This article was downloaded by: [University of York]On: 20 August 2014, At: 14:52Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,UK

Journal of the Asia PacificEconomyPublication details, including instructions for authorsand subscription information:http://www.tandfonline.com/loi/rjap20

ECONOMIC GROWTH ANDINCOME INEQUALITY INMALAYSIA, 1971–95Ishak ShariPublished online: 10 Jan 2008.

To cite this article: Ishak Shari (2000) ECONOMIC GROWTH AND INCOME INEQUALITYIN MALAYSIA, 1971–95, Journal of the Asia Pacific Economy, 5:1-2, 112-124, DOI:10.1080/13547860008540786

To link to this article: http://dx.doi.org/10.1080/13547860008540786

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all theinformation (the “Content”) contained in the publications on our platform.However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness,or suitability for any purpose of the Content. Any opinions and viewsexpressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of theContent should not be relied upon and should be independently verified withprimary sources of information. Taylor and Francis shall not be liable for anylosses, actions, claims, proceedings, demands, costs, expenses, damages,and other liabilities whatsoever or howsoever caused arising directly orindirectly in connection with, in relation to or arising out of the use of theContent.

This article may be used for research, teaching, and private study purposes.Any substantial or systematic reproduction, redistribution, reselling, loan,sub-licensing, systematic supply, or distribution in any form to anyone is

expressly forbidden. Terms & Conditions of access and use can be found athttp://www.tandfonline.com/page/terms-and-conditions

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ECONOMIC G R O W T H AND I N C O M E

INEQUALITY I N MALAYSIA, 1971-95

Ishak Shari

Abstract This article investigates trends in income inequality in Malaysia for the period 1970-95 based on published aggregated household income data, and places these trends within the broader economic policy framework of the period. An important issue addressed here is the extent to which the observed trends in income inequality can be linked directly to the different policies implemented by the government. This study shows that general development policies implemented under the New Economic Policy have had a major impact on reducing income inequality in Malaysia from the late 19'70s. However, since 1990 there is a trend towards rising income inequality, both overall and with inter-ethnic as well as urban-rural income disparities. It is suggested that the government policy reversal towards liberalization, deregu- lation and privatization since the late 1980s has contributed to this trend of increasing inequality.

Keywords Economic growth, income inequality, Malaysia.

INTRODUCTION

Equity is a powerful concept that lies at the heart of the human develop- ment paradigm. In Malaysia, equity issues - particularly poverty and income inequality - have attracted considerable attention, especially after the race riots of 1969 and the implementation of the New Economic Policy (NEP) in 1971. As in many other East and Southeast Asian coun- tries, economic growth in Malaysia has been rather impressive since 1957. With this rapid economic growth, one obvious question continues to be raised: How are the gains from this remarkable growth distributed across the population? In other words, what has been the impact of this rapid economic growth on the problems of poverty and income disparities in Malaysia?

This study has a limited objective. It examines the trends and patterns of income inequality in Malaysia during the period 1971-95. A focus of this study is the reversal in the trend towards reduction of income inequality, a trend that data indicate has been under way since 1991. The first part of

Journal of the Asia PaczJic Economy 5(1/2) 2000: 112-124 O 2000 Taylor & Francis Ltd ISSN 13547860 print/ISSN 1469-9648 online

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H AND INCOME INEQUALITY

the study briefly reviews economic growth performance and patterns of structural change during the 1971-95 period. It then details the changing pattern of income inequality during this period. The final section of the paper briefly discusses the changes in income inequality during the period 1991-5, i.e. after Malaysia had undergone the substantial liberalization of the mid-1980s.

ECONOMIC GROWTH AND STRUCTURAL CHANGE

Assessed by standard measures, Malaysia's economic performance during the 1971-95 period has been impressive. Over the period 1971-90, the Malaysian economy grew at an average rate of 6.7 per cent per annum. During the 1991-5 period, this rate was 8.7 per cent per annum.

The high growth rate of the Malaysian economy during the 1971-95 period has been accompanied by generally low rates of inflation. In 1978 prices, real GDP increased threefold from MR21.5 billion to MR120.3 billion during this period (see Table 1). As the population grew at an average rate of 2.5 per cent per annum, the per capita income of Malaysia (in 1978 prices) increased slightly more than threefold, i.e. from MR1,937 in 1970 to MR5,815 in 1995 (Malaysia 1996). However, the average growth figure conceals considerable fluctuations from year to year. For example, during the 1980s the annual growth rate of the economy fluctuated from 7.6 per cent in 1984 to -1.0 in 1985 and 1.2 per cent in 1986, returning to growth of 8.9 per cent in 1988 and 9.2 per cent in 1990.

The rapid overall economic growth in Malaysia during the 1971-95 period was accompanied by considerable transformation of the structure of the Malaysian economy. With higher growth rates in the manufacturing sector, the share of the primary sector declined from 37.2 per cent in 1970 to 20.1 per cent in 1995, while the secondary sector's share rose from 17.3 per cent in 1970 to 36.5 per cent in 1995.

The growth and structural transformation of the Malaysian economy during the NEP period had interesting implications for the growth of employment opportunities and the distribution of the labour force by sector. With total employment in Malaysia growing at an average rate of 2.7 per cent per annum during the 1971-80 period, the unemployment rate registered a decrease from 7.8 per cent in 1970 to 5.7 per cent in 1980. However, due to slow expansion of the economy during the first half of the 1980s, the unemployment rate increased to 7.6 per cent in 1985 and to 8.3 per cent in 1986. With recovery of the economy since 1987, the unemployment rate was reduced significantly to 6.0 per cent in 1990 and 2.8 per cent in 1995. In fact, before the recent crisis, the labour market had become tight, leading to some subsectors of the economy experiencing labour shortage and relying increasingly on immigrant workers.

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK SHARI

Table 1 Malaysia: GDP and employment by sectors, 1970-95a

Share to GDP (%) Agriculture and forestry Miningb Manufacturing Construction Services Imputed duties less bank

service charges

Total GDP (MR million) in 1978 prices

Proportion to total employment (%) Agriculture and forestry Miningb Manufacturing Construction Non-government servicesc Government services Total employment ('000)

Average growth rate (%) Agriculture and forestry 4.8 3.9 2.7 4.6 2.0 Mining 0.4 8.9 5.9 5.2 2.9 Manufacturing 11.6 13.5 5.2 13.7 13.3 Construction 6.6 12.6 5.8 0.4 13.3 Non-government services 8.5 8.4 5.4 6.9 10.4 Government services 10.1 9.0 8.8 4.0 6.7

GDP 7.1 8.6 5.1 6.7 8.7

Sources: Malaysia (1991a, 1991b, 1996). Notes: a Adjusted to 1978 prices. b Includes petroleum and gas. c Includes electricity, gas and water; transport, storage and communications; wholesale and

retail trade, hotels and restaurants; finance, insurance, real estate and business services and other services.

TRENDS AND CHANGES IN THE PATTERNS OF INCOME DISTRIBUTION, 1971-90

In this section we examine changes in the pattern of distribution of gross household income for the specified peri0d.l Given the nature of available data, we must confine this discussion to changes in income inequalities in Peninsular Malaysia only. We will examine in detail the changes at three levels: overall income inequality, urban-rural strata income inequality and ethnic income inequality. Only two measurements of income inequality will be used: the income share of various household income groups, and the

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H AND I N C O M E I N E Q U A L I T Y

Gini coefficient. These two measurements indicate changes in gross house- hold income only.

The period under investigation has been divided into five subperiods. The 1971-6 subperiod can be considered as the beginning of the implementation of the NEP and the effects of this policy, particularly on poverty eradication, were still limited. During the 1977-80 subperiod, the economy grew rapidly and primary commodity prices rose to a high level. The third subperiod (1981-4) witnessed a slight slowdown in economic growth due to the economic recession faced by major industrial economies in the wake of the second oil crisis in 1979. During this subperiod, as a result of the government's counter-cyclical policies to lessen the impact of the economic recession, there was a phenomenal rise in government expendi- ture, with the ratio of government expenditure to the GDP reaching its highest level to that time. During 1985-7, the economy experienced the worst recession since independence in 1963. The final subperiod (1988-90) saw the economy again experiencing rapid growth.

Overall income inequality

The pattern of income distribution during the period is shown in Table 2. Income inequality in 1970 was found to be relatively high and the Gini co- efficient ratio for the whole of Peninsular Malaysia was 0.5129. Although the overall mean household income increased substantially during the 1971-6 subperiod, the average rate of increase in income for households in different income groups varied. Table 3 shows that the mean income at constant 1980 prices for households in the top 20 per cent grew at an average rate of 5.2 per cent per annum as compared with a 1.4 per cent increase enjoyed by the bottom 40 per cent. As a result, income inequali- ties in Peninsular Malaysia worsened during the 1971-6 period. Rapid econ- omic growth during 1971-6 was thus accompanied by an increasingly inequitable distribution of income. However, the trend in income inequal- ities in Peninsular Malaysia began to change during the 1977-9 period, with the Gini coefficient declining to 0.508 in 1979 (see Table 2). Income dis- parities narrowed further during the 1980-4 subperiod, with the Gini co- efficient declining to 0.480 in 1984 and the income share of the bottom 40 per cent of households increasing to 13.6 per cent.

Despite the difference in economic performance for the subperiods 1985-7 and 1988-90, the available official data on income distribution show a narrowing of the income gap among households throughout Peninsular Malaysia. The Gini coefficient for the whole of the peninsula declined to 0.458 in 1'987 and 0.445 in 1990. The income share for the bottom 40 per cent, in turn, increased to 13.8 per cent in 1987 and 14.1 per cent in 1990, while the income share of the top 20 per cent declined further to 51.6 per cent in 1987 and 51.0 per cent in 1990.

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK SHARI

Table 2 Distribution of household income by strata and ethnicity, Peninsular Malaysia, 1970, 1976, 1979, 1985, 1987 and 1990

Percentage of households Income share (%)

Overall Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

By strata Rural Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

Urban Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

By major ethnic groups Bumiputera Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

Chinese Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

Indian Top 20% Middle 40% Bottom 40% Gini ratio Mean household income (MR) Median household income (MR)

Sources: h a n d (1983) ; Ishak and Ragayah (1995) ; Malaysia (1991a) ; Shireen (1997).

116

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H AND INCOME INEQUALITY

Table 3 Mean gross household monthly income of various income groups, Peninsular Malaysia, 1970, 1976, 1979, 1985, 1987 and 1990 (at 1980 constant prices)

Percentage of Mean gross monthly household income (MR) households

Overall Top 20% Middle 40% Bottom 40% All households

Urban Top 20% Middle 40% Bottom 40% All households

Rural Top 20% Middle 40% Bottom 40% All households

Sources: h a n d (1983); Ishak and Ragayah (1995); Malaysia (1991a); Shireen (1997).

Urban-rural inequality

Table 2 shows that a huge income gap existed between urban and rural households in 1970, with the ratio of rural mean household income to urban mean household income only about 0.50. However, at that time the degree of inequality in income distribution in Peninsular Malaysia was higher in urban than in rural areas.

During the 1971-89 period, although the income gap between rural and urban households fluctuated, economic development in Peninsular Malaysia reduced overall the income disparity between urban and rural households, especially after 1976. When we consider separately the direc- tion of change in the income inequalities among urban and rural house- holds, available data suggest that the pattern here is almost similar to that for Peninsular Malaysia as a whole. Income inequalities among both the urban and rural households in Peninsular Malaysia began to decline after 1976 (see Table 2). Thus, during the 1977-90 period, the income shares of the bottom 40 per cent and middle 40 per cent of households increased, while the share for the top 20 per cent declined. Furthermore, households in the bottom 40 per cent in rural areas increased their income share faster than their urban counterparts. Consistent with these trends observed here, during the same period, the mean income for households in both the bottom 40 per cent and the middle 40 per cent in urban and rural areas

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK SHARI

increased at a higher rate than that experienced by households in the top 20 per cent (see Table 3).

Ethnic inequality

As we see from Table 2, there was a wide gap in income between the major ethnic groups in Malaysia in 1970. The mean household income for the Bumiputera households constituted only 44 per cent of the mean income for Chinese households, and 57 per cent of the mean income for Indian households. The median income for the three ethnic groups for that year shows that 50 per cent of the Bumiputera households in Peninsular Malaysia received a monthly income of less than MR122, compared with a monthly income of MR269 for Chinese households and MR195 for Indian households.

Although the income gap between urban and rural households reduced during the 1977-90 period, the income gap between Bumiputera house- holds and households of other major ethnic groups does not exhibit a con- sistent reduction pattern. Using the disparity ratio between the mean incomes of the Bumiputera households and the Chinese households as an indicator, we find that the income gap narrowed during 1971-6, but increased slightly during 1977-9, before narrowing again during the 1980-7 period. It widened again, however, during 1988-9.

On the whole, the income gap between Bumiputera households and Indian households is smaller than the gap between Bumiputera and Chinese households over the same period. In the beginning, it could be said that the income gap between Bumiputera and Indian households showed no change. However, this gap began to narrow during 1977-87, before widening again in 1990.

Table 2 also indicates that in 1970 income distribution among Indian households, in relative terms, was most inequitable; income inequalities among Bumiputera and Chinese households were almost the same as each other. The Gini coefficient for Indian households in 1970 was 0.4'72, com- pared with 0.466 for Bumiputera and Chinese households. However, the situation was reversed in 1990, with income inequalities highest among Bumiputera households, followed by Chinese and Indian households.

The trend in income inequalities for each of the major ethnic groups taken separately for 1971-6 was similar to the overall trend for Peninsular Malaysia. Based on the Gini coefficient estimates, income inequalities among the Bumiputera, Chinese and Indian households increased, with the increase highest for the Chinese households, followed by Malay house- holds. It is instructive to note that the decline in the share of income for the bottom 40 per cent of Chinese and Malay households was accompanied by an increase in the share of income for the top 20 per cent. Among Indian households, however, this decline at the bottom was accompanied by an

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H A N D I N C O M E I N E Q U A L I T Y

increase in the share for the middle 40 per cent, while the share for the top 20 per cent also fell.

Table 2 provides further indication that the trend in income inequalities among all three major ethnic groups taken separately during the 1977-90 period paralleled the overall pattern of change for the whole of Peninsular Malaysia at that time. The Gini coefficient for Bumiputera households fell from 0.506 in 1976 to 0.428 in 1990, while for Chinese households it dropped from 0.541 in 1976 to 0.400 in 1990. For Indian households, the Gini coefficient fell from 0.509 in 1976 to 0.394 in 1990.

We can therefore conclude that during the NEP period of 1971-90, the government made considerable progress in bringing about economic growth with equity in Malaysia. Certainly, income inequity declined after 1976. Most importantly, the rapid growth of the Malaysian economy, along- side the government's anti-poverty programmes and deliberate affirmative action to improve the position of the Bumiputeras and other disadvantaged groups, substantially reduced the incidence of absolute poverty, i.e. from 52.4 per cent in 1970 to 17.1 per cent in 1990. The total number of poor households fell from 784,900 in 19'76 to 619,400 in 1990. However, as men- tioned above, by 1990 income inequalities were highest among the poorest of the three main ethnic groups, the Bumiputeras. Let us consider this development in greater depth.

Malaysia's rapid economic growth since the early 1970s and concomitant reduction of both absolute poverty and income inequality appears to con- tradict the pessimistic conclusion of Adelman and Robinson (1978) about countries such as Malaysia. As they see it, '. . . at low levels of development any kind of structural change such as industrialisation or expanded com- mercialisation tends to increase the poverty among the poorest members of the population'.

Elsewhere, Ishak and Ragayah (1995) have argued that rapid industrial growth, especially export-led industrialization, as well as the intervention- ist nature of the Malaysian State, have contributed to this success in poverty reduction. In particular, the employment restructuring strategy employed by the Malaysian State played an important role in transferring many Bumi- puteras from traditional sectors to more modern sectors. The proportion of Bumiputeras in the secondary sector increased steadily during the 1971-90 period to almost equal the proportion of non-Bumiputeras. In the tertiary sector, Bumiputeras actually outstripped non-Bumiputeras in 1990. This outcome was partly due to the government's move on massive absorp- tion of Bumiputeras into the public sector, and giving them priority when awarding bus and taxi permits (Onozawa 1991). Because it applied to rural as well as urban Bumiputeras, the move helped to alleviate rural unem- ployment (including disguised unemployment) and also contributed to poverty eradication and reduction of income disparity. Certainly, rapid industrial expansion helped to absorb surplus labour in the agricultural

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK SHARI

sector. Nevertheless, we need to acknowledge the important contribution of the employment restructuring strategy. Its significant contribution to increasing Bumiputera employment in secondary and tertiary sectors had favourable consequences for reducing both absolute poverty and income inequality.

TRENDS IN THE DISTRIBUTION OF INCOME, 1991-5

As we have considered above, since the mid-1980s, the Malaysian govern- ment has implemented a range of policy measures to induce economic liberalization and deregulation. These moves have served to progressively narrow the role of the public sector to traditional responsibilities such as defence, education and health. Furthermore, provision of subsidies has been curtailed and streamlined, with a tighter focus on the hard-core poor. The National Agricultural Policy, introduced in 1984, also encouraged further commercialization of agriculture (Jusedason and Hing Ai Yun 1997).

These policies were at first justified as a response to severe economic problems (including the fiscal and external debt problems) faced in the early 1980s. Nevertheless, economic recovery since 198'7 has encouraged the Mahathir administration to further consolidate these policies. Hence, with the official announcement of the Second Outline Perspective Plan (OPP2) for 1991-2000 and Vision 2020, these economic directions were reiterated and reconfirmed. Hence, the New Development Plan seeks to maximize economic growth through policies that allow for the free play of the market mechanism and the active participation of the private sector.

What have been the implications of these liberalization measures on problems of income disparity in Malaysia? The remarkable progress achieved in reducing the incidence of absolute poverty in Malaysia during the 19'71-90 period continued during the period of the Sixth Malaysia Plan (1991-5), with the overall incidence of poverty declining to 9.6 per cent in 1995 and the number of poor households reduced to 417,200. However, we must also note that the remarkable reduction in absolute poverty in Malaysia during the 1991-5 period was no longer accompanied by reduc- tion of income inequalities. While mean household incomes were increas- ing in both rural and urban areas, as well as among the major ethnic groups in Peninsular Malaysia, the differential rates of income growth among income groups and between strata resulted in an increase in income dis- parities during the 1991-5 period. Hence, the Gini coefficient for the whole of Malaysia increased marginally from 0.445 in 1990 to 0.456 in 1993 and 0.464 in 1995, an increase of 4.3 per cent across the period. As we see in Table 4, the differential income growth between urban and rural house- holds in Peninsular Malaysia also resulted in an increase in the urban-rural disparity ratio, i.e. from 1:1.'70 in 1990 to 1:2.00 in 1995. This experience

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H AND I N C O M E INEQUALITY

Table 4 Disparity ratios and Gini coefficients, Malaysia, 1970, 1980, 1990, 1993 and 1995

Disparity ratios Urban:Rural 2.14 1.77 1.70 1.75 2.00 Chinese:Bumiputera 2.29 1 .90 1.74 1.78 1.81 1ndian:Bumiputera 1.77 1.29 1.29 1.29 1.35

Gini coefficient 0.501 0.493 0.446 0.459 0.464

Source: As in Tables 2 and 3, and Malaysia (1996) Note: a Refers to Peninsular Malaysia only.

appears to suggest that poverty alleviation can continue with economic growth, but income inequalities tend to worsen without effective redistrib- utive interventions.

The consequences for economic growth, poverty and income inequality in Malaysia from liberalizing and deregulating the economy are both com- plicated and contingent. Available information does not allow a careful assessment of the welfare consequences of various liberalization measures on different socio-economic groups, including those in poverty. Neverthe- less, several explanations can be put forward tentatively at this stage to explain the unfavourable trend in income distribution in Malaysia during the 1990-5 period.

First, the continuing influx of migrant workers, both legal and illegal, from neighbouring countries may have denied some in the local labour force the full fruits of Malaysia's rapid economic growth since the late 1980s. A government estimate put the number of migrant workers in Malaysia at about 1.5 million by the early 1990s (Malaysia 1996). The con- stant inflow of immigrant labour has continued to add to the pool of unskilled labour so that rapid industrialization has failed to generate rising wages for unskilled workers. A glut instead of a shortfall of unskilled workers has lowered the relative wages of unskilled labour, while raising the returns to skills and conventional capital, thus hindering the trends towards reducing Malaysia's income inequalities.

Second, unlike in Korea and Taiwan, there is limited expansion of flex- ible social corporatism at the level of firms in Malaysia. In high-technology export-oriented firms (semiconductors in particular), developments in this area have been significant, stimulating cooperative behaviour in skills enrichment and remuneration growth (see Rajah 1995, 1996; Rajah and Osman-Rani 1996). However, most other subsectors have not experienced similar levels of growth in skill requirements, although governmental emphasis (through the human resource development fund in Malaysia) and external competition has pressured higher skills requirements. Growing demand for skilled labour in Malaysia has pushed up substantially

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK S H A R I

the wages of skilled workers. But in so doing it has also sharpened wage dif- ferentials between skilled and unskilled categories of workers, a problem that has been exacerbated by further labour inflows from Indonesia and Bangladesh.

Third, decline in the agricultural sector has made it lag behind other sectors in productivity increase, despite attempts to revitalize the nation's agriculture. Ever greater differences in the rates of growth in output, productivity and technological use between agricultural and other major sectors of the economy persist, despite some improvements in the linkages between the agricultural and manufacturing sectors. This naturally poses new and difficult challenges. In this respect, one major issue faced by the agricultural sector in Malaysia is the sluggish rate of growth in productivity and hence incomes in the unorganized smallholding subsector, which has attained a dominant position in the agricultural sector. Problems of labour shortages, ageing farm labour and the declining competitiveness of small- holder production units have helped to render idle large areas of cultivated land.

Historical studies of advanced market economies suggest that evidence of the Kuznets curve is likely to be most striking for those countries with an unbalanced history of technological advances, where agriculture has lagged behind other industrial development. The Kuznets curve is most likely to be absent in countries such as Japan that have been most successful in avoid- ing unbalanced advances in productivity across different sectors of the economy.

The above tentative analysis of possible explanations for the increase in income inequality in Malaysia during the first half of the 1990s, makes it clear that both labour market conditions and the educational system play a significant role in influencing the pattern of income distribution. Con- sistent with this analysis, Robbins (1996) has argued that shifts in demand for labour in several developing countries - in response to increased com- petition from new entrants to global markets (especially China and India which have huge reservoirs of cheap unskilled labour) - have increased income inequality in these countries. He argues further that the unequal- izing changes in demand for labour are often associated with trade liberal- ization and in particular the skill-intensive requirements of contemporary trade. Tan and Batra (1997) have also presented strong evidence that technological change in developing countries favours skilled workers, thus worsening income disparities.

CONCLUDING REMARKS

This paper has examined ways in which the rapid economic growth in Malaysia during the period 1971-95 has contributed to attaining equity in human development. The discussion indicates that rapid growth of the

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

E C O N O M I C G R O W T H AND I N C O M E I N E Q U A L I T Y

economy laid the necessary foundation that enabled poverty alleviation and reduction of income inequality during this period. Export-oriented industrialization, driven primarily by foreign capital, generated demand for labour, thereby reducing unemployment and raising household incomes. Concomitantly, a blend of human-capital policies coordinated by both government and the private sector, as well as various other government redistributive measures, especially in the rural areas, were instrumental in producing economic growth with more equal redistribution of income.

The long-term consequences of liberalization measures undertaken in Malaysia since the mid-1980s remain to be seen. The short-term results on the whole appear to be mixed. The liberalization measures appear not to have victimized and alienated all strata of society. Some sections of the peas- antry and urban low-income workers have become marginalized from the growth process (and some might even suffer from impoverishment). The upper classes and the 'silent' majority of the middle class (i.e. professional, managerial and technical workers and owners of small and medium-sized firms), which expanded rapidly during the NEP period, appear to be the present beneficiaries of economic liberalization. Thus, while rapid econ- omic growth during the 1991-5 period has enabled Malaysia to reduce the incidence of absolute poverty, it has coincided with, and contributed to, growing income disparities.

From the 1991-5 period, the benefits of rapid growth have spread more unevenly across different strata of ethnic groups and across different geo- graphic regions in Malaysia. Government deregulation of ownership, waning interest in the earlier redistributive mechanisms and emphasis on scale-intensive industries have helped to reverse the earlier gains made in reducing income inequalities. Existing trends suggest that if present con- ditions and liberalization policy continue, income inequality in Malaysia will continue to worsen.

Universiti Kebangsaan Malaysia

NOTE

1 The primary sources of the income data used are derived from the Household Income Surveys (HIS), which have been conducted periodically since 19'74 with the latest in 1995. During the period, the HIS was carried out in 19'76,1980, 1984, 198'7, 1989 and 1992. The data for 1970 was derived from the Post Enumeration Survey, 1970 (PES 1970), which was launched after the 19'70 Population Census to check the undercoverage and content of the population. The survey design, data collection and processing activities for the HIS and other surveys mentioned were carried out by the Department of Statistics (DOS), Malaysia. These surveys are comprehensive and identical, and there is a broad consensus that the available data provide a good basis for assessing income inequality and poverty in Malaysia. In fact, according to Bhalla and Kharas (1992), 'the overwhelming result from

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014

ISHAK SHARI

cross-checks of the data is that these surveys have been extremely well conducted and it is likely that they are amongst the most reliable of the surveys conducted in the developing world'.

REFERENCES

Adelman, I. and Robinson, S. (19'78) Income Distribution in Developing Countm'es, Oxford: Oxford University Press.

Anand, S. (1983) Inequality and Poverty in Malaysia: Measurement and Decomposition, New York: Oxford University Press.

Bhalla, S. and Kharas, K. (1992) 'Growth and equity in Malaysia: policies and conse- quences', in The Hoe Yoke and Goh Kim Leng (eds) Malaysia's Economic Vision: Issues and Challenges, Kuala Lumpur: Pelanduk Publications.

Ishak, S. and Ragayah, M. Z. (1995) 'Economic growth and equity in Malaysia: performance and prospect', Paper presented at the Fifth Tun Abdul Razak Conference, 13-21 April, Athens, OH, USA.

Jusedason, James V. and Hing Ai Yun (199'7) 'The state and ethnicity in Malaysia', in H. M. Dahlan, Hamzah Jusoh, Hing Ai Yun and Ong Jin Hui (eds) ASEAN in the Global System, Bangi: Penerbit Universiti Kebangsaan Malaysia.

Malaysia (1991a) The Second Outline Perspective Plan 1970-1990, Kuala Lumpur: Government Printers.

Malaysia (1 99 1 b) The Sixth Malaysia Plan, 1991 -1 995, Kuala Lumpur: Government Printers.

Malaysia (1996) The Seventh Malaysia Plan 1996-2000, Kuala Lumpur, Government Printers.

Onozawa, J. (1991) 'Restructuring of employment patterns under the New Economic Policy', The Developing Economies XXIX (4).

Rajah, R. (1995) Foreign Capital and Industm'alisation in Malaysia, London and New York: Macmillan and St Martin's Press.

Rajah, R. (1996) 'Changing organization of work in Malaysia's electronics industry', Asia PaciJic Viewpoint 3'7 (1) : 21-37'.

Rajah, R. and Osman-Rani, H. (1996) 'Enterprise training and productivity in Malaysian manufacturing', Paper presented at the World Bank Conference on Enterprise Training and Productivity, 12-1 3 June, Washington, DC.

Robbins, D. (1996) 'HOS hits facts: facts win - evidence on trade and wages in the developing world', Harvard Institute for International Development, Harvard University, Cambridge, MA.

Shireen Hashim (199'7) Income Inequality and Poverty in Malaysia, Lanham, MD: Rowman & Littlefield.

Tan, Hong and Batra, G. (199'7) 'Technology and firm size-wage differentials in Colombia, Mexico, and Taiwan (China) ', World Bank Economic Review 11 (1).

World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press.

World Bank (1995) World Development Report 1995: Workers in an Integrating World, New York: Oxford University Press.

Dow

nloa

ded

by [

Uni

vers

ity o

f Y

ork]

at 1

4:52

20

Aug

ust 2

014