Social Mobility Across The Centuries

This has been one of the most widely read recent columns on VoxEU – over 65,000 hits in barely two weeks (excerpt):

What’s your (sur)name? Intergenerational mobility over six centuries
Guglielmo Barone, Sauro Mocetti

Societies characterised by a high transmission of socioeconomic status across generations are not only more likely to be perceived as ‘unfair’, they may also be less efficient as they waste the skills of those coming from disadvantaged backgrounds. Existing evidence suggests that the related earnings advantages disappear after several generations. This column challenges this view by comparing tax records for family dynasties (identified by surname) in Florence, Italy in 1427 and 2011. The top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago. This persistence is identified despite the huge political, demographic, and economic upheavals that occurred between the two dates.

I'm not as confident as the authors that one can generalise these results to other countries and cities, but they do emphasise the point that the social/wealth structure of societies left to themselves tend to ossify. Literature on more recent times (discussed in the article) suggest intergenerational advantages tend to dissipate after a number of generations, but this is in an environment of government intervention and redistribution (such as mass education). Nevertheless, the fact that income generation and wealth remains concentrated in the same families after close to 700 years is staggering.

Technical Notes

Link to original paper:

Barone, G and Mocetti, S (2016) “Intergenerational mobility in the very long run: Florence 1427-2011”, Bank of Italy working papers, 1060

TPPA and Jomo: The Academic Debate

Recently, KS Jomo has been in the headlines on his criticisms about the TPPA (e.g. here), or more specifically, the models that showed that the TPPA would be a net benefit to Malaysia (however marginal).

Some of his concerns I consider absolutely legitimate – assuming full employment and ignoring the impact on labour utilisation, labour income and inequality undermines the net-benefit conclusion of the CGE models most have used to analyse the TPPA. I also think that his call for the ongoing debate on the TPPA to encompass more than trade and include the socio-economic aspects should be supported.

Having said that, the GPAM model used by Prof Jomo and his colleagues has significant weaknesses too. Not least because the claim that Malaysia would see job losses, a reduction in the labour share of income, and a negative impact on GDP growth don’t stand up to much scrutiny.

I haven’t as yet tracked down the details of the GPAM model, but the paper analysing the TPPA (link here) treats Malaysia as part of a bloc that includes Singapore, Vietnam and Brunei as a single entity. How you can make any definite conclusions on a single country based on aggregated regional data is beyond me, especially since the raw data in the paper shows the labour income share dropping (pg 16; for the bloc as a whole), whereas Malaysia over the past decade and a half has seen the labour share of income stable and then rising.

I’m also really surprised that Jomo neglects the huge, huge impact that the TPPA will have on Malaysia’s labour laws, particularly in terms of freedom of association. For decades, trade unions have been highly restricted in how they can operate and to what degree (MTUC for example is registered as an NGO, and cannot operate as a trade union). That will change with the TPPA, and the resulting increase in labour bargaining power should, ceteris paribus, act to increase the labour share of income. That’s an institutional change that few if any models, trade or otherwise, incorporate in their framework.

For a more thorough critique of the GPAM model, try here. Prof Jamal notes the same problem as I did, and then some.

On a larger note, and this isn’t confined to the current topic, I wish more people would bother to read the damn academic papers before taking their conclusions at face value. It saves embarrassment in the long run.

Budget 2016: Some Thoughts

The best laid plans of mice and men…

I was going to put up an analysis of Budget 2016 the day after the budget, but as luck would have it, I managed to come down with pneumonia and have spent most of the last two weeks trying to recover. So here’s a very belated, quick overview of what I think of the budget.

Or you can take this is as the confused, feverish ramblings of a diseased brain.

Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth
Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Translation: It's nurture, not nature. If that's the case, meritocracy (in an aggregate sense) without some government intervention would be a sub-optimal growth and development strategy, even in a relatively equal society.

Technical Notes

Black, Sandra E., and Paul J. Devereux, Petter Lundborg, & Kaveh Majlesi, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth", NBER Working Paper No. 21409, July 2015

Income Inequality In Perspective

A new IMF staff discussion note takes on global inequality (excerpt):

Causes and Consequences of Income Inequality: A Global Perspective

Widening income inequality is the defining challenge of our time…Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.

First, we show why policymakers need to focus on the poor and the middle class…Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth….

Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class…Our analysis suggests that

• Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs….
• Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
• There is no one-size-fits-all approach to tackling inequality…More generally, complementarities between growth and income equality objectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.

Pretty self-explanatory I think, though the details are interesting, especially the role of financial market development in skewing the income distribution in developing economies. Something for weekend reading.

Coming Soon To Malaysia: It’s A Woman’s World

The Economist has an essay on one of the biggest social and demographic changes in history (excerpt):

Badly educated men in rich countries have not adapted well to trade, technology or feminism

…Tallulah may be an extreme example, but it is part of a story playing out across America and much of the rest of the rich world. In almost all societies a lot of men enjoy unwarranted advantages simply because of their sex. Much has been done over the past 50 years to put this injustice right; quite a bit still remains to be done.

The dead hand of male domination is a problem for women, for society as a whole—and for men like those of Tallulah. Their ideas of the world and their place in it are shaped by old assumptions about the special role and status due to men in the workplace and in the family, but they live in circumstances where those assumptions no longer apply. And they lack the resources of training, of imagination and of opportunity to adapt to the new demands. As a result, they miss out on a lot, both in economic terms and in personal ones.

Gender Pay Inequality

This is for the US, but the pay gaps are similar though smaller in Malaysia (excerpt):

Gender Wage Gap in Eight Charts

Most women will never earn as much as men in their lifetimes.

In Wyoming, it will take 144 years for equal pay, according to a recent report from the Institute for Women’s Policy Research that looked at trends in women’s employment and earnings. Other states with particularly high disparities included Louisiana, North Dakota and Utah. The state with the shortest wage gap, Florida, was still 23 years. And Washington, D.C. marks the best place for women’s employment and earnings, the report found, perhaps because it is small and urban. Still, the pay imbalance won’t close until 2055.

Tuesday marks national Equal Pay Day, an event from the National Committee on Pay Equity, a nonprofit advocacy group. The date represents how long into 2015 it would take a woman to earn what a man did in 2014.

Health and Inequality

From Bloomberg (excerpt):

More Proof That the Richer You Are, the Healthier You'll Be
At every step along the income ladder, higher income means lower prevalence of disease

No matter how much you earn, people who earn more than you are likelier to be healthier and live longer. That's the takeaway from a new report by researchers at the Urban Institute and Virginia Commonwealth University examining the complex links between health, wealth, and income.

It shouldn't surprise anyone that poverty is often associated with poor health. Less obvious: Health and income improve together all the way up the economic pyramid. The wealthiest have fewer illnesses than the upper-middle class, who are in better shape than the lower-middle class, and so on.

The Urban report analyzed a dozen health problems for which the Centers for Disease Control (CDC) has recorded prevalence by family income. In every case, the rich are better off. With just a few exceptions, there's a steady improvement in health as you climb the income scale...

Just sayin'

More On The Role Of Parenting In Inequality

From The Economist magazine (excerpt):

Minding the nurture gap
Social mobility depends on what happens in the first years of life

Our Kids: The American Dream in Crisis. By Robert Putnam. Simon & Schuster; 386 pages; $28 and £18.99.

THE most important divide in America today is class, not race, and the place where it matters most is in the home. Conservatives have been banging on about family breakdown for decades. Now one of the nation’s most prominent liberal scholars has joined the chorus.

Robert Putnam is a former dean of Harvard’s Kennedy School of Government and the author of “Bowling Alone” (2000), an influential work that lamented the decline of social capital in America. In his new book, “Our Kids”, he describes the growing gulf between how the rich and the poor raise their children….

Comparing Malaysia With Singapore

I probably shouldn’t bother, but from TMI (excerpt):

When the success of one nation casts shadows on the failures of another

...That Malaysia, with her bounty of natural and human resources, has failed miserably to keep up with Singapore is a sad reflection of the policies we’ve undertaken in the last 50 years. Where one has chosen unwavering pragmatism and a merit-based administrative policy to push its nation forward, the other is still proclaiming the supposed inherent superiority of one race over others.

Singapore is able now to move beyond focusing entirely on economic policy, to addressing problems such as social mobility and a rapidly ageing society to further better the quality of life of its citizens. Malaysia seems to be obsessed with proposing-debating-and-proposing-again the implementation of hudud, instead of fighting the deeply-rooted disease of corruption and inefficiency which leads to the billions of ringgit that slip out of our country’s coffers every year.

I hate repeating myself, but:

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly....

...But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing....

…In Malaysia’s case, it’s probably more pertinent – and accurate – to wonder not why we aren’t rich when we have abundant natural resources, but rather how Malaysia has managed to grow so far and so fast despite the handicap of having abundant natural resources.

In addition, three links on my series on corruption and growth (here, here and here), or if you want the whole series, you can start from here. From Part III of the series (excerpt):

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

The difference in growth between Singapore and Malaysia really boils down to volatile commodity prices before Malaysia’s economy was fully diversified beginning in the 1990s. There are a few other things, which I won’t get into right now.

Natural resources are not a blessing. Anybody who watched oil prices plunge last year can certainly attest to that. Long term, any country relying on natural resources is not on a path to prosperity.

The statement that Malaysia is “…staggering behind most of her Asian peers,” is sheer hyperbole. Since 1965, the only countries to have overtaken Malaysia in real GDP per capita in East Asia is Korea and Taiwan – despite the fact that both had had institutionalised corruption during their highest growth phases. This also ignores that we have been making steady gains on both, as well as against developed country standards, in the last decade.

Lastly, on the (de)merits of pure meritocracy, try here, here and here.

Wages and The CE/GDP Ratio

I’ve come across the same dilemma myself, but a box article in BNM’s 2014 Annual Report outlines the latest data (excerpt; emphasis added):

Trends in Malaysia’s Gross Domestic Product by Income

…In terms of share, capital income forms the largest component of GDPI (Chart 3). However, with the growth of labour income outpacing the growth of capital income, the share of labour income to GDP has risen steadily from 29.5% in 2005 to 33.6% in 2013. By definition, however, the labour income component in GDPI excludes income earned by self-employed individuals…With such adjustments, the share of labour income for Malaysia is higher, on average, by 8.0 ppt. throughout the period (Chart 4)….

Economic Efficiency and GST

We’re less than two weeks away from GST going live, so it might be appropriate to look at the economic arguments in favour of it.

On the WCI blog, Frances Woolley reviews the textbook arguments (excerpt):

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US, Canada, and New Zealand.

The equity argument for taxing groceries is straightforward. Suppose everyone spends $500 a month on groceries. If groceries were taxed at 10 percent, everyone would pay about $50 in tax (or slightly less, if people cut back on their food expenditures when the tax is introduced). If part of the revenue raised by taxing groceries was used to give every low income individual a $60 tax credit, the tax on groceries would actually increase the well-being of the worst off members of society. Any additional revenues raised could be used either to decrease other taxes, leading to greater economic efficiency, or to provide needed social or infrastructure programs, further enhancing efficiency and/or equity.

Dato’ Charon on the State of Malaysian Households

Khazanah Research Institute is a new policy think tank that just started up last year. Here's their MD on their first publication, "The State of Households" in Malaysia:

Your browser does not support native audio, but you can download this MP3 to listen on your device.

You can download the report here, and the Executive Summary here.

There's really no big surprises in the report (at least for me), but the KRIS report does a great job of showcasing the data in a very impactful way, for example showing the differences in access to public goods between rich states and poor states. I absolutely love two of the charts they came up with - household expenditure by income strata and category (pg 18) and GDP per capita comparing both states and cities internationally (pg 8). KL for instance, has a GDP per capita equivalent to Korea's and within striking distance of Seoul, but is nearly 2.5x the Malaysian average and almost 7x that of Kelantan. The Klang Valley is almost literally a different country from the rest of Malaysia.

OECD: Income Inequality Harms Growth

Just a quick note – unfortunately, quick notes appear to be all I have time for these days. The OECD has released a new report on the influence of income inequality on economic growth (excerpt):

Inequality hurts economic growth, finds OECD research

09/12/2014 - Reducing income inequality would boost economic growth, according to new OECD analysis. This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.

The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth....

Malaysia Human Development Report 2013 [UPDATED]

I attended the launch yesterday, which included commentary by the authors, led by YBhg Tan Sri Kamal Salih, and a very lengthy panel discussion.

You can download the full copy here.

This has been a looong time coming as publication was held up for a year. though I’m not a liberty for revealing why. In any case, if you want the very short version, this video explains everything in 2 minutes and 34 seconds:

UPDATE:

Due to bandwidth limitations (too many people have tried to download the report), the MHDR site has been overwhelmed. You can try this alternative link instead to download the report. Warning: it’s a massive 66MB file, so the download could take a while.

The Colour Of Inequality: Available Now

I reviewed the book a week ago. It’s now in stock in MPH, and can be ordered online.

You can check out the blog here and the Facebook page here.

Dr Muhammed is also on Twitter @inequality_MYS

The Colour Of Inequality

[Full disclosure: Dr Muhammed is a good friend of mine, so the following commentary should be taken as unbalanced and totally biased. You have been warned]

There’s a new book coming out this weekend on income and wealth inequality in Malaysia, at MPH:

Inequality Starts At Birth

This isn’t a nature or nurture argument; this is a nature AND nurture argument (excerpt):

Inequality Begins at Birth

Over the past year, the lack of universal pre-kindergarten for American four-year-olds has become a national issue….Even as these efforts are being made, however, new research is making it increasingly clear that educational disparities start much earlier.

The value of universal access to early education has long been recognized: it improves the life chances of disadvantaged children and is crucial to keeping a level playing field for all….

Even Billionaires Are Complaining About Inequality

Li Ka Shing is losing sleep (excerpt):

Sleepless in Hong Kong

...I am 85 years old going on 86. I feel blessed to have seen more in life than I could remember, and happy to remember more than I have seen; so why am I sleepless in Hong Kong?

I fear that widening inequality in wealth and opportunities, if left unaddressed could fast become ‘the new normal’. Inequality is perhaps inevitable as some are simply better able than others to capture the opportunities that globalisation and the knowledge economy affords.

I fear that intensifying resource scarcity will pose challenges of immense proportions to our future.

We need to act now to turn challenges into opportunities. Technology is no panacea, but we need technological and innovative interventions to increase our options.

Right Conclusion; Wrong Analysis

A commentator sent me this link (excerpt):

How our Winner Take-All Market Deepen Income Inequality while Decaying Our Education System?

Are we better off than we were 10 years ago? I am sure the majority of us will answer with a resounding ‘NO’. Why is this so? There are many reasons that contributed to this, among them are the following.

• Increased in income inequality
• Rising costs of living
• Income not catching up with inflation
• Longer working hours and less recreation
• More indebted than before
• Less opportunity for self-improvement due to time constraint
• Society is getting more competitive
• Crime on the rise

Wonder what caused the above? Listed above are the consequences or the price of economic development that are caused by forces that shaped our social economic fabric. We are living in a world where resources such as land, labor and natural resources are in limited supply or scarce. To maximize the usage we not only have to limit wastages but also need to efficiently allocate these scarce resources to the most important part of the economy.