Home / Hwok-Aun Lee

Hwok-Aun Lee

Some Malaysian inequality measures more equal than others

Author: Hwok-Aun Lee, University of Malaya

Is inequality in Malaysia going up or down? Answers differ. Official statistics unambiguously show household income inequality going down in the past decade, but almost everyone seems to think it has gone up. So what’s going on?

 A boy runs at a temple casted with shadows of traditional Chinese lantern decorations ahead of the Chinese Lunar New Year in Kuala Lumpur, Malaysia, on Tuesday, 17 Feb 2015. (Photo: AAP)

The most common measure of income inequality is the Gini coefficient. It suggests falling inequality in Malaysia. The Gini coefficient fell from 0.46 in 2002 to 0.43 in 2012. This Gini coefficient series was calculated using Malaysia’s Household Income Survey — a large sample, consistent and nationally representative dataset. Statistics derived from this source carry substantial weight.

But popular perception and anecdotal accounts view the issue differently. Most people seem to think that inequality has been rising, or at least persisting at high levels. The dissonance between the official figures and public perception warrants further investigation.

Rising inequality also loomed large in Malaysian popular discourse in the 1990s. But across that period, official statistics backed up popular perceptions — Malaysia’s Gini coefficient increased.

Public policy has for decades been preoccupied with targeting and monitoring reductions in inequality between ethnic groups. But the data and the policy direction seem to be at odds. Since 2010, some ethnicity-blind programs have been introduced to target the exclusion and lagging socioeconomic progress of the bottom 40 per cent of households. But this group actually had the highest income growth in the preceding decade. From 2002 to 2012, mean household income for the bottom 40 per cent grew by 6.1 per cent annually, compared to 5.6 per cent for the middle 40 per cent and 4.6 per cent for the top 20 per cent of households.

Why are low income households still considered to be in great need of assistance when their incomes have improved significantly?

Inequality is a zeitgeist issue that has resonance materially, politically and emotionally, regardless of official Gini coefficients. The notion that inequality has risen is believable because of a wider malaise in Malaysia. Malaysians are dissatisfied with rising prices, sluggish wage growth and economic insecurity. Many also resent the concentration of wealth among elites, especially through political-business connections or suspiciously corrupt means. Continual reports of misappropriation of public funds and the lavish livelihoods of corporate, financial and political elites tend to reinforce perceptions of unfairness and unequal opportunity.

Surveys by the Merdeka Center offer some insight into public opinion. In recent years, concerns over economic conditions, especially inflation, employment and wages, have grown. In April 2005, the top concerns were crime and public safety (16 per cent of respondents deemed this the biggest national problem), inflation (10 per cent), business opportunities and economic growth (9 per cent), with unemployment/lack of job opportunities (4 per cent) further down the list. In October–November 2012, the majority considered price hikes/inflation/rising cost of living to be the most pressing issue (23 per cent), followed by crime (7 per cent), unemployment/lack of employment opportunities (6 per cent) and unfavourable economic conditions (6 per cent). It is possible that Malaysians are simply conflating the general economic environment with inequality.

But it is also important to remember that everyone experiences inequality differently. For example, household income inequality need not move in the same direction as personal wage inequality or household wealth inequality. And the Gini coefficient isn’t the only way of measuring income inequality, either.

Malaysia’s official inequality statistics are calculated based on gross household income — that is, adding together all forms of income from multiple sources, including earned income (wages and self-employment earnings) and non-earned income (rent, dividends, transfers, remittances, and so on). It also counts multiple earners in the same household. This highly aggregated calculation can mask the effects of wage growth and asset accumulation, and other factors that affect inequality.

The full Household Income Survey datasets are also not available, meaning research in this field must assemble data from other sources.

One of these sources is data from the Employees’ Provident Fund (EPF), which allows us to calculate wage inequality over time. Formally employed private sector workers maintain accounts with the EPF, which had 6.5 million active members in 2013. Members regularly contribute to their accounts from basic wages and receive dividend payments, at uniform rates regardless of the size of the account. So changes in the distribution of EPF accounts will likely reflect changes in the distribution of wages. And the Gini coefficient of EPF savings accounts has been rising, giving us grounds to believe that wage inequality has increased in the past decade or so.

Other sources concur with a broad picture of steadily rising inequality. In the public sector, the number of managers and professionals at the upper regions of the wage distribution has grown disproportionately faster. Luxury cars constitute an increasing share of passenger vehicle sales, while property sales show rising concentration at the upper end.

Popular perceptions of rising inequality, it turns out, are supported by empirical evidence. Household inequality may be falling, as the data suggests, but other forms of inequality are rising.

Malaysia needs to pay more attention to wage distribution and labour market dynamics as well as wealth inequality. There are indications that wage inequality is rising, as well as widespread concerns over wage growth, household livelihood and housing affordability.

And the rich Household Income Survey datasets need to be made available for exploration — again, to investigate earnings and wealth, and to disaggregate personal and household dimensions. Only then can we really begin to untangle the complexities of inequality in Malaysia.

Hwok Aun Lee is Senior Lecturer in the Department of Development Studies at the University of Malaya. This article draws on a working paper co-written with Muhammed Abdul Khalid.

Read More »

Political preference crowding out enterprise in Malaysia

Author: Hwok-Aun Lee, University of Malaya

Malaysia’s government-linked companies (GLCs) are, relatively speaking, among the most extensive and powerful in the world in terms of capitalisation, market presence and socio-political mandate.

GLCs reportedly comprise 36 per cent of the Malaysian stock exchange’s capitalisation and 54 per cent of the entities that make up the Kuala Lumpur Composite Index. The Malaysian government controls GLCs through its government-linked investment companies (GLICs) — gargantuan and powerful investment arms including Khazanah Nasional, Permodalan Nasional Berhad — and the Ministry of Finance.

GLC market presence varies by industry, as measured by share of value-added. Based on data from publicly listed companies, Asian Development Bank lead economist Jayant Menon estimates that in 2012 GLCs accounted for 93 per cent of income in utilities, 80 per cent in transportation and warehousing, and over 50 per cent in agriculture, banking, formation and communications, and retail trade. Menon further notes that GLCs invest at a higher rate than private companies due to their superior reserves and political connections, which give them added leverage and privilege. Menon argues that GLCs crowd out private capital, significantly accounting for Malaysia’s anaemic private investment rate since the 1997–98 Asian financial crisis.

The statistical finding that GLCs crowd out more investment than they stimulate makes sense intuitively. It also appears to be consistent with the economic situation in Malaysia. But Menon’s data limits his empirical analysis to publicly listed companies. The omission of privately held businesses, especially in manufacturing and in service industries such as retail, probably leads him to overstate the dominance of GLCs.

Yet the Malaysian government cannot deny the crowding-out phenomenon. As part of its GLC Transformation Program the government has committed itself to divesting certain GLCs. But, as expected, the divestment project targets smaller entities within its massive portfolio and has progressed behind schedule.

The durability of GLCs as a domain of government policy underscores the need for reform prescriptions to be informed by historical and political economy perspectives and to acknowledge GLCs’ socio-political mandate. Developing the Bumiputera (ethnic Malay) Commercial and Industrial Community (BCIC) has been at the forefront of policy since the New Economic Policy was launched in 1971. The BCIC passed through various phases, from reliance on state development agencies, to heavy industry, then to privatisation from the late 1980s until the Asian financial crisis, which saw the renationalisation of many failed companies.

These entities, rebranded as government-linked companies, have become the primary agents for the BCIC agenda, which remains, like it or not, an unfinished business and political imperative. In other words, affirmative action, through managerial development and preferential procurement, is deeply embedded and cannot be drastically rolled back.

Interestingly, criticisms of the BCIC never oppose the policy objective of Bumiputera participation and ownership. Instead arguments typically assume that scaling down GLCs, divestment and privatisation, and rolling back preferential treatment will jolt Bumiputera entrepreneurs and capitalists into emerging as a competitive, innovative force. Competitive Bumipitera capitalists, it is argued, should be the true beneficiaries of affirmative action. But this argument is invariably asserted as an article of faith, unsupported by evidence. Logically, the shortfalls of the BCIC agenda drive the conclusion that privatisation would diminish Bumiputera participation.

If the policy has failed to produce a critical mass of competitive Bumiputera entrepreneurs — as it was widely supposed it would — wouldn’t sudden removal almost definitely cause a downturn in Bumiputera participation? This would be a politically unpalatable outcome regardless of any boost it might bring to private investment rates. Failure or reluctance to openly acknowledge these eventualities and their political consequences often precludes robust examinations of GLC performance and their preparedness for phasing out their role in supporting the BCIC.

Malaysia’s GLC policy, on the other hand, preserves its role in promoting the BCIC, but also introduces its share of equivocation. The GLC Transformation Program articulates merit-based selection as a key feature of the new government policy, implicitly distinguishing the current regime from former practices that bred inefficiency. This is only partly correct: ‘merit-based’ means selecting more capable Bumiputera managers, subcontractors and vendors over less capable Bumiputera managers, subcontractors and vendors.

Amid the misinformation, the program lacks a clear plan on how to move away from overt Bumiputera preference. The government needs to come clean and acknowledge that ‘merit-based’ selection remains exclusive to Bumiputera participations. A fuller transformation would entail ensuring that these Bumiputera business empowerment programs are conducted effectively, so that transition plans can also be developed to phase out overt ethnic preferences.

The GLC Transformation Program, under the oversight of the government investment agency Khazanah, involves the 17 largest and most strategically important GLCs, including Tenaga Nasional (power), Telekom (telecommunications), Malaysia Airlines, diversified conglomerate Sime Darby, CIMB Bank and Maybank.

Market conditions and the business performance of these GLCs vary. Some, such as CIMB, Maybank and Axiata (under Telekom) are expanding to be regional players, while others are confronted by structural challenges or, like Malaysia Airlines, beleaguered by recent tragedies.

Internal reviews of GLCs have written glowing reports. It is not surprising that GLCs generally outperform private companies, given their structural and political advantages. Also, GLCs have not, in the past decade, been engaged in the pervasive profligacy and profiteering seen in the 1990s.

GLCs continue to serve key roles providing services, generating profits for GLICs and other stakeholders, serving as training grounds for managers, directors and entrepreneurs through the employment they offer, and by providing linkages through procurement and subcontracting. But the efficacy and integrity of these programs has not been rigorously and independently analysed. Too much of the GLCs’ and GLICs’ operational performance, financial flows and pursuit of their socio-political mandate remain under-researched.

Hwok-Aun Lee is Senior Lecturer in Development Studies at the University of Malaya.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

Read More »