16 - Income Inequality: A Drag on being a Developed Nation?

Summary

Introduction

Income distribution has always been a core and prioritized issue in Malaysian economic development. Although inequality (as measured by the Gini ratio) was rising prior to 1976, it was reduced by about 16.6 per cent by the end of the New Economic Policy 1971–90 (NEP). However, inequality has fluctuated in the last twenty years and currently remains at the same level as in 1990. The persistent high inequality can be an obstacle to eradicate absolute poverty, improve inclusiveness (Bourguignon 2003, p. 6) and can threaten economic growth. Although Malaysia has successfully reduced absolute overall poverty incidence to 3.8 per cent in 2009, there are still geographical areas with high concentrations of poverty. Moreover, Malaysia's income disparity is not only much higher than that of many developed countries in the world, but also relative to its neighbours — Indonesia, Philippines, and Thailand (World Bank 2011, p. 73) which have much lower per capita incomes than Malaysia.

Given the above concerns, this chapter aims to examine the Malaysian income distribution status, attempt to explain the reasons for the changes in the last twenty years, and propose some recommendations to improve the situation. For this purpose, the next section analyses the trends and patterns of overall, rural, urban, and ethnic inequality. Some of the indicators of inequality will also be decomposed into “within group” and “between group” components to give a deeper understanding of the income distribution situation. Section 3 offers several explanations regarding the changes in income distribution, while Section 4 will provide some policy recommendations to narrow income inequality in Malaysia. Section 5 concludes the chapter.

Trends in Income Inequality

Table 16.1 shows that the Gini ratio reflecting the overall income distribution rose from 0.513 in 1970 to 0.557 in 1976, falling to 0.442 at the end of the NEP period, and thereafter oscillating to reach 0.441 in 2007. Table 16.1 also shows that income distribution in both the rural and urban areas exhibit similar trends over the NEP period. The Gini ratio for rural households rose between 1970 and 1976 but fell thereafter to 0.401 by 1992. It also exhibited fluctuating values after this, falling to its lowest level in 2007 but rising again to 0.407 in 2009.