Inequality the cause of Malaysia’s socio-economic growth’s woes

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https://www.youtube.com/watch?v=HTiAYmjJc94 (

We can’t be in denial about our education system, says Anwar)

22 Jan 2024 #FMTNews #AnwarIbrahim #EducationSystem

22 Jan 2024 • #FMTNews #AnwarIbrahim #EducationSystem

Prime Minister Anwar Ibrahim says ‘our failure’ is the obsession with past successes. Read More: https://www.freemalaysiatoday.com/cat... Laporan Lanjut: https://www.freemalaysiatoday.com/cat...

Inequality the cause of Malaysia’s socio-economic growth’s woes

KUALA LUMPUR, Jan 24, 2024: The above image was posted on Facebook.

It reflects Malaysians’ shameful and extremely poor command of the English language.

The notice was put up in a MARA office lounge (not sure whether it is MARA College, if yes, then it is even worse. The notice says we are teachers). You can hardly read or understand what was written in the notice.

Why have Malaysians’ command of English deteriorated so much, since the British colonial era and Merdeka (Independence) 1957?

A failing education policy and system not based on meritocracy but race.

Over the decades the colonial English primary and secondary school have also been dismantled, converted to national-type schools.

And, even today, racial and religious bigots and political leaders are still trying get rid of Chinese and Tamil schools - an issue politicised for political mileage to serve their selfish agenda, not that of rakyat dan negara (people and country).

Those who disagree with what has been penned thus far, view the above video links that feature Malaysia’s 10^th Prime Minister (PMX) Anwar Ibrahim take on why the education system has failed.

Inequality in tertiary education opportunities over six decades has cost severe and critical losses in talent, quality and competent human capital due to growing brain drain.

But, there are also many other inequality factors that are causing Malaysia’s socio-economic growth’s stagnancy.

No News Is Bad News reproduces below an article by former Bank Negara Deputy Governor Sukudhew (Sukhdave) Singh titled “With or without merit - inequality in Malaysia”:

With or without merit - inequality in Malaysia

Sukudhew (Sukhdave) Singh

Former Deputy Governor, Central Bank of Malaysia | Former Independent Director, Khazanah Nasional Berhad

August 6, 2019

Text of speech delivered at the Economic and Leadership Forum (ELF) 2019, Sunway University, Kuala Lumpur, 3rd August 2019.

Views expressed here are my own and should not be attributed to any institution I am affiliated to now or in the past.

Inequality has many faces. We can talk about inequality of opportunities. We can talk about racial and gender inequality. We can even talk of about inequality due to sexual orientation. However, given the limited time that I have, I am going to focus my remarks on income inequality. This is not to say that the other types of inequalities are not important. In fact, it is the case that income inequality is often related to other types of inequality, such as gender inequality, racial discrimination and the inequality of educational opportunities. In my talk today, you will hear me often drawing on these relationships.

I will start by saying that inequality is not always unjust and equality is not always just. If the inequality is due to a lack of personal effort on the part of some despite opportunities being provided, while others put in great effort to achieve great things, how can the resulting inequality be unjust? Correspondingly, if equality is forced irrespective of personal effort, what incentive is there for society to better itself through greater effort? Such equality cannot be considered just.

However, it is the case that religious, cultural, political and economic filters determine what people see or do not see as inequality. As someone once said, “When you’re accustomed to privilege, equality feels like oppression.” And it these differences in perspective that often prove to be a stumbling block to addressing inequality.

Trends in Income Inequality

Nevertheless, let’s consider trends in income inequality. Taking the very long view of developments in inequality, the picture is a positive one, in the sense that incomes in most countries today are far above subsistence levels. In fact, inequality has declined in some places that are typically not associated with prosperity, such as parts of Latin America and Sub-Saharan Africa. More recently, the fast growth of large and populous economies such as China and India, has led to income convergence between developed and developing nations, resulting in declining global inequality since the late 1980s.

These trends have also been visible in Malaysia. Average monthly household income increased from RM166 in 1970 to RM5,228 in 2016. Over the same period, Malaysia’s Gini coefficient declined from 0.51 to 0.40. The mean income of the bottom 40% households as a share of the mean income of the top 20% households increased from 10.3% to 17.7% over this period.

However, these numbers hide the fact that progress has recently slowed down. Over the recent two decades, many countries, both developed and developing, have experienced a rise in within-country inequality. In fact, half the countries in the world recorded increases in national inequality, with their Gini coefficients rising by more than two percentage points, according to the IMF. Nobel laureate Michael Spence has observed that labour’s share of national income began to decline as far back as 40 years ago. In Malaysia, despite the positive trends, the level of inequality remains high, with its Gini coefficient being 30 percent above the average for the OECD countries.

It is also important to note that while the level of poverty has dropped significantly, there are still many that remain vulnerable. By that I mean that these households are no longer officially poor, but they have not yet reached a comfortable lifestyle and are still unable to afford goods and services beyond what is needed to meet their basic needs. They have little savings and have no access to credit in the formal financial system. A significant economic shock could potentially push them back into poverty.

Why Inequality Matters

So why should we care about inequality? Well, for one thing, like the Aesop parable of the old man and the bundle of sticks, societies that have a high degree of inequality are like a loose bundle of sticks, disunited and easily broken. They tend to be unstable and prone to episodes of violence. Often, to preserve the privileges of the wealthy and entitled, such societies become increasingly repressive. We do not need to look at other countries for examples of this. 

In Malaysia, recent years have seen the introduction of repressive laws aimed at preventing criticism of those in power and also entitled groups. The machinery of the state was used to repress those who were critical or questioned undeserved privileges and corrupt economic and political practices. Such laws also seek to obscure the fact that anyone who wants to weaken us economically and politically can easily divide us along racial, ethnic and religious fault lines created by decades of toxic politics. While championing a united Malaysian society, our ethnically defined political parties and politicians have in fact actively sought to create a divided society for their own benefit.

Vulnerability to income shocks is prevalent in highly unequal societies. Those in the lower income groups have very little or no financial cushion. A survey by the Merdeka Centre in November 2017 found that 29% of respondents did not have enough savings to meet a financial emergency of RM500, with 40% delaying or even being unable to pay their electricity or phone bills on time.

When a substantial part of the population is unable to meet their daily needs and is unable to sustainably achieve a decent standard of living, the resulting frustration and anger could manifest in political outcomes that may not necessarily be in the long-term interest of the country.

Inequality can also undermine economic growth. When the bulk of income and wealth is concentrated in a small group with a low propensity to consume goods produced in the local economy, while those with a high propensity to consume do not have the economic means to do so, what happens to aggregate demand? Obviously, it will grow more slowly than in a similarly endowed economy where there is less inequality. A poorly educated workforce undermines growth through low productivity. Societies where there is active discrimination in education, employment and economic opportunities will experience a drain of its brightest talent. Unjust societies do not foster loyalty among those who are affected by these injustices. Ultimately, these factors will come to play in affecting the growth potential of the economy, and hence, entrench low incomes and make inequality even harder to address.

Causes of Income Inequality

So what are some of the causes of income inequality? My own view is that the first underlying cause is the nature of the economy itself. For instance, if the economy is not diversified and highly dependent on commodities, then the source of income for a significant portion of the population would be unstable. In Malaysia, we have been fortunate that over time we have developed a fairly diversified economy. However, economic mismanagement and poor governance can undermine an economy that otherwise has favorable fundamentals, and lead to poor growth, low incomes and high levels of income inequality.

Weak governance in public institutions can have particularly adverse implications for the welfare of those who are stuck at the bottom of the income ladder. It can affect the quality of government assistance programs for these groups. Often times, these programs fail to achieve their objectives. Weak governance leads to a lack of accountability for outcomes and funds are often diverted for other purposes. When public institutions tasked with the health and safety of all citizens are compromised, those at the bottom of the ladder, given their limited economic and political influence, often incur the highest cost. 

All developing countries including Malaysia are facing rapid urbanization as the population becomes increasingly concentrated in urban areas. The cost of living is higher in cities, and for those working in menial and low-paying jobs, it is a major challenge to deal with the escalating cost of urban housing, transportation, education and health care.

Globalization has also had a role in widening inequality, although its overall impact on economies has been complex. There are clearly benefits to international trade in that it has helped many developing countries grow at a faster rate, creating jobs, and lifting many out of poverty. 

At the same time, globalization has also had negative impact. Financial globalization has led to large capital flows that have destabilized financial markets and economies. The benefits of globalization are also not evenly spread. The competition has been greatest in the tradable goods and manufacturing sectors, less so in the services sector. Developments in automation has further exaggerated the loss of good-paying jobs in manufacturing for the lower-income groups. Observers like Dani Rodrick have expressed concern about the premature deindustrialisation of developing countries.

In Malaysia, the massive influx of low-skilled foreign workers, has benefitted employers but the social cost has been passed to society. While such labour is necessary in some sectors, the widespread presence of foreign labour across the economy has particularly affected the lower income group by increasing competition for their jobs, which has reduced their capacity to earn higher wages. 

However, the bane of many developing countries in terms of inequality is rampant corruption. Rent seeking benefits the individuals but impoverishes the rest of society. It damages the economy by making economic activity very costly and having a disproportionate share of the benefits flowing to those in power. Government spending is skewed towards the pockets of these individuals, and not towards providing health, education, housing and security to its needy citizens. More than anything else, I blame this for the inequality we see today in the developing world, including in Malaysia. Many developing countries have ample resources to fund their own development – they do not need to borrow from global development institutions. The fundamental problem is that in country after country, those that are entrusted with looking after these resources for the benefit of society, have instead turned to plundering those resources for their own benefit. These corruption is the root cause of much of the inequality we see in the developing world today. That and wars, which are fought by the poor but often benefit the economic and political elite. 

Malaysia has the distinction of being a land of titles. There are obviously deserving individuals who have provided great service to the country and society. But no one can deny the proliferation of titles in our country, and if they were indeed based on merit, we should be one of the top performing economy in the world and our society should be the envy of the world. But we are not the top performing economy and our society is not the envy of the world. Instead, this proliferation of titles has created a caste-like system of social and economic hierarchy. Not only has this skewed the direction of economic benefits but it has also made us a subservient and superficial society. Instead of seeking fame through real accomplishments, many are fixated with getting a title, and hoping to achieve fame and fortune through that. The whole ecosystem of giving and receiving titles has, in my view, worked against creating a dynamic competitive economy and has added to the inequality of economic benefits and opportunities that exist in our society.

I am a strong believer in meritocracy. If we want to build a globally competitive economy, I do not see how we can do it without putting our best and brightest up front. I know of no successful economy where individual effort and merit are not valued. However, pure meritocracy can also worsen inequality.

Social science research is nearly unanimous in agreeing that there is a strong correlation between parental income and children outcomes. Children of rich and well-to-do parents will have far more opportunities available to them than the children of poorer parents. Here, I am not only talking about the children of billionaires, tycoons or rich politicians. Even the children of successful professionals have a head start in life. Not only do they have access to better education, better job opportunities, better professional networks, they will also most likely inherit the wealth of their parents. On the other hand, the children of the poor, having none of these opportunities, will find it very hard to get out of their parents shoes. Without intervention, this inequality can be perpetuated across generations. Therefore, meritocracy, while a necessity, must also be tampered with the provision of opportunities to the less fortunate. But how those opportunities are provided, and the incentives they create, are extremely important to their success in reducing inequality, and also to the overall efficiency and performance of the economy.

There are three other trends that could potentially lead to greater income inequality in the future.

First, the increased frequency of adverse weather conditions and rising seas caused by climate change are likely to have a very significant impact on the lives of the lower-income groups, who do not have the resources to protect themselves against losses from climate change. It is estimated that inundation of shorelines by rising sea levels will affect as much as 60% of Indonesia’s population. The climate calamity will affect developing countries more than the high-income countries and within developing countries, the low-income groups more than the higher-income groups.

Second, populations in many parts of the world are rapidly aging. Even in Malaysia; it is estimated that by 2035, the number of people over the age of 65 will reach 15% of the population. What is alarming is that the social, health and economic infrastructure to deal with this demographic shift is largely lacking. Pension and welfare systems in many countries, even in the high income countries, are severely underfunded. Therefore, the prospects of a large number of elderly destitute and poor is going to bring a new dimension to inequality. 

Third, technological development, particularly in the areas of automation and artificial intelligence, are changing the way we work, but increasingly, also what work we do. An Oxford study estimates that up to half of all jobs in Malaysia could be at risk of automation over the next two decades. The tendency is to think that only low and semi-skilled jobs will be affected, but the way these technologies are evolving, the impact could be much broader. CPA Australia recently warned about the disruption of the accounting and finance sector due to the increasing use of AI technologies. There are concerns that these technologies may eventually commoditise labour. This could perpetuate the inequality in the share of national income going to workers as opposed to the owners of capital. Already, among the reasons identified for the rise in populism in the developed world is the increased labour-market insecurity, initially from globalisation but increasingly from technology.

Reducing Inequality  

The foremost means to reduce inequality in my mind is to create an open, dynamic and competitive economy that can grow in a sustainable manner. Only then can we create the opportunities and wealth to raise the welfare of the less advantaged members of our society.

Such an economy would not just fall into our laps. We would have to work for it. Structural reforms are needed, in particular, reforms in the governance of the economy. As the Economist magazine notes: “The absence of democratic checks and balances encouraged politicians to identify the state’s interest with their own.” There needs to be proper transparency and accountability at all levels of economic activity, particularly those involving government entities. There are too many government-linked companies (GLCs) in our economy — many do not contribute much of value to the economy. We also have to rid our economy of excessive rent seeking which not only undermines the efficiency of the economy, but ultimately increases the cost of goods and services for consumers. Enforcement agencies and regulators need to have appropriate governance to ensure that they do not deviate from their mandates, or misuse the powers provided to them by law, or are misused by those with political influence. 

In making structural reforms, we must not fall into the same trap as the developed countries in trying to patch over structural problems with monetary policy. In particular, prudent management of public finances is critical. The fact that the Malaysian Government debt and liabilities have reached RM1 trillion puts Malaysia well above its peers and will have negative consequences. Government funds that could have been otherwise spent on improving the social security safety net would now have to be spent on servicing that debt. It is important that fiscal health be restored for the demands on public resources will only increase in the future, given trends like the ageing population and the potential dislocation in the job markets due to automation and AI. Although the capacity of the government to impose higher taxes has its limits given the mobility of labour and capital, dealing forcefully with corruption and tax evasion and avoidance, as well as having fiscal discipline in expenditures, could potentially generate enough resources to provide ample funding for social security safety nets.

Another area of fundamental reform that is very much needed if we are to reduce inequality in a sustained manner is in education. The type and quality of education I believe is still a key differentiator in terms of lifelong prospects at material well-being. It is not the only factor but it is a key factor. The trends I mentioned earlier will only make it more critical for workers to be well-trained, adaptable and fast learners.

Yet, it is here that that the perversity of the situation in Malaysia is most striking. Instead of providing quality education to the children of the targeted groups, the tendency has been to lower the education standards for these group to receive paper qualifications. But what about the other skills that go with a quality education? The ability to communicate, the ability to work in diverse environments, the ability to think critically and creatively, the ability to internalise new strands of knowledge? As a result, there are too many graduates in our system that have not faced the rigours of a good education system and therefore lack the skills and knowledge needed to compete in a job market that is going to be evolving rapidly.

The national education system is everyone’s favourite flogging horse but curiously, the political will for reforms seems to be seriously in deficit. Too much weight is given to the views of those who are looking after their own self-interest rather than those of the children who need a high quality education. Even as the insidious effects of a weak education become increasingly evident in our society, the cycle of the narrow-minded and weakly-educated teaching another generation of narrow-minded and weakly-educated gets repeated. And as the size of the weakly-educated vested interest group continues to grow, the political prospects for educational reforms will become ever more remote. And our society and the economy will pay the price. 

Let me be very clear. In a globally competitive work environment, the weaknesses of the education system will not only perpetuate income inequalities but will also undermine productivity in the economy and push the economy back rather than forward. Without deep and rapid educational reforms, the current demographic bonus that Malaysia enjoys will very soon turn into a demographic burden. The fact that a weak education system breeds mind-sets that are regressive, rather than progressive, is a real threat to economic progress. We can have all the wonderful blueprints of how we are going to be part of the next technology cycle and be a part of the new economy, but without the right workforce, those blueprints are nothing but pipe-dreams. We cannot afford such delusions because globalisation, demographic changes and advancements in technologies will make us poorer and even more unequal.

This leads me to my final point: augmenting affirmative action with meritocracy. To be clear, I am advocating affirmative action based on those in need from the entire population and not any particular group only. To be a truly united nation, we must treat equally all Malaysians who are disadvantaged. Opportunity in life should not be determined by the birth lottery, be that ethnic, religious or economic. It is important to create opportunities for all. So, “yes” to affirmative action, “yes” to the creation of opportunities, but based on need and not anything else. And such affirmative action must be balanced and tempered with meritocracy. Without meritocracy, affirmative action programs, like those that give paper qualifications but not the skills and knowledge to compete, are essentially a pathway to lifelong affirmative action. How long can a nation sustain that in a competitive global environment without making itself weaker?

Conclusion

Let me say it again: Inequality is not always unjust and equality is not always just. However, a high level of inequality is not justifiable, not only from a moral standpoint but also from an economic and political one. It is in the interest of society to reduce such inequality. However, how we choose to reduce that inequality is equally important. Policies to address inequality must create opportunities for all citizens who are in need of them. Such programs must have strong governance that ensures transparency, measurability of outcomes and accountability. Such programs must teach people to stand on their own feet and not create a culture of lifelong dependence on affirmative action programs. Such programs must support the overall economy by creating a talented and productive workforce. Such programs must enhance the overall competitiveness of the economy and not undermine it.