Thursday, June 11, 2015

What must we do about inequality

Since the introduction of the New Economic Policy (NEP) in 1970, Malaysia has been a global leader in recognising the need for inclusivity in economic and social policy, as well as in the implementation of policies to achieve greater horizontal (or group) equality.
The NEP has two objectives: to reduce and eventually eliminate poverty, and to accelerate the process of restructuring Malaysian society to correct imbalance so as to reduce and eventually eliminate the identification of race with economic function.
In both objectives, Malaysia has been outstandingly successful. This performance deserves recognition and respect. Malaysia’s success on the three fronts – growth, poverty reduction, and improvements in horizontal equality – over a prolonged period is one of the best in the world.
Global leader. Outstandingly successful. Deserves recognition and respect. Best in the world.
These potent words run in contrast to public perception and discourse, which seem to inhabit a different world – the policy has failed, poverty remains high, and income inequality is widely said to be increasing, or persisting at high levels. 
But those sentences in the first paragraph are not ours. They belong to Francis Stewart, the Professor Emeritus of Development Economics from University of Oxford, who wrote them as foreword for the Malaysia Human Development Report 2013.
It is of interest to note at this point the results of empirical analysis undertaken by the UNDP NHDR Malaysia 2013 team regarding the impact of NEP on growth, poverty and inequality.
Malaysia’s achievements are a matter of record. While almost half of the population was in poverty in 1970, the poverty rate has since dropped dramatically to 16.5% in 1990, and 1.7% in 2012.
The reduction in poverty was evident across all groups. The notion that the policy failed or benefited small groups of people is factually incorrect. The success in poverty eradication is acknowledged by World Bank where it stated that "the initial implementation of the NEP helped increase educational and employment opportunities for poor households, supporting poverty reduction during the period"[1].
The success of poverty eradication has been due to an increase in household income for the population. From 1970-2012, the average household income grew by 7.3% annually. A comparison by income class shows that the bottom 40% of income earners enjoyed the highest income growth, at 7.9%, higher than the 6.9% registered for the top 20% and the 7.5% for middle income households. Inequality, therefore, dropped.
The Gini coefficient, a standard measurement of income inequality, also decreased by 16% during the same period.
It is without doubt that Malaysia has achieved a level of social equality barely imagined nearly half a decade ago. It is rather an impressive achievement considering that the total cost for poverty eradication and restructuring of policy is relatively small, about 5% of total expenditure of the Malaysian government from 1970 to 2012.
However, the NEP’s success brings new challenges, and the work remains unfinished.
One, income inequality remains at a level that is almost the same as the past two decades despite a continuous increase in economic growth.
Two, income and poverty among Bumiputera communities remain high, and pockets of marginalisation prevail in both rural and urban areas.
Three, new inequalities have emerged, especially in asset ownership. Asset inequality, especially in financial assets, shows wider gaps compared with income inequality.
Four, there remains exclusion in the labour market, both in public and private sector. There is evidence that ethnicity, and to some extend gender, exerts influence over employment, which pose questions towards inclusiveness in the work place. 
Five, the size of the middle class in Malaysia remains small, and barely budged in the past two decades. By conventional income-based definition, the middle class in Malaysia currently stands at 22% compared with 20% in 1989.
Moving forward, it is plausible that economic inequality could widen in Malaysia in the near future given current challenges in the labour market, changes in education policy, and consolidation of fiscal policy to reduce the federal deficit.
What then must we do? While there is no silver bullet and since defeatism will only guarantee defeat, there are several policy reforms that can be adopted to promote inclusive development in Malaysia.
These include fiscal policies to increase spending on health and education, access to affordable housing and quality education, targeted transfers to low income households, and implement fair and progressive taxation.
Labour market reforms can be simultaneously undertaken to boost the labour share of total income and ensuring equality of opportunities and fairness of employment practices, and, at the same time, reduce the size of foreign labour.
There is also room for financial reforms in ensuring our financial system is more inclusive. Finally, and equally vital, is the social policy reform.
A few measures can be undertaken, such as implementing unemployment insurance, focus on asset ownership especially housing, and strengthening of social safety net provisions including enhanced old age pensions.
Importantly, however, there is an urgent need to broaden our development paradigm beyond economic growth or stock market performances.
We must view development as representing a transformation of our society. GDP growth or a rising level of stock market are necessary, but not sufficient to achieve development and freedom from poverty, exclusion, and a more equitable and just society.
Ignorance is unfortunately not bliss, as failure to ensure inclusiveness could be fatal, be it in economic, social, or in political domains, as history has repeatedly shown.
Persistence of inequality over a prolonged period of time or across generations could not only lower economic growth and simultaneously diminish channels of upward mobility but would also possibly incite anger and raise questions with regards to the notion of fairness.
More generally, societies may experience a widening mistrust of institutions, including the government itself and a sense of despondency towards the status quo and the prospects of positive change. 
The report from UNDP evidently issues a clarion call for inclusive development to be increasingly incorporated into policy and academic discourses in Malaysia. – June 11, 2015.
Dr Muhammed Abdul Khalid a director of research at Khazanah Research Institute and Tan Sri Dr Kamal Salih is adjunct professor of Economics and Development Studies at Universiti Malaya.

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