The ETP And The Distribution Of Income

My apologies for the long silence over the past week – I’ve been on holiday, and haven’t checked my mail for a while, or been too bothered about blogging. The next couple of weeks won’t see much in the way of posting either, as I’m going through some major changes in my life. I might (or might not!) write about it, depending on how circumstances develop. In any case, I’ll be returning to a more regular blogging schedule in January, God willing.

In the meantime, I’ve been asked to comment on a couple of speeches made by the opposition Pakatan Rakyat over the past week.

First is a dinner talk given by Datuk Seri Anwar Ibrahim:

ETP will widen income gap by 2020, warns Anwar

KUALA LUMPUR, Dec 15 — Datuk Seri Anwar Ibrahim sounded warning bells today, saying the government’s Economic Transformation Programme (ETP) will worsen income disparity and force some 1.7 million Malaysians into poverty by 2020.

On the flip side, he said, corporate giants and government cronies would be enjoying a larger slice of the economic pie even as the common Malaysian struggle with hardship.

The former finance minister poured doubt over the projections in Datuk Seri Najib Razak’s ETP introduced last year, claiming that instead of reducing the number of low-income workers and increasing the number of high-paying jobs, the initiative would only see the number of urban poor climb.

By 2020, he said, there will be between seven and 8.3 million urban poor in Malaysia, with monthly earnings of RM1,500 and below...

…Anwar (picture) noted that the ETP projects a salary distribution for 2020 that will see an additional 2.8 million people earning more than RM4,000 per month.

But, he said, the trend of slow growth in real wages here would only turn this projection into a “falsehood”.

He noted that statistics from the Human Resources Ministry revealed that wages growth in Malaysia recorded an average increase of 2.6 per cent annually for the past decade while “cost of living has outpaced the wages growth”…

…Another flaw in the assumption used for the ETP, said Anwar, is the 2.8 per cent average inflation for the period up to 2020 which contributes to the programme’s GNI (gross national income) per capita target of RM48,000 by 2020.

If inflation grows higher than 2.8 per cent in the next few years, he said, real wages will be lower and the GNI per capita target is nothing more than “a number on a fancy ETP brochure”.

Putting aside the political slant, my opinion – and it’s just my opinion – is that he has a point. I’d argue about the comments on inflation, as one very real consequence of raising real wages is of course rising inflation. You can’t expect to increase disposable income without also dealing with higher costs of production.

But our drive towards high income status will have other consequences as well. High paying jobs go to those with skills, and there is an acute skills shortage in Malaysia, one that won’t be driven off by tweaks to the education system or anything close to the reskilling/retraining proposals being mooted by either the NEM or Pakatan’s Buku Jingga.

I’m not going so far as to claim an increase in the number of poor, urban or otherwise, but I’m not going to swallow the line that we’re all going to be rich either. There will be changes in the real purchasing power of even the lowest income households, as I believe that as we approach high-income status, there will be changes in relative prices – material goods will become cheaper relative to average incomes while services will become more expensive. So there will be some improvement over and above the real increase in wages, though not enough to really make a difference in the distribution of income, or in other necessities like the affordability of housing.

Where I depart from Anwar’s stance is that I don’t think this is a problem specifically with the ETP, which is primarily aimed at demand side measures. Rather I consider it a consequence of the structural transformation that Malaysia is undergoing on the way to becoming a high income nation.

Our problem over the next ten years is really the existing workforce, not the putative better-educated-and-skilled one to come. The NKRA for education is lagging the rest, but even if any substantive reform were to be undertaken right this minute, the real impact would be well after 2020. And I see little in the NEM, ETP or GTP that would have a substantial impact on changing the structure of incomes in the economy. And before anybody from PR starts gloating, I don’t see much in the way of improvement in Buku Jingga either – it’s pretty vague on the subject.

A lot of hope seems to be focused on putting a floor under wages via the minimum wage, and while that might affect changes at the lower end of the income scale, it won’t do diddly-squat to actually change the distribution of income.

For example, let’s assume that PR takes over after the next general election and implements their promised policies (whatever they are) to raise minimum household income to RM4,000 a month. This won’t have a redistributive effect because putting a higher floor under wages actually pushes up wage scales across the board – a bank officer will and should always earn more than a clerk, a construction foreman will and should always earn more than an ordinary construction worker, a doctor more than a nurse, and so on and so forth.

Rapidly raising the incomes going to lower skilled groups just raises inflation and the cost structure of the economy (and as a corollary, unemployment), and real gains to average household income might be illusory. There are plenty of examples of advanced economies who’ve enforced a minimum wage, yet have relatively high income and wealth inequality. A minimum wage is no panacea – I only see it as a sort of social protection for the lowest income groups, not as a redistributive tool. It’s worth doing for that purpose alone, but let’s not burden it with expectations it cannot fulfil.

Ensuring efficient utility costs and embedding food, gas and petrol subsidies won’t change this basic equation either, not least because subsidies primarily benefit the middle class, and not the poor.

The problem is, I don’t see either Barisan Nasional or Pakatan Rakyat having the political capital to really make any quick headway in reducing income inequality. The most effective tool for this empirically is tax-and-transfer, conditional or otherwise. But would any politician or political party in this economic climate really run on a platform of raising taxes? Or push forward equal tax treatment of income, whether it’s derived from wages or capital/property gains? Or (horrors!) implement an inheritance/estate tax? These are all vote-losing propositions, even if the goal is one in which all citizens would have some sympathy for.

So what we’re left with is political posturing. I don’t see the ETP as essential in remaking Malaysia into a high income economy. By the same token, I’m not going to blame it for something it’s not designed or intended to handle.