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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1957 - 1970 (Part 3)


[E]. PERIOD: 1957 - 1970 /cont'd

Analysing Economic Policies During Tunku's Premiership
Tunku's Premiership was relatively short given the level of his calibre and his far-sighted vision. He was ousted out of UMNO, the ruling party. He was often criticised for not paying enough attention to the needs of the Bumiputras and allowing the non-Malays to gain at their expense. This was a widely accepted view amongst the Bumiputras, because empirical evidence reveals the extent to which non-Malays were better off than the Malays and other indigenous groups. However, a closer scrutiny of the socio-economic policies implemented during Tunku's times from independence until 1970 would starkly reveal that the Bumiputras were very, very far from neglected. The irony was that the other communities also felt neglected, a situation that can only happen when the leader has the entire nation's interest at heart.

Considerable amount of development expenditure served to improve the welfare of the rural population, which were mainly the Bumiputras. For example, as mentioned previously, more than 60% of public expenditure for mining and industrial development was devoted to MARA, an institution that exclusively served the Bumiputra community. So why were such accusations made against Tunku? Since the purpose of this report is to discuss economic issues and not conspiracy theory, the reasons for Tunku's ousting would not be discussed further. Nevertheless, it is crucial to note that despite actual results falling short of targets at times, policies implemented during his time provided a firm platform for Malaysia's economic development. Moreover, many of the government agencies established during his Premiership continue to exist today, still playing significant roles in Malaysia's economic development.

Given that the Bumiputra community received considerable attention and assistance, why then did economic imbalances remain so distinctive? Is it because the Bumiputras lacked the initiative or expertise to seize benefits given to them? Or are imbalances merely part and parcel of an emerging economy in its initial stages?

At this point, it is pertinent to consider the various schools of thought pertaining to the relationship between equality and growth. Briefly, the first school of thought holds that the trade off between equality and growth is temporary, and in the long run, there is no trade-off. This means that inequality only increases during the initial stages of development, and falls with sustained economic growth. On the other hand, another school of thought holds that there is no distinctive relationship between growth and equality. This means that the level of inequality in a society is dependent on factors exogenous of growth, such as redistributive policies undertaken by the government. For this section, we will consider the views of renowned economists, Kuznets, Galor, Tsiddon and Perotti.

1. Trade-off between growth and equality is a short run syndrome

(i) Kuznets (1955) - Inverted U hypothesis
Kuznets' theory of income distribution, the inverted-U hypothesis, postulates that in the initial stages of economic development, income inequality would first increase before falling. This therefore means that income inequality exists as only part and parcel of economic development and would decline naturally with sustained economic growth. Kuznets' theory was based on a study performed on the level of income equality in the United States, England and several other developed nations after World War II, when reconstruction and development efforts took place. Figure 8 below shows that over the course of economic development in the United Kingdom, the percentage of income received by the richest 5% of the population fell, whereas that of the lower 85% increased. In short, there was a declining level of income inequality in the UK.

Figure 8: Percentage of Total Income Received

In this same paper, a comparison was also made between income distribution in developed and underdeveloped countries. The results revealed that income distribution was more unequal in underdeveloped countries due to several reasons. They are:

  1. The income structure in underdeveloped countries is associated with a much lower level of per capita income compared with that of developed countries. For this reason, only those at the very peak of the income pyramid have the capability to save, and hence, the wealth accumulation effect only contributes further to income inequality;
  2. Economic growth of underdeveloped countries in the past decades fell far short of the rate in developed nations, leading to limited opportunities for economic mobility and improvement in living standards and
  3. The average income per capita of the rural population is usually lower than the urban population's income. Hence, when a developing or an underdeveloped nation undergoes industrialisation, the increase in urban population causes income inequality to rise.
Due to the aforementioned factors, sustained economic growth would lead to a reduction in inequality because:
  1. As economic development continues, the average income per capita of the nation as a whole rises. With this, the ability to save and consequently, accumulate wealth is no longer limited to only those at the very peak of the income pyramid. Therefore, economic growth makes it possible for a larger portion of the population to accumulate wealth and consequently, reduce inequality;
  2. Opportunities for economic mobility and thus, better living standards increase because, as the economy expands, more jobs are generated, making the option of moving up the value chain plausible, ie higher paying jobs are more readily available and
  3. Rural-urban migration is likely to rise when a country undergoes the process of industrialisation. While initially the discrepancy between the average wage of skilled workers and unskilled workers is significant, this discrepancy is likely to narrow as the supply for unskilled labour becomes increasingly scarce, putting upward pressure on unskilled labour wages. Therefore, income inequality declines as this gap narrows.
For the purpose of this discussion, greater emphasis is placed on the second and third factors. Pertaining to the second factor, it is because, unlike the developed Western nations, which let economic development run its natural course despite the rising inequality in the initial stages, Malaysia took the opposite path. In the face of the widening income gap between the Chinese and the Bumiputras, the Bumiputras were quick to blame Tunku for their inferior economic position and pushed for affirmative action policies, which ultimately resulted in a reversal of growth-promotion policies. Had they adopted attitudes similar to that in the developed countries during the initial stages of development, whereby, there was tolerance of the rising inequality because of the realisation that the population as a whole would benefit from the sheer impact of the multiplier effect, the Malaysia that exists today would have been a very different one.

With regards to the third factor, where migration would cause unskilled labour to become increasingly scarce and therefore, put upward pressure on unskilled labour wages, it is reasonable to expect the pattern in Malaysia's case to be similar. However, in any case, it is pertinent to note that even in the absence of the income gap narrowing, using the sole measure of income is unlikely to be an accurate comparison between the living standards of the urban and rural population. This is due to several factors.

First, cost of living is undoubtedly far higher in urban areas than in rural areas. This therefore, means that the minimum income level for an individual to live comfortably in an urban area is far higher than in rural areas.

Secondly, the availability of land in rural areas makes it conducive for subsistence economies to exist, meaning that the rural population is able to plant their own crops and engage in animal husbandry for their own consumption. This contributes further to the lower cost of rural living, meaning that the rural population is able to maintain certain living standards with far lower monetary requirements. Hence, although the average wage of the urban population may exceed that of the rural population by far, the level of income earned should not be an automatic reflection of the corresponding living standards.

This argument is pertinent to Malaysia's case because the Bumiputras immediately and conveniently jumped to the conclusion that just because the income gap was widening between the Bumiputras and the non-Bumiputras, particularly the Chinese, they were much worse off. By making this conclusion, they neglected the fact that because a large number of them lived in rural areas, the minimum income required to live comfortably was far lower than if they were to live in similar locations as the non-Bumiputras, ie urban areas.

Moreover, it appears that the method utilised to gauge the level of inequality was based solely on income. If the definition of well being had been defined in the broader sense of the word, perhaps politicians and Malaysians at large would have realised that the level of inequality was not as drastic as originally perceived. This therefore implies that concerns over the widening income gap were over-exaggerated.

(ii) Galor and Tsiddon (1996); Perotti (1993)
Similar to Kuznets' inverted-U hypothesis, Galor and Tsiddon (1996) holds that inequality would decline once the benefits experienced by the upper classes spill over to the rest of the country. In fact, Galor and Tsiddon (1996) even hold that inequality is necessary in order to kick start economic growth in terms of human capital development. This is because in times when the total national income of the country is at extremely low levels, no one would be able to have sufficient excess funds for investment in human capital if income were to be spread evenly since the cost of education can be substantial. Conversely, inequality enables the members of the relatively more well-off families to invest in education, and overcome the gravity of a low stable equilibrium. Therefore, during the initial stages of development, inequality is an essential element in ensuring that the aggregate level of human capital improves, and consequently, output increases.

The domino effect of human capital investment on the economy as a whole is that the knowledge accumulated by the upper classes would inevitably trickle down to the lower segments of society via technological progress in production. As time passes, the knowledge that was initially only accessible to the elite becomes increasingly accessible to the lower classes, and this in turn, creates economic mobility and increases the opportunities for reduction in inequality.

Similarly, Perotti (1993) holds that inequality provides a platform for the upper classes of society to invest in education in one period, and subsequently, benefit from higher income levels in the next period. As for the population at large, they derive indirect benefits from the spillover effects of this initial investment in human capital by the upper classes (known as positive externalities).


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