5 - Regional Disparities, Income Inequality, and Poverty: A Cumulative Causation from Malaysia's Experience

Summary

Changes in economic structure are normally associated with an economy's transformation from an emphasis on agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and services economy. Structural change refers to the relative importance of sectors in the economy such as production and factor use, increases in the rate of accumulation, shifts in the sectoral composition of economic activities (industrialization) focusing initially on the allocation of employment, change in location of economic activities (urbanization) and accompanying demographic transition, decreasing poverty, and inequality in income distribution.

Income inequality and regional disparity happen because of uneven structural change occurring at the same time in different regions. Each region often experiences different patterns of economic and demographic structural changes as well as differences in concentration of population, investment, manufacturing products, labour productivity, and job creation. The levels of regional income have strong linkages with the establishment of the manufacturing sector. Since independence and subsequently after the implementation of the New Economic Policy (NEP) in 1971, the Malaysian Government has made serious efforts to decentralize manufacturing activities. This is because industrial imbalance has an important relation to the imbalance of household's monthly income, poverty, and unemployment.

Production sources, especially natural resources, capital, and labour, are imperfectly scattered. Many economic activities are concentrated in particular regions, where such regions are an important source of international specialization and trade (Krugman 1999). Uneven regional growth and distribution in the process of structural change are affected by three key factors: firstly, natural resource advantages (imperfect factor mobility), secondly, economies of concentration (imperfect divisibility), and finally, transport and communication (imperfect mobility of goods and services) (Hoover and Giarratani 1999).

Although a study by the World Bank showed that newly industrializing countries, which have rapid export growth and economic growth, have significantly reduced absolute poverty, improved human welfare, and reduced the inequality of income distribution during the thirty years before the onset of the financial crisis in the middle of 1997 (World Bank 1993; Nakao 1997; Ishak 2000), it did not show how this rapid growth creates inequality of economic growth among regions in that particular country. In other words, the general relationship between economic growth and poverty reduction is clear: growth will decrease poverty (World Bank 2001, p. 52). However, rapid growth did not occur in all regions but was restricted to manufacturing-based regions.