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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1957 - 1970 (Part 5)


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

How accurate is Kuznets' inverted U hypothesis?
In the recent issues of i Capital, it has written about Kuznets' inverted-U hypothesis. This refers to the fact that the trade-off between growth and income equality is merely a short-run one and that in the long-run there is no trade-off. As mentioned previously, Kuznets' conclusion was based on empirical evidences of income distribution in the United States, United Kingdom and other developed nations. Although this theory has received a great deal of recognition, the arguments against its accuracy have been equally pertinent. This is because, as acknowledged by Kuznets himself, the degree of the accuracy of the data leaves much to be desired. Hence, a conclusion that may have been based on inconclusive evidence has implications on the basis of our argument that the trade-off between growth and equality is merely a short-run syndrome and that this trade-off dissipates in the long run. Therefore, it is important to consider alternative schools of thought in terms of the relationship between growth and inequality.

No distinctive correlation between growth and equality
In a research publication, YP Chu found that in the long run, there is no distinctive, consistent relationship between growth and equality. This conclusion was based on a study of economic development in Taiwan from the post-war period onwards and found that although there was a decline in income inequality from the post-war period up until 1980, this trend reversed thereafter. This study is extremely useful to us because Taiwan's experiences in terms of economic development, as well as economic policies adopted share similarities with that of Malaysia's.

Economic development in Taiwan can be divided into 3 phases:

  1. 1950s-early 1960s: Rapid agricultural development and import substitution
    During this period, there was a decline in the level of inequality from a Gini coefficient of 0.2860 in 1952 to a Gini of 0.1790 in 1967. The rapid decline in inequality was a result of the land reforms undertaken during the post-war period, whereby the government expropriated the land and subsequently implemented rent reduction, sale of public land and compulsory sale of private land. Also, land improvement and agricultural education following land reforms helped to mitigate the inequality. Other contributing factors included the considerable degree of nationalisation of large enterprises and the fact that the small and medium enterprise sector played a key role in industrial expansion.

  2. 1964-1980: Export-promotion
    As agriculture declined in importance to under 30% of national output and import-substitution ran out of steam, the government changed its stance and began promoting exports. Government efforts included the establishment of export processing zones, handing out tax rebates on imports used for export manufacture and exchange rate alignment. With this, Taiwan's growth became export-led, as the timing was perfect to tap the buoyant US demand, in the face of rising labour costs in Japan. During this period, the Gini coefficient of household income fell from 0.321 in 1964 to 0.294 in 1970, and to 0.277 in 1980.

    The decline in the level of inequality was due to the general improvement in the quality of education, making the supply of labour more accessible. Concurrently, the supply of unskilled labour became scarcer, causing the wage gap between skilled workers and unskilled workers to narrow.

  3. 1980 - 1993: Contraction of domestic labour-intensive industries
    As total labour supply fell during this period and the population became increasingly educated (with 65% of the population receiving secondary education, compared with 44% in 1980), the rise in the cost of unskilled labour persisted. This phenomenon, with the combined effect of currency appreciation, hit the labour-intensive export industry. To remain competitive, labour-intensive manufacturing activities were relocated to places with lower labour cost such as Malaysia, Thailand and Bangladesh, and this led to a plunge in demand for unskilled Taiwanese labour. As a result, the skilled-unskilled wage ratio, which was 1.72 in 1980 rose to 1.80 by 1986. Correspondingly, the Gini coefficient rose from 0.277 in 1980 to 0.312 in 1990 and 0.316 in 1993.
When Chu concluded this study, the trend in Taiwan was similar to that in the other East Asian economies, whereby land values were skyrocketing and there were increasing returns to skilled labour. Such developments are likely to contribute to increasing levels of inequality.

The case of Taiwan is a pertinent comparison with Malaysia because like Taiwan, economic development in Malaysia began with agricultural development and import-substitution policies and subsequently, progressed to export-led growth. The situation in Taiwan in the 80s whereby the cost of unskilled labour was rising and firms relocated to remain competitive is pertinent to the situation in Malaysia today, as we are now losing out to low-cost labour locations such as Vietnam, Myanmar, India, Thailand, Indonesia, Cambodia and China.

What do the similarities between Taiwan and Malaysia tell us? Does it mean that the lack of correlation between growth and equality applies to us as well? Does this then mean that even in the absence of affirmative action policies such as the NEP, there would be no trade-off between growth and equality, making the existence of the NEP redundant?

Before we evaluate how successful the NEP has been in achieving its objectives, we will look at the redistributive policies that were implemented by the Japanese government after the world wars to reduce income concentration. This is because such policies provide a general outline of alternate policies, which can be adopted to promote growth and income equality; policies which may be far more effective than the NEP in achieving high growth and reducing income inequality and consequently, promote national unity.


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