income distribution in malaysia: old issues, new approaches (2008)

8/6/2019 Income Distribution in Malaysia: Old Issues, New Approaches (2008)

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Income Distribution in Malaysia: Old Issues,

New Approaches

Ragayah Haji Mat Zin

Institute of Msian & International StudiesUniversiti Kebangsaan Malaysia

[email protected]

11th International Convention of the East Asian

Economic Association15-16 November 2008

Manila


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Outline

1. Introduction2. Structural Transformation of the

Malaysian Economy

3. Trends in Income Inequality4. Main Factors Influencing Income

Distribution

5. Shift in Approach to Narrow Inequality6. Concluding Remarks


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How income is distributed is crucial because it determinesnational unity & poverty incidence

Diagram shows clearly that both growth and inequalitychanges play a major role in generating changes in povertyred area due to growth & blue area due to redistribution.

Thus need both growth & distribution policies.

1. Introduction


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Introduction

Density(Share

of pop)

Income ($ a day, logarithmic scale)

Growth and Distributional Effects on Poverty Eradication


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Introduction

The neglect of ensuring equitable distribution of the economicpie was said to lead to the 13 May 1969 racial riot as well as

probably one of the causes of the National Front loss on 8

March 2008

Gill and Kharas (2007: 271): one of the hurdle for mid-Y ctrieslike M'sia to leap to the developed status is how widely thebenefits have been shared. While the growth record of East

Asian countries, including Malaysia, "is both impressive and

uncontroversial, concerns remain about .. how widely the

benefits have been shared and whether . the economic andsocial opportunities for the vast majority of the citizenry" have

appreciably improved as socioeconomic disparities can also

threaten economic growth.


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2. Structural Transformation of the MalaysianEconomy

Msia experience high economic growth, due to rapidgrowth of the mfg sector. GDP share of mfg sector rose

from 13.9% in 1970 to 30.1% in 2007 while that of the

agric. sector fell from 29.0% to 7.6%, while share of the

services sector also rose from 36.2% to 53.6%.

Unbalance changes in sectoral GDP shares & empt. resultedin uneven productivity, with those in the industrial sectorfar > that of the agric. sector--implies inequitable income

distribution.


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3. Trends in Income Inequality: How the

economic pie has been shared?

Trends in Income Inequality


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3.2.3 Income Disparity Ratios by Strata

1970-2007


D'parity

Ratio

1970 1979 1984 1987 1990 1993 1995 1997 1999 2002 2004 2007

Urban:

Rural

2.14 1.90 1.87 1.72 1.70 1.75 1.95 2.04 1.81 2.11 2.11 1.91


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3.2.4 Decomposition by Strata Decomposition of household income by strata, ie. urban

and rural areas, shows that most of the inequality is

explained by the "within group" component and a much

smaller proportion is explained by the "between group"

component.

Generally, the between group inequality seems to explain3.88% to 16.01% of total inequality, depending on the

parameter of the GE and Atkinson indices being used. This

contradicts the widely accepted view that urbanruralincome disparity accounts for a very large part of the

existing inequality, as is implied by the core strategy of

reducing urban-rural inequalities to narrow Malaysian

inequalities (Ninth Malaysia Plan 2006-2010).


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3.3 Ethnic Income Distribution,

Malaysia: 1970 - 2007



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Mean Household Income of Major Ethnic GroupsRelative to National Mean, 1970-2007


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3.3.3 Disparity Ratio by Ethnic Groups,

1970-2007


D'parity

Ratio

1970 1979 1984 1987 1990 1993 1995 1997 1999 2002 2004 2007

Chin :

Bumip

2.29 1.90 n.a n.a 1.76 1.78 1.80 1.83 1.74 1.8 1.64 1.54

Indian :

Bumip

1.11 1.29 n.a n.a 1.31 1.29 1.33 1.46 1.36 1.28 1.27 1.20


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Most of the inequality is also explained mostly by the withingroup component; eg. GE(1Theil Index) for 2004, 93.71%

is accounted for by the within group differences while only

6.29% is explained by the ethnic differences.

Between group component has been declining since 1995from 10.06% to 10.0% in 1997, 9.69% in 1999 and 9.32% in

2002 and 6.29% in 2004, implying that the policies

implemented to narrow inter-ethnic differences have been

effective. It also means that some of these policies might

have been causing the within group inequality to widen, eg.

privatization of projects in favor of Bumiputeras.

3.3.4 Decomposition by Ethnicity


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4.1 During NEP & beyond:

Rural Developmentwhile improved income & welfareof rural households, their efficacy in achieving this

objective as well as redistribution of income can still beimproved

Education and employment Export-oriented industrialization Restructuring of equity ownership and asset

accumulation Other policies and programmes including

Provision of basic services, infrastructures & housing

NGOs, eg. Amanah Ikhtiar Malaysia (AIM) & Yayasan Basmi

Kemiskinan (Poverty Rradication Foundation)

4. Main Factors Influencing Income

Distribution


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4.2 Explaining Inequality after NEP

Gill and Kharas (2007): Growth occurs as a result of theexploitation of scale economies through specialization and

innovation and is reflected in international integration via the

trade in goods, money, and ideas. This integration triggers

spatial and social changes that have an impact on domestic

integration and the process on urbanization and incomedistribution. But economies of scale may not be geographically

or sectorally evenly distributed. The authors have proposed

five major drivers of inequalities

trade and globalization labour market reform the formation of clusters and agglomeration effects the process of fiscal decentralization

impediments to the process of internal migration.


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Explaining Inequality

4.2.1 Lag in the growth of the agriculture sector

Due to uneconomic farm size that hinders technologytransfer as well as labour shortage, ageing farm labour,

declining competitiveness of the smallholder unit ofproduction, lack of opportunity for off-farm income.

Recent rejuvenation in agricultural output and favourablecommodity prices had helped faster rise in rural income

than urban income, resulting in a narrowing of income

disparity between urban and rural areas.


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4.2.2 Trade and globalization As M'sia tries to move-up the K- & technology-intensive

ladder, demand for skilled and highly educated workers

increased. As supply lagged, then these skilled workers

were able to command an increasing premium.

Divergence of the wages is also enhanced by the massiveentry of unskilled foreign labour into the M'sian economy

that dampened the wages of the unskilled labour.

Liberalization and creation of BCIC through theacceleration of privatisation both contributed to the

subsequent widening of income inequality.


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4.2.3 Impacts of the process of internal migration

Percentage of urban-rural migration in the top occupationalcategories > percentage of rural-urban migration, but

opposite is true for the lowest occupational category.

The former stretched the income range at the top in the ruralareas while the latter at the lower-end in the urban areas,thus widening inequality.

Moreover, migrants to urban areas are not the poorest, butare more likely to be relatively young, have certain abilities

and educational attainment as well as some resources tosupport them while they look for work. This process would

then leave on average the aged, those with less ability and

without resources in the rural areas, further enhancing

inequality.



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4.2.4 State-Government-Party Collusion

State-government-party collusion (corruption, cronyism andnepotism)ownership and control of the economy by political

parties, & parties linked to noted business tycoons or

cronies, many of whom are engaged in rent-seeking

enterprisesthe common thread is that the leaders of ruling

parties have been able to use their political clout and

influence to earn enormous rents for themselves or their

political cronies and families.

This phenomenon transcends ethnicity and enabled aselected section of the Malaysian society to accumulate

income and wealth very rapidly, thus accentuating

inequality.



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Should focus more on reducing inequality within both urban& rural areas as well as within each state, although economic

development in the laggard states have to be geared up in

order to reduce the regional gaps.

Shift the focus of reducing inter-ethnic inequality to intra-ethnic inequality, and to re-conceptualise the strategies of

attaining ethnic income parity such that they do not worsen

within group inequality among the the various ethnic groups.

Move from race-based policies to national policies, which areinclusive of all ethnic groups. The urban poor and low-

income groups should be seen as socio-economic groups

rather than groups aggregated based on ethnic origins.

5. Shift in Approach to Narrow Inequality


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Education is the sharpest tool for poverty eradication andmoderating income inequality. Thus, need more access to

quality education for the poor. Assistance should favour the

disadvantaged. Better-off parents take the responsibility of

educating their children, if not fully, at least part of the costs.

A mechanism must be developed to ensure that beneficiaries,esp. those getting the privatization projects or benefiting from

any other direct redistributive policies, to give back to society.

Projects need to be allocated based not on politicalconnections, the influential and powerful, but according togenuine ability criteria. Eg. through the community or

bottom-up approach. Transparency and proper governance

should always be part of the guidelines in the allocation.

New Approaches


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The issue of foreign labor must be resolved. Althoughthe Government is encouraging greater automation and

mechanization of labour-intensive industries in order to

reduce the dependence on foreign workers, these

measures must seriously be implemented.

The demand for minimum wage or higher wages to bepaid to the local workers needs serious consideration.

Since most of the taxes have become less progressive, astudy should be carried out to explore the viability ofintroducing 'leveling taxes', such as hereditary or wealth

taxes.

New Approaches


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The decomposition of income inequality indicates that the"within group" far > "between group" inequalities, questions regarding certain present income distribution

policies, as "within group" reduction would be more

effective than pursuing the "between group" option.

Some decomposition results reflect that past governmentpolicies have been successful and need no longer be

emphasized as others should be given priority.

Many policies are still appropriate in handling theinequality issues, but their approaches to solving them

must change, esp. this should be done according to the

needs-base rather than ethnic-base approach.

6. Concluding Remarks


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income distribution in malaysia: old issues, new approaches (2008)

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