Wednesday, September 18, 2013

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.


  1. Agreed. How can the poor invest in ASB2. I like this statement"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."

    Can the Human Resources Minister handle this? Also prevent foreign labour entering our labour market but also doing business.

    1. @anon

      Yes they can. The question though is, will they be willing to?

      As for foreign labour, I'm in two minds whether barring immigration is a good idea or not.

  2. Isn't the Bumi agenda part of the national agenda? The non-Bumis are also part of the national agenda, no?

    If needs-based policy is constricting the kind out middle or upper SES level outcomes desired for Bumiputras, shouldn't the solution be found in anti-discrimination solutions?

    Since Bumis are being discriminated in the private sector (or non-Bumis in the public sector), wouldn't an anti-discrimination or equal opportunities commission benefit both parties?

    If wealth redistribution is the aim here for bringing back estate tax, wouldn't it be just far easier to work on the income tax brackets and tax the rich more? No need to wait for generations to fill up our coffers. In fact, just putting the damn GST in place would be a step in the right direction.

    Our Constitution got it right over the first time, focus on securing education and business opportunities for the Malays and Bumiputera so that they don't get crowded out. The way it works now is to de-incentivize competition and let the children play among themselves, until they feel ready to play with others. I say dump them into the pool and they will have to learn to swim or sink, and the Government can be the lifeguard.

    That said, our Government has some reliability, credibility and trustworthy issues.

    1. @anon 7.19

      1. Yep, an anti-discrimination policy would benefit all, not just Bumis.

      2. On taxation, been there, done that, bought the t-shirt. Higher income taxes would limit income inequality, but not wealth inequality. I'll have more to say about that soon.

      3. The disincentives concern me too, but education and business opportunities are insufficient. See the follow-up post to this one.

    2. @anon 7.19

      BTW, you'll note that the policy measures I'm advocating in this blog post are largely race-neutral.

  3. Poor people make up the majority of the country’s poor and hardcore poor, NOT BUMIPUTERAS

    There are rich Bumiputeras and poor Bumiputeras, lets not assume them ALL to be poor! sigh.. Why is everyone ignoring this simple logic???

    1. @anon 7.58

      How did you get from what I wrote to presuming that it meant that all Bumiputeras are poor?

  4. You lost me here:

    "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."

    Given what you have said previously:

    "high income individuals tend to come from higher income and stable (two-parent) families with better educated mothers"

    In which case it is not so much that they are inherently more likely to succeed but merely that they have been given every opportunity to succeed so why would we be concentrating efforts in assisting them?

    1. Hmmmm, so we let the lower income (poor) to rot then, become thieves, join gangs, etc....

      And we start to stay in gated community???

      Zuo De

    2. @anon 8.37

      The logic is that since they have been given every opportunity to succeed (since birth), they are most likely to do so. But as I said in the following paragraph, that isn't and shouldn't be our goal.

      That's why things like quotas and quantitative "targets" can be misleading. We could be mistaking the means (increasing the number of successful Bumi entrepreneurs) with the ends (reducing inequality in society). An example would be the state sponsored cronyism of the Mahathir era.

    3. Zuo De,

      You might be interested in this.

    4. Yes i have the book "The Spirit Level" and also "The Selfish Society". I have similar conclusion as you. BUT, a big BUT, it is always the implementation that fails. I can buy bringing up all the poors rather than just concentrating on just bumi in general and Malay in particular. The devil is in the details... HOW TO SPREAD WEALTH EVENLY, that i believe you are also trying to achieve like a lot of us want to see.

      Zuo De

  5. The only thing that I can agree with you is on the education part although I sounded too details for the policy makers to address I.e BRIM based on completion of homework. Nevertheless, the question on education is still on the basis of "education for what"? The future of our labour forces must really depends on the type of knowledge and skills. Malays with adequate level of science and mathematics knowledge will definitely become part of a very strong and skilful labour forces that can change and address the inequality issues. So, without effective strategy to increase that level of knowledge will undoubtedly brings us to much bigger gap than what we have now. Lastly, I can sum up the whole situation that we face now just like we are living in a family whereby the parents must always initiates any household work such as sweeping away dry leafs. The father must take the penyapu first then only the children interested to participate. Without his initiative the children won't do anything. That kind of culture need to be changed for the whole society.

    1. Izuddin,

      Education is certainly one part of the strategy, but I'm focusing here not on what the government has done or is doing, but have missed out on.

      You might want to read through the follow up post to this one.

      A lot of the factors that predict successful academic achievement are ingrained in children before formal education even begins. Reforming education is one thing, but the children of the poor are disadvantaged even before they get to that stage.

    2. But you're right, it's indeed a culture change that is needed.

  6. Hi Hishamh,

    I agree that having lesser inequality is a good thing. However, it should be colour-blind and targeted. The distribution channel must also be transparent. As tax payer, I would like to know that we are really helping the poor, instead of some corrupt individuals.

    Furthermore, I'm all-in for a consumption based tax (GST) and an inheritance tax.

    However, I'm against raising income tax or an introduction of capital gains tax in the financial markets. I personally felt it penalises the hardworking. It doesn't help to attract investments and intellectuals into the country. While reducing inequality (the share of economic pie by the population), we must also focus on growing the economic pie. Your thoughts?


    1. @Kenny

      Apologies, I missed your comment until today. Please refer to this blog post. It explains quite a bit. This paper on the other hand, shows the impact of non-intervention in capital income.

    2. HI Hishamh,

      Read the blog posts. I still think that having a high personal income tax / capital gains tax will reduce incentives for people to work hard / stay in the country.

      How will a high income tax / capital gains tax translate to economic growth? With a high income tax (eg: 83% as suggested), we will be leaving the distribution of wealth, consumption and economic generation on the hands of the state. In the end, we will be moving towards the direction of a socialist country, or worst, communism. It will also encourage cronyism.

      In the current global environment, where the workforce are highly mobile, many will leave the country in search of a higher take home-pay.

      What remains, will be a state controlled economy with supply, sales and distribution networks and prices of goods and services fixed by the state. Productivity of the population will suffer, as people see no incentives to move up the income ladder, the state will distribute the wealth to them anyway. Again, I'm seeing socialism / communism here.

      In my opinion, across generation, it should be fair, where if possible, everyone start off with equal footing. While within a single generation, we should let the free markets and merits of the individuals shine, allow creativity and innovation to grow, encourage science and technological advancements. Let the success of the creative, the hardworking, be an inspiration for others.

      In this globalised world, we should be focusing our efforts on growing the economic pie, while reducing any inequality not due to the merits of the individuals (inter-generation wealth transfers).

    3. Kenny,

      This isn't the road to serfdom :)

      1. I don't think imposing capital gains tax or raising income tax rates turns an economy into a socialist one. I don't think you can call either Japan or Korea socialist economies, despite the fact that they both impose capital gains tax, and have comprehensive tax and transfer systems. In the US, short term capital gains are charged at the income tax rate (up to 39.6%), long term at 23.8%. In Malaysia, the capital gains tax rate is zero for financial assets, and a maximum of 15% on property.

      2. High is relative. The point about optimal taxation theory is to find the marginal tax rate that maximises tax revenue. But put another way, this is also the point where taxable income is highest (i.e. the pie is largest).

      3. You should read the paper I linked to, not just the post. From the paper (pg 26):

      "The regressions consistently display negative coe fficients across the full period, suggesting that low top tax rates are detrimental to growth. The estimates however are not fully robust to the choice of time period, as seen in columns (2) to (6). Therefore, we can conservatively conclude that low top tax rates do not have any detectable positive impact on GDP per capita."

      4. I think you need to expand your perspective a bit. Does a higher marginal tax rate reduce the incentive to work? Yes. But two things here - we're talking about the top marginal rate, which would only effect the top end of the income distribution where I suspect the marginal utility of extra income gets smaller. Second, you need to factor in that higher inequality has negative growth effects as well. The optimal point of taxation would be where the positive and negative effects of higher taxation cancel out, which would be different for each country.

      5. On the issue of CGT, I don't see where the disincentive effect really comes in. CGT applies to profits from asset sales, which in practical terms means financial transactions and IPOs. There's not much argument against the former, particularly since dividends are taxed while trading profits are not. For the latter, we're talking about a small minority of entrepreneurs who will ever get that far.

      6. Re your last couple of points - I think that's more or less what I proposed in the blog post :)

  7. Hisham

    There are many political and social issues that are not as clear cut as your article suggests. e.g. socialism vs capitalism and you have conveniently side stepped the issue of institutional racism and the power of incentives.

    The more money we provide the poor to have a so called "level playing field" the less the incentives there are for the middle-class to rise up the learning curve and invest in the potential talents of their children. That is simply because they know some gov policy will protect them when the competition for jobs heats up.

    But the problem is that the competition for jobs is now global just as the competition for capital. A small country like Malaysia, unlike Indonesia, cannot afford to disincentivise its labour market (not only the minorities are affected but the majority bumis are adversely affected by the subsidy mentality).

    So if the productivity of labour market is constrained by but bad 'socialist-race-based' policies, what other resources do we have? Commodities? Land? Asset reflation tactics of the central bank?

    The socialist/statist Obama's policies to narrow the gap between the rich and poor is ineffective and flawed in many ways. As in Malaysia, the rich-poor gap is worsened by rising wealth of the stock-owning class. How much does the 5% rich in Malaysia actually derive from market cap of their shares? How much of those owners are holding shares on behalf of or as obligations to bumi politicians/tycoons ? Has the wealth gap within the bumi group widened more than other races in the past ten years?

    Malaysia's economic and social policies have few precedents or parallels in the world past or present. And if we choose to consider our society as exceptions to the rule, that will be a major intellectual mistake. At the end of the day, the economics of incentives will determine the productive capacity of a nation and the moral well-being of a nation.

    The hard core poor should be helped, but not at the expense of the moral and economic fibre of the whole nation.

    1. @Jeremiah,

      1. Only so much can be done within the context of a blog post (in fact, this one's longer than usual).

      2. I'm unsure of the mechanism in your claim that money to support the poor reduces incentives for the middle income group to invest in their children. I would have thought the opposite would be true - the greater implied competition between children would increase the incentive for higher income families to invest to ensure that their children get ahead.

      3. With respect to the wealth gap, Gini coefficients for Bumis and Chinese households have fallen in the past decade, but have risen for Indian households (link). Just to cross check, I tabulated the ratio of mean top incomes against mean low incomes for all three, which confirms the trend in the Ginis.

      4. For impact of incentives, you might want to read this.

  8. As I said, the Malaysian social experiment has no precedents.

    It is a miracle that we could have grown despite the social and productivity handicaps of the nation.

    But with world commodity demand slowing and capital going back to the developed world, we will start to reap what we have sown. Maybe no disaster but a slowdown to global irrelevance just as our markets are no longer quoted in many financial news.

    No amount of academic studies or intellectual diversion can mask the reality of a biased and flawed economic policy.

    And the biggest lie that has captivated policy makers here is zero sum economics: one person's economic gain is another person's loss= one race group's gain will be at the expense of another race group. Thanks to a maverick former PM using race as a vehicle for power.

    1. @Jeremiah,

      I don't think we live in the age miracles.If we have grown "despite" social and productivity handicaps, I want to know the whys and wherefores.

      "But with world commodity demand slowing and capital going back to the developed world, we will start to reap what we have sown."

      Commodity markets (for Malaysian exports) slowed down last year - it looks more like they've bottomed out this year. Also, the evidence suggests that portfolio capital flows do more harm than good for emerging markets. I'm perfectly sanguine over the likelihood of capital outflows.

      There is more empirical support for foreign direct investment, but given the hazy definitions involved (and the fact that most direct investment flows are between advanced economies, not to emerging economies), it's hard to say whether this is a positive or negative.