The determinants of urban household poverty in Malaysia

Abstract

Since independence in 1950s Malaysia has been recognised as one of the more successful countries in fighting poverty: head count ratio came down to 5.7 percent by 2004. However the recent process of rapid urbanization has led to an increase of urban poverty aggravated further by the 1997 Asian financial crisis. It is important to understand the nature and scale of urbanization, the various driving forces that affect it and the determinants of urban poverty as linked to this process. Our paper identifies the determinants of urban poverty in Malaysia using a logistic regression. Multiple regression model which used to be the main tool of analysis in this kind of studies has been criticised for a number of drawbacks and binary probit or logit models have been proposed as alternative and widely used. Previous studies have used income to identify poor households. We have two problems with this procedure. First, the official poverty line in Malaysia is an consumption expenditure. Secondly data on household incomes are known to be less reliable than consumption data obtained from household expenditure surveys. We therefore compare a person’s consumption expenditure with the poverty line to determine its poverty status. This agrees with the idea that poverty is the inability to attain a critical minimum amount of consumption. We study the effect of human capital, region of residence and other household characteristics on urban poverty using this benchmark A sample of 2,403 urban households from the 2004-05 Household Expenditure Survey (HES) has been used in this research. We first estimate the probability of households with specified characteristics to fall below Malaysia’s official poverty line. Results show that human capital significantly reduces the chance of being poor while migrant workers are more prone to poverty. Household size, race and regions are also important determinants of poverty outcome in urban Malaysia. Then we analyse the sensitivity of the probability estimates to shift of the poverty line over a reasonable range. Effects of education, number of children, number of male adults, number of elderly, foreign migrant-headed household, Chinese household and households living in Region 1 on poverty are robust over the shifts. The findings have important policy implications for Malaysian government which has pledged to reduce overall poverty rate to 2.8 percent and eradicate hardcore poverty by 2010 under the Ninth Malaysian Plan.