Malaysian Economy PDF

MALAYSIAN ECONOMY Growth, Poverty, and Distribution CHAPTER 8 1 Overview The difference between factor, vertical and horizontal income distribution The important to eradicate poverty and ameliorate income inequality The...

MALAYSIAN ECONOMY Growth, Poverty, and Distribution CHAPTER 8 1 Overview The difference between factor, vertical and horizontal income distribution The important to eradicate poverty and ameliorate income inequality The different theories explaining poverty and the various measures of poverty eradication Trends in international poverty incidence The different measures of inequality Trends in international income distribution The relationship between growth, inequality and poverty incidence in Malaysia Trends in poverty incidence and income distribution in Malaysia 2 Introduction This chapter discusses the concepts and measurement of poverty and subsequently examines government policy and poverty trends in Malaysia. The chapter addresses both absolute and relative poverty and critically analyzes the drivers of changes in both the incidence of poverty and income inequality in Malaysia. 3 The Important to Eradicate Poverty and Ameliorate Income Inequality The two main objectives of economic development are first, to allocate resources in such a way as to ensure the growth of real per capita income and second, to ascertain that income and wealth are distributed in an equitable manner. Implied in both objectives is the need to alleviate absolute poverty and over time eradicate it altogether. Many link poverty with conflicts and terrorism. Bourguignon has shown that both growth and changes in inequality play a major role in eliminating poverty (see Figure 9.1). 4 The Important to Eradicate Poverty and Ameliorate Income Inequality Figure 8.1 Decomposition of changes in distribution and poverty into growth and distributional effects 5 The Important to Eradicate Poverty and Ameliorate Income Inequality Theories and Measurements of Poverty Absolute poverty refers to a situation when people do not have the means of meeting their basic needs. Relative poverty refers to income inequality and defines the poverty line in relation to the average standard of living of a particular society at a particular time. The poverty line income (PLI) refers to the minimum income necessary to enjoy basic needs in life. Sources of poverty: ○ Lack of wealth ○ Lack of education, training, experience and intelligence 6 The Important to Eradicate Poverty and Ameliorate Income Inequality Theories and Measurements of Poverty (cont.) ○ Poor health, handicaps and old age ○ Work orientation, time horizon and culture of poverty ○ Discrimination faced by race, class, gender, etc. Sen’s definition of poverty Measures of poverty: ○ Headcount index ○ Poverty gap ○ The squared poverty gap index or the severity of poverty index 7 The Important to Eradicate Poverty and Ameliorate Income Inequality Incidence of Poverty: International Evidence Cross-country comparison of poverty incidence and inequality is difficult due to differences in the definitions of income as well as the PLI. In the international examples shown from Southeast Asia, Malaysia has by far achieved the biggest drop in the incidence of poverty. Singapore has been the best performing country in Southeast Asia because it has eliminated absolute poverty. 8 The Important to Eradicate Poverty and Ameliorate Income Inequality Figure 8.2 Population living below the national poverty lines (%) by ASEAN Member States, 2005-2017 9 The Important to Eradicate Poverty and Ameliorate Income Inequality Theories and Measurements of Income Distribution ❑ The ability theory ❑ The stochastic theory ❑ The individual choice theory ❑ The human capital theory ❑ Theories of educational inequalities ❑ The inheritance theory ❑ The life cycle theory ❑ Public income distribution theories 10 The Important to Eradicate Poverty and Ameliorate Income Inequality Figure 8.3 Lorenz curve and Gini coefficient, A/(A+B) Theories and Measurements of Income Distribution (cont.) ❑ Measures of income distribution: Gini coefficient (see Figure 9.2) Generalized entropy inequality index Atkinson Index Note: P is share of population and L is 11 share of income. Why Poverty Eradication and Income Distribution is Important? Income Distribution: International Evidence Comparisons of income distribution between countries is often difficult because of problems of classification and definition of incomes. The value of Gini Ratio spreads from 0, as a perfect equality, to 1, as a perfect inequality, in income distribution of population. Table 9.2 offers longitudinal evidence of income distribution for selected Southeast Asian countries. Malaysia’s Gini coefficient showed a trend fall from 2005 to 2018. 12 Table 8.4 Gini ratios for household income of ASEAN economies, 2005-2018 13 Why Poverty Eradication and Income Distribution is Important? Income Distribution: International Evidence In 2018, the lowest Gini Ratio, indicating more equality in income distribution, was found in Cambodia at 0.29, followed by Myanmar at 0.30 During the period of 2005-2018, increase in Gini Ratio, indicating a rise in income inequality, was recorded in Indonesia and Lao PDR. While Gini Ratio in Cambodia, Malaysia, Singapore, and Thailand declined over the same period. Note that income inequality has remained low in Indonesia because their Gini ratios are based on expenditure instead of income data. Hence, their Gini ratios cannot really be compared to other countries. 14 Government Policy on Poverty and Distribution The New Economic Policy (NEP) of 1971–1990 New Development Policy (NDP) of 1991–2000 National Vision Policy (NVP) of 2001–2010 Five-year based Malaysia plans have been the main channel through which government development and poverty eradication programmes are disseminated (see Table 9.3). 15 Table 8.5 Total development and poverty eradication allocation by plan (RM million) Average Total Poverty Percentage Plan period annual growth development eradication share rate allocation allocation Second Malaysia Plan, 7.1 8,950 2,350 26.3 1971– 1975 Third Malaysia Plan, 8.6 31,147 6,373.4 20.5 1976– 1980 Fourth Malaysia Plan, 5.1 46,320 11,238.5 24.3 1981– 1985 Fifth Malaysia Plan, 6.7 35,300 13,660 38.7 1986– 19901 Sixth Malaysia Plan, 8.7 54,705 13,900.8 25.4 1991– 1995 Seventh Malaysia Plan, 4.9 67,500 n.s. – 1996– 2000 Eighth Malaysia Plan, 4.5 170,000 n.s. – 2001– 2005 Ninth Malaysia Plan, 6.0 220,000 4,465.3 2.2 2006– 2010 Tenth Malaysia Plan, 5.3 240,000 2011 - 2015 Eleventh Malaysia Plan, 2.8 248,500 16 2016 - 2020 Poverty and Distribution Trends and their Causes Government programmes to alleviate poverty: ○ Rural development ○ Education and employment ○ Export-oriented industrialization ○ Restructuring of equity ownership and asset accumulation ○ Provision of housing and social amenities ○ NADI (nerve) programme ○ Urban entrepreneurship programme 17 Poverty and Distribution Trends and their Causes ○ Other programs : a. Role of non-governmental organizations b. Public/social assistance Explaining persistence of poverty: ○ Slow growth in agriculture ○ Trade and globalization ○ Internal migration ○ State-government-party collusion 18 Table 8.6 The relationship between growth, inequality and poverty incidence, 1970 – 2007 Year Average GDP Gini Poverty Comments growth rate ratio incidence 0.513 (1970) Beginning of NEP era, low growth and high poverty 1970s 7.5 0.529 (1976) 52.4 (1970) incidence and high inequality Mid NEP era, changing economic structure that propelled economic growth through export-led 5.8 0.505 (1979) 37.4 (1980) 1980s industrialization, followed by significant poverty and inequality reduction World recession, negative growth, but did not 1985 – 0.1 0.483 (1984) 20.7 dampen poverty alleviation efforts End of NEP. Era of robust economy growth 1990 – 0.446 (1990) followed by significant poverty reduction. Focus on 9.1 17.1 (1990) 1997 0.464 (1995) eradication of hardcore poor. However, inequality started to widen again Poverty incidence reduced to single digit but 1997 7.3 0.470 6.8 inequality reached highest level since the NEP. Beginning of financial crisis 1997– 1998 Negative growth. Poverty incidence increased due 1998 – 7.4 n.a. 8.0 to the financial crisis 19 Table 8.6 The relationship between growth, inequality and poverty incidence, 1970 – 2007 Average GDP Gini Poverty Year Comments growth rate ratio incidence Economy rebounded after the financial crisis, slower impact on poverty alleviation but inequality narrowed 1999 6.1 0.452 7.5* slightly Low growth, poverty reduction continued at a slower pace. Focus on addressing pockets of poverty and 2002 4.1 0.461 5.1* reducing relative poverty inequality widened again Growth rate accelerated. The switch to the new PLI 4.4 2004 7.1 0.462 methodology PGK resulted in an increase in poverty 5.7*,** incidence Growth moderated again but both poverty incidence 2007 6.3 0.441 3.6*,** and inequality decreased substantially Referring to the new 2019 methodology, the PLI for 2019 4.3 0.407 5.6 household is revised to RM2,208 per month. This provides a new look the poverty rate in Malaysia. *Refers only to Malaysian citizens. **Based on the 2005 methodology. Previously, the calculation of poverty incidence was based on the 1977 methodology. Note: n.a. = not available 20 Conclusion ❑ This chapter discussed the essential concepts of poverty, the theories behind them and instruments used to measure them before evaluating the Malaysian Government policies to eradicate poverty and the consequences. ❑ While effective policies and programmes are crucial in enabling the economy to move to the set targets of poverty eradication, often the attainment of these targets might be derailed by exogenous factors like the down- swing of the business cycles. 21 Conclusion Malaysia has been fortunate during the recessions of mid- 1980s and the Asian financial crisis 1997–1998 as the prices of export commodities involving especially the rural poor recovered. While being generally prudent in budget management, the government engaged in counter-cyclical measures when deemed necessary and increased fiscal expenditure to facilitate the development of the economy. 22 Conclusion ❑ Poverty incidence trends show that poverty eradication has been highly successful, especially relative to other developing countries, and income distribution is narrowing over the last few years. ❑ However, certain sections of society remain marginalized with a tendency towards ethnic polarization. ❑ These cracks in national unity should be addressed immediately before it is destroyed beyond repair. ❑ Programmes for poverty eradication and redistribution may still need to be tailored specific to each disadvantaged ethnic group or region since the causes of poverty may differ according to each ethnic group or poverty pocket. 23