income distribution in malaysia: old issues, new approaches (2008)
TRANSCRIPT
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Income Distribution in Malaysia: Old Issues,
New Approaches
Ragayah Haji Mat Zin
Institute of Msian & International StudiesUniversiti Kebangsaan Malaysia
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
Trends in Income Inequality
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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Trends in Income Inequality
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
Trends in Income Inequality
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Trends in Income Inequality
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
Trends in Income Inequality
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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Trends in Income Inequality
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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Explaining Inequality
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.
Explaining 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.
Explaining 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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