The Bumi Agenda: The Importance Of Evidence Based Policy

Saturday’s announcement by the Prime Minister of measures to rekindle the Bumi Agenda, if I can call it that, has taken its share of brickbats and support (more of the former rather than the latter, by the commentary on social media).

Here’s my take: I think the Bumi problem is real and shouldn’t be sidelined. But, I also think that these new measures don’t go far enough, or go too far in the wrong direction, to be truly meaningful in addressing the situation.

So let’s check the facts, and see where that leads us:

1. Bumi household incomes continues to lag those of other ethnic communities in Malaysia, even those in the top income quartiles. There has been a lot of progress, but there’s still some way to go.
2. Bumiputeras make up the majority of the country’s poor and hardcore poor. I don’t think any assistance for the poor is controversial, nor does it appear does anyone else.
3. Bumi ownership of residential property is poor and of commercial property abysmal.
4. Effective control of the corporate sector remains well below the New Economic Policy target of 30%. But then it depends on who’s counting.
5. Bumi professionals have made substantial inroads into their respective professions, but remain well below the proportion of the population they represent (except perhaps in veterinary medicine).
6. Bumi entrepreneurs on average have amassed less efficiency, capability and capacity, despite 40 years of government support. But this should be set against negative discrimination in terms of procurement and working capital constraints for smaller SMEs (higher prices; no credit terms for example).
7. Bumi workers are discriminated against in the private labour market (yes, there’s plenty of research backing this). On the other hand, non-Bumis aren’t keen in general on working in the public sector. So much for eradicating the identification of race with economic function.
8. But, affirmative action policies are known to be inefficient (in an economic sense), and are inequitable to those with greater capability and skills.

As against this, unequal societies:

1. Limit their growth potential
2. Have a greater incidence of crime;
3. Are less happy and healthy;
4. Display greater social ills, such as drug use and single parentage;
5. Are less cohesive and more unstable

If inequality is worth overcoming, there is also the basic underlying tug-of-war between those who believe in equality of opportunity and equality of outcomes, or to over-generalise, between capitalism and socialism.

The problem with affirmative action based on race is that it is economically inefficient and unfair to the rest. The problem with a needs-based policy that focuses solely on the poor, on the other hand, is that it doesn’t address labour market discrimination or negative discrimination in the wholesale or distributive markets i.e. you’re only addressing the costs of relative poverty but not the other factors working against equality of opportunity.

The problem with throwing your hands up and opting for equality of opportunity approach wholesale (i.e. the meritocracy approach) is that you just embed existing inequality in the fabric of society, as the underlying factors that lead to higher incomes (i.e. you’re born into a high income family) are given full play – the rich stay rich (Bumi AND non-Bumi), and the poor stay poor.

As Paul Krugman wrote a few days ago, “Inherited privilege is crowding out equality of opportunity…”

Here’s a real policy dilemma that doesn’t admit of any easy answers.

So, what we got last week to address all these are measures to increase Bumi financial resources via a new Amanah Saham Bumiputra 2; money for entrepreneur development; preferment and KPIs in government and GLC procurement and contracts; and a political commissar Bumi development unit in each Ministry.

I’ll be honest – apart from the establishment of ASB2 (which would help promote financial asset accumulation, especially among the poor), I don’t see much long term benefit in any of these. They mostly address the symptoms, without addressing the causes.

Even with respect to ASB2, there is the issue of inequality between Bumis. Even with the current cap of RM200k, returns on the current ASB scheme disproportionately benefit higher income Bumis, and not the greater mass who don’t have the ability to accumulate savings. Adding a new fund exclusive to Bumis doesn’t change the dynamics of this particular problem.

Anyway, here’s my take on the whole Bumi Agenda issue in two parts, the first on education and labour, and the second on entrepreneur development. This might be a bit incoherent, because I’m trying to bring together a whole bunch of disparate threads of research into something that resembles a policy framework, which isn’t exactly my forte. But bear with me.

Equalising opportunities

As a general rule (and not just from the Malaysian experience), high income individuals tend to come from higher income and stable (two-parent) families with better educated mothers, who provide adequate and appropriate educational stimulation for children. This is particularly important in the critical development period before formal education begins, when most kids pick up non-cognitive skills such as language and social interaction.

In the research literature, it’s quite clear that lower incomes also carries with it a welfare cost to both the individuals in those households, and the children born into them. For our purpose, the biggest manifestation of this is the inability to invest qualitatively and quantitatively in their children’s futures, and in caring for their health and development.

The implication of such findings are clear – without intervention of some kind, even meritocratic societies will tend towards unequal outcomes that have nothing to do with natural ability or aptitude, which in turn are perpetuated across generations. That’s how we get aristocracies in monarchies and elites in democracies.

Obviously some individuals rise to the top from the very bottom, but these are the exceptions that prove the rule.

Higher income households share certain traits that we should thus try to propagate to all households to actually achieve true equality of opportunity – less children but higher investment in each child; as well as a focus on cognitive and non-cognitive skill development at an earlier age. Both higher individual lifetime income and the probability of gaining tertiary education is predicated on these factors i.e. if you focus on tertiary education alone (e.g. admission quotas), it’s waaay too late. I’d even venture to say that would be true at secondary level as well.

The obvious (needs-based) approach is to support low income families in the areas where they are weakest. Probably easier said than done, but there are ways and means.

For example, the BR1M program can be extended but also made conditional – we give RM1,000 for every child that stays in school and finishes their homework for example. We give another RM500 for periodic annual health checkups for each member of a household. We give another RM1,000 for parents beginning their families to undertake parental training courses, with an emphasis on early child development and nutrition. No more TV as babysitters, please. Family planning advice and paraphernalia (yes, condoms), never mind the moral dimension, should also be encouraged for low income families.

I’m not exactly proposing anything new here – most of these measures have been tried elsewhere, with some success.

Turning to labour market discrimination, the obvious answer is an Equal Opportunities Board or Commission, with broad legal powers to investigate and prosecute. This would be helpful not only to address Bumi employment, but also women or the disabled, in fact any marginalised group. This is one area that should be color-blind and gender blind, and physical disability blind. The public sector should be subject to this too.

Last but not least, we should start having some public consensus on the use of tax policy to address inequality. I and a few others have raised the desirability of capital gains taxation to equalise the tax treatment of income – since we don’t have such a tax, those who have the wherewithal to shuffle assets or speculate in financial markets get a free ride, while legitimate investors are taxed on their dividends.

More, we should also think about bringing back the estate tax, which was abolished in Malaysia in 1993. Estate/inheritance taxes played a key role in the decline of the landed aristocracy in the UK beginning from the early 20th century. The purpose here is the same – limit the transmittance of inherited wealth across generations and equalise opportunities for succeeding generations.

Entrepreneur Development

Previous research on the traits of entrepreneurs found little difference between them and their salary-earning brethren. Under those circumstances, a blanket approach to helping entrepreneurs is thus warranted. It might be a crap shoot, but its a fair crap shoot.

But if this paper is right, successful entrepreneurs share the same traits as those earning high incomes in salaried employment too, with the addition of a propensity to break the rules.

In other words, the educational approach described above is the right and only way. We should be striving to create individuals who are likely to be productive high earners, irrespective of whether they work for themselves or someone else. While this is what the new education blueprint is all about, what I’m looking at is all the other factors that come into play outside the formal education system.

If in fact successful entrepreneurs are a combination of nature (natural ability and aptitude) and nurture (family background and upbringing), by the time the government gets around to lending them a hand as entrepreneurs, the dice have already been loaded.

Beyond that, we have a lag problem. The kind of educational efforts I’m envisaging would take a generation to come to fruition. They say in politics a week is a very long time. An effort that takes years to see any real results obviously won’t get a look in.

Having said that, I won’t argue against any assistance given towards entrepreneurial development. What I’ve described in the paragraphs above are general tendencies, not hard and fast rules. But any such assistance should be tempered with the realisation that progress will be slower unless we get the foundation right.

Paradoxically, and believe me it sticks in my throat to say this, taking all the above suggests that nepotism and crony capitalism are actually viable development strategies. If on average scions from higher income families are more likely to succeed, it is more economically efficient to concentrate efforts on assisting them rather than entrepreneurs coming from the broader population.

Thankfully our goal is to reduce inequality rather than perpetuate it, even if it means accepting less than perfect results in the meantime.

One last thing is ensuring a level playing field at the business level. A couple of weeks ago saw MAS and Air Asia being fined RM10 million by the Malaysian Competition Commission. We need the MyCC to expand its horizons to price discrimination at all levels, not just the corporate sector.

Bumi entrepreneurs and suppliers are seen as uncompetitive, but this is not surprising given negative discrimination in supply networks. Giving preferment in procurement to Bumi suppliers without really addressing this issue, simply means paying higher costs without making them necessarily more competitive. For a more in depth look at this issue, try satD’s very relevant and well researched post here.