Social-Economic Consequences of Malaysia's High Income Inequality
The Income Inequality have always been a thorny issue for the past few thousand years. During the Middle Ages in Europe, they have the bourgeois (higher class includes the Church) and the proletariat (ordinary folks). In ancient China they too have different class with the merchants and the artisans, court officials, laborers and etc. Needless to say the bourgeois and the merchants controlled most of the wealth.
Even during the ancient Babylonian days they also do have this problems. In George Clason’s ‘The Richest Man in Babylon’, it describe how those who know how to accumulate Gold succeeds while the rest are mere laborers. To find the answer to the puzzle on why ordinary citizens don’t know how to accumulate Gold, King Sargon summoned Arkad, who is the richest man at that time and accumulated the most Gold. Arkad disclosed to the King on how he managed to accumulate so much gold through ‘Seven cures for a Lean Purse’. The following are the Seven cures for a lean purse.
1) Start thy purse to fattening
2) Control thy expenditures
3) Make thy Gold Multiply
4) Guard thy Treasures from loss
5) Make of thy dwelling a profitable investment
6) Insure a future Income
7) Increase thy ability to earn
The above are the classic guide on how to be Financially Independent. It has been proven to this day after more than a few thousand years in existence.
The question is how can we measure Income Inequality? Fortunately it can be measured with a statistical approach known as the Gini Coefficient.The Gini Coefficient was developed by a statistician named Corrado Gini, and it is a measure of the income distribution of the population in a country. It range between 0 and 1 with 0 being in perfect equal and 1 being highly unequal. It helped define the gap between the rich and poor nations. The income distribution of a nation can also be represented graphically with the Lorenz curve below.
The upward sloping 45 degrees sloping line represents the equal distribution of wealth. An example will be the intersection point of the 20% of the income distributed and the 20% of the population. On the y-axis (vertical) you have the income distribution as expressed in decimals and on the x-axis you have the wealth of the nation. The area that is shaded in red represents the ‘area of inequality’ in income distribution. So the flatter the Lorenz curve the bigger will be the ‘area of inequality’ and hence income distribution.
An example of unequal distribution is where the 11% of income intersects with the 40% of the population on the Lorenz curve. This shows that 11% of the income is distributed to 40% of the population.
How Malaysia compared to the rest?
Anyway as of 2009 Malaysia is ranked 102 out of 136 countries surveyed by the CIA for the most unequal income distribution. The following is the income distribution of different ethnic in Malaysia and also its Gini coefficient from 1995 till 2009.
|GINI Coefficient Of Malaysia|
Source : Economic Planning Unit 2009
The performance of Malaysia’s Gini Coefficient from 1995 – 2009
Source : Department of Statistics Malaysia
According to World Bank, Malaysia was one of the few East Asian countries that reverse its income inequalities over the past decades but unfortunately reverses its direction since the 1990s. In other words policies drafted by policy makers since then are not effective.
This may be due to the bias policies that are drafted to the benefit of the ‘Bumiputra’ community while neglecting others and also the emergence of a new ‘ruling class’ that are make up of political cronies. This new group are given special treatments and are encouraged by the ‘powers to be’ to gobble up much of the nations strategic and big businesses in order to make up what they called the ’30 percent Bumiputra quota’.
Needless to say the end result is the re-emergence of the old Colonial type of ‘Rent Seeking’, businesses where being the monopoly or duopoly is the order of the day. As we know being in a position to monopolize any sector of the economy will only resulted in being contented. No incentive for being innovative and competitive made this conglomerates being redundant and badly managed and in the end left to decay.
Good examples include MAS, PERWAJA STEEL, PROTON and Bank Bumiputra just to name a few.
What are the Consequences?
Effects on economic Growth
- High inequality in income will have negative effects on economic growth. One study done by economist Andrew Berg and Jonathan Ostry of the IMF recently found that the countries with higher inequality of income tends to have a shorter spell of economic growth than those that with more equality.
- Due to income inequality the wealth of the nation will be concentrated to a few individuals which constitute the top 1% of the population. As a result more people are forced to borrow more and more to meet ends need. With the top 1% controlling most of the country’s wealth it is no surprise to see the mean income remained low or unchanged for the past decades. As a result since most of the population are in the lower end of the income spectrum it will be difficult to see any increase in spending to uplift the economic activity that is needed to drive economic growth.
- There will be class warfare
- Effects on Health
With Malaysia’s high Debt to GDP of about 53.5% in 2011, it will be a difficult task for it to reduce its debt because the growth of debt will always be faster than economic growth. Why is this so? This is because Debt servicing in the form of interest rate grows exponentially through what we called ‘compound interest’ while economic growth only grows organically due to the boom and bust cycles. Economic growth can be likened to the shape of the Sine Wave or S curve below.
The following graph depicts the difference between the growth of Money or Debt versus the growth of the real economy.
As can be seen from the above, once the growth between compound interest and the real economy (GDP) starts to diverge then the gap between them will start to widen. This implies that once our Government’s debt reaches a certain level to GDP then its ability to pay back its debt will very difficult if not impossible. From empirical evidence in the last few years from the ongoing financial crisis in Europe, whenever a country’s Debt/GDP reaches above the 70% threshold then there is a very high probability that its economy will go into a tailspin in the next few years. This is because once the Debt/GDP ratio increases it will decreases the country’s ability to service its debt because more money will be needed to repay its interest and hence less will be directed towards the real economy that will help generate more income.
Moreover when a country’s Debt/GDP ratio increases, its Sovereign ratings risk being further downgrade by Ratings Agencies. Whenever a country’s Sovereign ratings being downgraded then its ability to raise funds in the international market will be dampen because its cost of funds has increased. Bond holders will need to be compensated for holding the higher risked Sovereign Bonds now and hence the yield (interest rate) will be higher.
With Malaysia’s Debt/GDP being 53.5% and without any real effort to address this problem, it will soon shoot up to the 70% threshold. If left unchecked then in a few years time Malaysia will be heading towards the path taken by Ireland, Greece, Portugal, Spain and the soon to join the club Italy.
Again another key area that the government needs to do is to gain the Trust of its people. Since most of the government revenues are raised from taxes and if it wants to collect more then it will need to give them the assurance that the money will be spend wisely and on projects that will further improve their life in the future. A corrupted government like Malaysia will find it tougher to achieve such a goal because it first needs to overhaul its political system to make it more transparent in order to win the trust of its people. Further increases in taxes will be countered with more revolts as people felt more burdened by increase in their cost of living.