcare, healthcare and other essentials.
For another, the Poverty Line Income approach only determines the minimum income necessary to ensure basic survival. It’s mainly used to aid poverty eradication efforts.
But by determining PAKW, or the basic expenditure of decent living, the Madani government is aiming to deliver more than just survival. Instead, it is trying to deliver a meaningful and decent life for all Malaysians.
Finally, shifting the focus to PAKW makes sense considering Malaysia’s socio-economic ambitions and targets.
The World Bank estimates that Malaysia can attain high-income nation status by 2028. With average wages potentially on the rise, having a new PAKW indicator that essentially measures net disposable income will complement existing measurements for poverty and net household income.
With the PAKW, the government is also looking to better target social assistance, such as subsidies, to vulnerable households that can’t afford a decent standard of living.
The PAKW is meant to minimise what’s known as inclusion and exclusion errors when channelling that assistance.
When a household earning RM50,000 per month receives fuel subsidies, even if it has a few other expenses, for instance, that’s an inclusion error.
But when a household earning RM8,000 per month with many financial burdens doesn’t receive fuel subsidies, that’s an exclusion error.
Plus, PAKW will guide government policy. In areas where households aren’t able to afford a decent standard of living, Putrajaya can then intervene in a more targeted manner. For example, by creating jobs and stimulating economic activities in the relevant areas.
Measuring PAKW
It’s important to note that the PAKW actually has two sets of numbers.
The first is the basic expenditure of decent living for all households in an area. The second is the basic cost of decent living for a single household in an area.
Put differently, every single Malaysian household will know how much it costs to lead a decent life based on their own specific circumstances.
That tailor-made number is based on several factors, one of which is location. That’s because the cost of living in Kuala Lumpur, for instance, will vary greatly from the cost of needs, wants and participation in society in Gemas or Sandakan.
But the economy ministry and department of statistics Malaysia, which runs the Central Database Hub (Padu), will also consider other factors when calculating the PAKW. This includes the number of people in the household and whether there are any special needs, such as caring for senior citizens or people with disabilities.
PAKW’s future
Moving away from general income groups like the B40, M40 and T20 towards PAKW has the potential to make Malaysia’s socio-economic policies — including job creation and welfare assistance — more effective.
But launching PAKW is just one step of many.
For one, it might be useful to establish a feedback mechanism for the Cost of Living Index, which is also due to be launched this month. That way, Malaysians can provide input on the accuracy of an area’s cost of living.
And for PAKW to keep improving Malaysian lives, the measurement itself has to be continuously refined. That means tackling challenges like putting a number on subjective things such as participation in society, or even adjusting for inflation and changing economic realities.
Most importantly, PAKW has to be complemented by good policies, such as addressing the differences in living costs within and between regions. Only then can PAKW be translated from a number into a decent standard of living for all.