Monday, March 18, 2013

Growth And The Distribution Of Incomes

Pemandu CEO Idris Jala on inclusive growth (excerpt):

Transformation is not all about income only

TRANSFORMATION is not all about income. Yes, income is the key part and we put a lot of emphasis on and look at ways and means to increase that, but we are equally aware that income must reach everyone.

There must be inclusiveness in development that is, the drive towards achieving developed status by getting a per capita income of US$15,000 (RM46,795) a year by 2020 must include as many people as possible in that process.

Importantly, we must develop at a pace which we can sustain over time without putting too much strain on our available resources, not rush at breakneck speed with no thought of the morrow.

We must also give thought to the preservation of the environment and conservation in our development plans. These highlight the need to keep our development sustainable in addition to being inclusive.

This balanced approach to development, which combines high income with sustainability and inclusiveness, is what provides us with a sense of perspective about development, the ultimate purpose of which is improve the quality of life for everyone.

Many countries in their development programmes did not focus on the other aspects of development such as inclusiveness and sustainability. They paid the price for it with lop-sided development and an increasing gap between the rich and poor.

We have much to do in this respect as our Gini Coefficient (a measure of the gap between rich and poor where low means greater income equality) is very high and we are taking measures to deal with this…

I remember asking him a year or so back, how the ETP was going to address Malaysia’s income and wealth inequality problem. I admit I was somewhat disappointed with the answer as it was a variation of “trickle-down” economics, which I’m sceptical of, e.g. a rising tide lifts all boats. That hasn’t been an effective approach in the past.

At least here, we’re seeing the national conversation being directed in what I think should be the right mode – looking at the issue directly rather than solving it as a by-product of economic growth. There’s also a growing awareness of environmental issues,  both in this piece and in others, and I don’t mean Lynas alone.

Even PR’s manifesto appears to be finally taking the issue of inequality a bit more seriously, even if they don’t appear to have given it much thought beyond its surface manifestation of poverty and in labour-employer relations.

I’ve been doing a lot of reading in development economics this past month, and I’m hearing a lot of echoes here.

But returning to the issue of inequality, the whole problem is a lot deeper than it looks – and certainly should not defined solely by income gaps between the top and bottom, or between Bumis and Chinese and Indians. Economic and social mobility for instance, for which we don’t have good data (but, if I can jump the gun a little, will be forthcoming).

But before we can come up with substantive policies, we need inequality to come into the national consciousness without the baggage of legacy issues. It’s baby steps at the moment, but at least in the right direction.


  1. Dear Tuan Tanah,

    I have always wondered, as a layman, how does the government would try to achieve distribution of income that would really benefit all sectors. I mean, the petrol & diesel subsidy is immensely benefiting the upper part of the population pyramid.

    I say, somebody has at least put it in their agenda to answer the growing concern on economic inequality.

    As for the projection of Malaysian being a high-income nation in 2020, do you have any reading recommendation on the possible effect to Malaysia in this coming 8 years?
    Surely not all will be desirable?


    1. Hi zakzak,

      I wrote this almost 4 years ago now - looking back, I see no need to change my mind:

  2. Wealth inequality problem is not easy to handle by any Govt.

    If we were to look at the present scenario, Malaysian Govt has created so many opportunities for the rakyat to improve their standard of living.

    Unfortunately a lot of people are just happy going to their RM1.2k per month job instead of taking the risk of becoming entrepreneur and earn a lot more.

    After talking with so many people, I noticed that everybody wants to be rich BUT then refuse to take even the first step to become rich. They will come up with a long list of excuses why they can't take even the first step.

    So how? Govt can only do so much.

    I predict that the richer Malaysia become. The gap between rich and poor will widen. It is not the Govt's fault. I personally think that it is the fault of the rakyat themselves.

    1. M Kha Sha,

      I don't think greater entrepreneurship alone would matter much, though obviously from an overall economic perspective it would probably be better if we were.

      Hong Kong for instance is famously laissez faire, but inequality there is worse than in Malaysia. The US, which doesn't appear to have a problem starting businesses, has approximately the same level of inequality as we do.

      I think the answers lie elsewhere.

  3. I'm trying to reply to M Kha Sha but the javascript isn't working on my browser...

    Just wanted to say, don't blame the poor for being lazy. It's about as wrong as saying that a certain race is poor because their race is lazy or unintelligent. I believe there are no broken people, only broken systems.

    Some might say it's a tautological saying, but societies with high equality are that way because their culture values equality. The countries in the top third of the GINI index are "generally" the ones with socialist leanings, labour influences, larger union power. They certainly aren't there because the poor people in those countries are more likely to be entrepreneurs - they're there because they have laws that take care of the bottom rungs of society, and an egalitarian wage structure - where the gap in pay from general worker to manager to director is actually quite minor compared to what it is in countries with high inequality like Malaysia. How does a country find the will to change its entire culture? I am not sure.

  4. Aetherfox,

    Are you saying Malaysia should lean towards socialist? Can't say I will agree to that. Even though we should help bring up the poor BUT not by pulling down the rich and the risk takers.

    I believe in the "High Risks High Rewards" principle. In my case for instance, I came from a humble background with no political cable or any cable for that matter. I took risks, work hard and now I'm enjoying the fruits of my labour.

    For awhile now I've stopped working. Not because I'm rich but because I have more than enough to sustain my simple lifestyle.

    My neighbour on the other hand continues to work even past retirement age. He is getting richer and richer. Our income inequality widens.

    Is it his fault or was it mine? I'm happy where I am. Why should his wealth be curbed just because I refuse to increase mine?

    It will only be a problem if my neighbour in his quest for more wealth do everything he can to sabotage me from acquiring more wealth so that our wealth inequality will continue to widen.

    My point is, Govt has done enough.I'm not sure about other countries but opportunities are abound in Malaysia. Now the ball is at the "Have Nots" court.

    By the way, if we can't blame the poor for being lazy, should we then blame the rich for being hard-working and productive? I agree that intelligence are God-given but efforts are purely human.

    1. M Kha Sha,

      Sorry for seeming to pile on you, but inequality is more than just about individual effort.

      Research into wealth and income inequality point to two critical factors in the persistence of inequality over time. The first is inherited wealth; the second is socio-economic background (especially of mothers). You can neatly encapsulate the problem as the rich stay rich and the poor stay poor.

      At the individual level, you can improve your own situation by effort and education. But the likelihood of that happening increases as you go up the income scale i.e. rich kids are more likely to be better educated and go on to have higher incomes than a child of similar intelligence and ability who comes from a poorer family.

      There are of course exceptions, but we're looking here at the general trends not hard and fast rules.

      When aetherfox is talking abour socialism, I think he's not thinking in terms of Vietnam or China, but more along the lines of social democracies such as Finland or Sweden, which have successfully married capitalist market economies with socialist ideas.

      One goal here is to equalise opportunities, not equalise outcomes.

      A second goal is to reduce inequities in the social contract and address market failures.

      For example, gross productivity and wage per worker in the Malaysian manufacturing sector closely tracked each other from Independence to about 1997. Since 1997 productivity has increased 40% more than wages have. The share of manufacturing wages as a percentage of manufacturing sales has fallen from over 7% in 1997 to less than 5%. Something is not very right here.

      A third goal is to reduce the inter-generational transfer of wealth. Up to 1993, Malaysia had an estate tax of 40%.

      Unless we deal with wealth transfers, meritocracy eventually evolves into aristocracy.

  5. I'm sorry but I find these patronising comments insulting, as if your wealth was the sole result of your own efforts.

    There has been much discussion in this blog and elsewhere about inequality of opportunity, different starting points for different strata of society and the balance of power between labour and capital.

    I always get annoyed when people attribute their success wholly to their own skill and their failures as wholly to 'bad luck' or 'other people's fault'.

    There's always an element of each that determines the outcome