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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1957 - 1970 (Part 4)


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

Is Malaysia's case comparable with the trends in Western nations?

How accurate is Kuznets' inverted U hypothesis, ie that the trade-off between growth and income equality is merely a short-run one and that there is no trade-off in the long-run. If it is, then, the widening income gap was merely temporary and would have narrowed in the long-run even in the absence of the New Economic Policy (NEP). To provide an objective and rational answer as to whether or not Malaysia is comparable with the Western nations, the inherent similarities and differences have to be considered. However, whether or not Malaysia is actually comparable in this case is a separate issue altogether because paragraph 33 of the 3rd Malaysia Plan (1976 - 1980) states:

"It must be appreciated that planned development through public sector spending aimed at correcting imbalances and restructuring society will tend to initially accentuate rather than reduce these imbalances. The initial benefits from the construction of multi-million dollar irrigation schemes, for example, will accrue to urban entrepreneurs and construction workers before they benefit the rural poor for whom these schemes are meant. On the same basis, it can be expected that efforts to urbanise and integrate Malays and other indigenous people into the mainstream of modern economic activity would also benefit the other communities first. This process of planned public sector spending affects the speed of restructuring. It is important to understand and emphasise this. Otherwise, the Malays and other indigenous people will become embittered because they are not receiving what they have been promised..."

The statement above implies that the people who ousted Tunku and implemented the NEP acknowledge the inevitable lag in policies and their intended beneficiaries. Whether intentional or otherwise, these views are similar to that of Kuznets. In this case, would it not then mean that it was only a matter of time before socio-economic policies adopted during Tunku's time would eventually correct the economic imbalances in society? Does this not also imply that the NEP was not a necessity to reduce income inequality and ensure political stability ? With its emphasis, particularly in the later implementation phase, on redistribution instead of growth, would it not mean that the NEP paradoxically slowed rather than accelerated the journey to greater income equality?

To consider alternatives that the Malaysian government could have undertaken to deal with economic inequality instead of implementing the NEP, i Capital will look at the efforts of China's government. This is because the problem of the widening income gap faced in China today is generally comparable with the situation in Malaysia in the 1960s.

China : Rising inequality and government policies

Rising inequality with economic development
When economic reform in China began in the late 1970s, urban residents were guaranteed lifetime employment, free housing and healthcare, while rural residents were banned from migrating to urban areas. Although people lived minimalistic lives, and the level of absolute poverty was high, the Chinese people were not much worse off than their neighbours. Therefore, income disparity was low during the initial stage of economic reform. However, as economic development progressed, the level of income inequality rose correspondingly.

By the mid-90s, 9% of urban residents were living below the official poverty line of 1,800 Yuan (US$217) a year. Of course, in some areas, this proportion was much higher. For example, in Xian, a city of 2.7 mln people, about 30% were living below the poverty line. Even worse, in Shuangyashan, situated in the north-east, home to many of the country's worst-performing state-owned industries, 60% of its 1.8 mln people lived below the poverty line. Many of these people were forced into poverty as a result of factory closures and lay-offs. Moreover, unemployment benefits, on the rare occasions where they were provided, were barely sufficient to fulfill basic needs. In contrast, China now has an increasing number of millionaires. The richest 20% of urban households received 42% of total urban income, while the poorest 20% received only 6.5%. Additionally, according to official statistics, the average urban income was 1.7 times of rural income in 1984 but by 1999, it was 2.65 times.

As for China's Gini coefficient, which measures the level of income inequality, with 0 being a situation with perfect equality and 1 being the other extreme, it has been rising. According to the State Statistics Bureau, its rural Gini coefficient had risen to 0.36 in 2001 from 0.24 in 1980. Similarly, the urban Gini coefficient, which was 0.18 in 1980, had risen to 0.32 in 2001. Although official figures show that the level of inequality had risen dramatically, economists such as He Qinglian, who wrote a 1998 bestseller, "China's Pitfall", believes that official figures have been grossly understated and that the actual figure could be close to 0.6. This is because it is believed that official figures fail to account for illegal or undeclared earnings, particularly among the rich.

As a result of the growing disparities of inter-rural-urban and intra-rural-urban incomes, discontentment has been rising in the face of the increasing level of relative poverty. In 2004 alone, the government documented more than 70,000 demonstrations, which were attended by some 3 mln protesters.

Government efforts to mitigate social tensions arising from the increasing income disparity
It is clear that the problem of growing inequality is increasingly threatening social stability. However, the Chinese government, like all governments that have to deal with the problem of rising inequality, faces a dilemma. While it needs the export sector to continue booming in order to absorb the surplus labour from rural areas, it is aware that the rapid growth in recent years has opened fractures that could continue to grow even wider. Therefore, in dealing with the increasing social tension arising from the increasing level of income inequality, China's government tackled this urgent and serious problem at two levels. The first level deals with actual efforts to reduce inequality, while the second level deals with persuading those at the losing end to tolerate the temporary increase in the level of inequality.

China's efforts to mitigate social tensions arising from increasing income disparity
It is clear that the problem of growing inequality is increasingly threatening social stability. However, the Chinese government, like all governments that have to deal with the problem of rising inequality, is aware that the rapid growth in recent years has opened fractures that could continue to grow even wider. In dealing with the increasing social tension arising from the increasing level of income inequality, China's government tackled this urgent and serious problem at two levels. The first level deals with actual efforts to reduce inequality, while the second level deals with persuading those at the losing end to tolerate the temporary increase in the level of inequality.

(i) Actual efforts to reduce inequality
It is clear from the efforts displayed by the Chinese government that great emphasis is placed on the eradication of poverty. This is because over the years, since economic reforms began in 1978, extensive, systematic efforts have been undertaken to eradicate poverty, the scale of which the world has never seen before. Between 1978 and 2000 the number of poverty stricken people declined dramatically from 250 mln people to 30 mln and the proportion of the poverty stricken in the total rural population plunged from 30.7% to 3%. The following is a brief outline of the plans implemented by the Chinese government to eradicate poverty:

The Chinese government focused on rural development. Since it identified the main problem associated with poverty to be the operation system in agriculture that did not facilitate optimum productivity levels, reform efforts began with reforming the land management system, where the collective management system was replaced with the household contract system. Consequently, this change led to increased enthusiasm among peasants and increased land output. Meanwhile, other efforts included gradually relaxing control over the prices of agricultural products and devoting major efforts to developing township enterprises. These reforms accelerated the development of the national economy and conveyed benefits to the poverty-stricken as it raised the prices of agricultural products, added value to agricultural production, as well as increased the employment of rural labourers in non-agricultural sectors.

Although the first stage of efforts gave rise to rising incomes, disparity (economic, social and cultural) increased simultaneously. Therefore, in an effort to reduce the level of inequality, the government established special "help-the-poor" work units, allocated special funds, and formulated policies that favoured the poor. Examples of preferential policies include:

  1. Waiving the mandatory state grain procurement quotas of households whose problem of food and clothing have not been solved;
  2. Appropriately prolonging the utilisation time limit of aid-the-poor loans and softening the terms of mortgage and guarantee, according to the actual situation; and
  3. Reducing or remitting agricultural taxes and taxes on special farm produce according to the relevant provisions of the regulations on agricultural taxation.
Subsequently, the 7-year Priority Poverty Alleviation Program was implemented between 1994 and 2000. Its main objective was to lift 80 mln people out of absolute poverty by concentrating on human, material and financial resources.

To ensure effective implementation of all the efforts mentioned above, the Chinese government set out clear definitions, criteria and guidelines so that the issues relating to poverty and those who qualify for government assistance are based on objective criteria. Furthermore, the Leading Group of the State Council for the Economic Development of Poverty-stricken Areas (renamed Leading Group of the State Council for Development-oriented Poverty Relief in 1993) was established in 1986 to organise, direct, coordinate, supervise and examine poverty alleviation-related plans.

Additionally, much emphasis was placed on aiding the poor through technology and education. In 1996, the Outline of the National Plan for Aiding the Poor with Technology (1996-2000) was formulated. Under this program, funds provided by the government were utilised to introduce, test, demonstrate and promote the improved seed strains and advanced technologies, and for conducting technical training. Also, the National Project of Compulsory Education in Poor Areas was implemented, through which, over 10 bln Yuan has been provided to assist the institutionalisation of the national 9-year compulsory education. Additionally, the Chinese government has put in place scientific and technological personnel and research institutions to teach in poor areas and promote agrotechniques in poor townships or villages.

Since the Chinese government realised the lack of uniformity in the pace of economic development across the different areas, it encouraged poor peasant households to move out of areas with extremely difficult living conditions to more favourable areas. To assist this relocation, subsidies were granted to poor households that migrated and resettled near their relatives or friends. Also, the government assisted in erecting shelter at migrants' new settlements and allowed them to retain their old homes until the new settlements were well in shape for stable production and habitation.

Similarly, the government encouraged the transfer of labour from poor areas to more developed areas to increase the employment and income of workers from the poor areas and enabled them to learn new technologies and working methods. This, in turn, broadens their outlook and improves their ability to develop independently.

The following were some of the efforts undertaken by the Chinese government that were listed in a summary report delivered by the minister in the State Planning Commission, Chen Jinhua, at the first session of the Ninth National Peoples' Congress on 6 Mar 1998:
  • A system guaranteeing minimum living standards has been established in 330 cities.
  • A unified basic old-age social insurance system for enterprise employees has been started. This system is a pension-like program, which mimics the social security model of Chile, for rural residents between the ages of 20 and 60 to make personal contributions to individual retirement accounts. Although such efforts were initially concentrated in wealthy areas, efforts have been undertaken to extend the system to township and village areas.
  • The experimental reforms of the medical insurance system have been expanded.
In short, the Chinese government has distributed grants, relief money and goods through administrative organs in an egalitarian manner to poor areas. Moreover, instead of merely providing aid, it encouraged the establishment of economic entities, service organisations and enterprises to enable the poor to pull themselves out of poverty, and subsequently, earn stable incomes.

(ii) Persuasion efforts
The second level of the Chinese government's efforts includes persuading those at the losing end to tolerate the temporary increase in the level of inequality. "Let some people get rich first," was the famous instruction of Deng Xiaoping, as China struggled to throw off the shackles of Maoist egalitarianism. This was the basis of China's growth strategy, whereby the Chinese government took special efforts to ensure that the expectations of the Chinese people were managed. This means that instead of allowing the Chinese population as a whole to be under the false impression that economic growth would be spread equally and evenly over the entire population, the Chinese government stated right from the beginning that it would take a reasonably long time before the benefits of economic reform would be evenly spread.

Nevertheless, the rampant rise in income disparity has undoubtedly led to a great deal of discontentment, especially among those living in rural areas. The Chinese government admits that in 2005 alone, there were at least 87,000 outbreaks of unrest. Thus, it was becoming increasingly urgent to contain the extent of the discontentment.

Therefore, in the recent 10-day annual congress session, much emphasis was placed on unveiling reform efforts to ease the unrest in the countryside. However, more importantly, there was a fair deal of publicity on such efforts, signifying that the Chinese government is utilising the media, to manage the expectations of its population. First, as the 10-day session opened, Prime Minister Wen Jiabao pledged to narrow the gap between the rich and poor, and introduced a new five-year plan to improve education and healthcare for the rural poor. This year, the government will spend an additional US$5.2 bln on rural schools, hospitals, crop subsidies and other programs, increasing spending in those areas by 15%. Additionally, he told reporters at the end of the session that his government will take unspecified measures to combat land seizures by developers, which have triggered many of the uprisings and that the government would enforce the strictest land protection system.

From the efforts displayed by the Chinese government, it is clear that despite the widespread protests arising from the increasing level of income disparity, the Chinese government did not reverse her growth-promotion policies. It is fairly obvious that like the Malaysian government, the Chinese government also faces the challenges of striking a balance between promoting economic growth and maintaining social stability that is essential for economic growth.

Furthermore, like Malaysia, China faces the issue of ethnic diversity. It has 55 minorities, of which 53 have spoken languages of their own and 23 have their own written languages. Also, not many people realise that the autonomous regions occupy more than half of China's physical territory. Despite the fact that these minorities constitute only 7% of the Chinese population, this 7% translates into approximately 91 mln people in absolute terms and by any standards, 91 mln people is an extremely large number of people. Of these minorities, Zhuang is the largest ethnic group with about 18 mln people, almost 3/4 of Malaysia's population. Additionally, in China's case, the uprising from the minorities in their quest for independence was far more rife. Such cases include Tibet's quest for independence.

It is obvious that ethnic diversity is not a challenge that is peculiar to only Malaysia. In addition, in China's case, the Chinese government encounters endless obstacles in the international arena from the superpowers such as the US, Europe and Japan, which constantly attempt to undermine her economic development efforts by all kinds of means.

Despite the aforementioned challenges, the Chinese government, unlike the Malaysian government, did not decide that merely because the level of discontentment was rising, they should instead implement policies which would promote income equality at the expense of stifling economic growth. Since China is still far from reaching its destination of being a developed nation, we are unable to ascertain whether or not the policies implemented by the Chinese government will be a success. However, it is crucial to note that the purpose of using China as an example is not to imply that its growth model should be duplicated for Malaysia or that it is superior, but rather, it is to provide examples of alternative routes to achieving economic growth in the face of rising income inequality, ie that the NEP is not the one and only method to tackle the issue of growth and social instability.


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