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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1957 - 1970 (Part 6)


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

Reduction of income concentration coupled with economic growth in Japan

High level of income concentration and contributing factors
Prior to the two World Wars, the level of income concentration in Japan was notable. Between 1885 and 1940, the richest 1% of the population possessed between 14%-20% share of income. This proportion halved to between 6%-9%, post World War 2. The dilution in the income share of the top 1% was due to several reasons. To understand the reasons for this dilution, one has to first understand the contributing factors to income concentration.

The two main sources of income prior to the World Wars were capital income (dividend and rent) and business income. This was because:

Government policies that reduced the level of income concentration
After World War 2, income concentration of the richest 1% diluted dramatically due to several factors:

  1. Dilution in business ownership and reduction in dividend income
    • First, the War destroyed 25% of physical capital, mainly in the metropolitan areas, having devastating effects on their owners.
    • Secondly, the government intervened to cap dividend rates at 8% in 1940, and subsequently, at 5% in 1945, compared with 10% in 1935. Also, the average dividend to profit ratio fell to 50% in the 1950s from nearly 70% in the 1930s.
    • Thirdly, between 1946 and 1948, the zaibatsu were dissolved. Although the dissolution of the zaibatsu had more to do with America's attempt to prevent Japan from rising as a formidable economic power than to promote income equality, the end result was that income concentration declined. This was because the directors of the firms were expelled, and their shares were confiscated and redistributed to a large number of employees and other investors at the market price. Inevitably, this transferred wealth from the high end to the lower end of income earners.

  2. Dilution in land ownership and rental income
    • First, the government expanded its land redistribution policy in 1938, and again in 1943 with the objective of increasing food production. Here, farmers were encouraged to gain ownership of cultivated land. Moreover, in 1941, the government established a two-tier pricing system that paid higher prices to the owner-farmers and tenants who actually cultivated the land than landlords who did not.
    • Secondly, in 1939, controls were imposed on rent and land prices, increasing the value of tenancy vis-a-vis landowner rights.
    • Thirdly, the government implemented land reforms between 1947-1950, which mandated landlords to sell their farmlands to ex-tenants, diluting land ownership. As a result, the percentage of land cultivated by tenants plunged from 46% in 1941 to 9% in 1955.
    • Fourthly, the implementation of progressive property tax between 1946 and 1951 led to the dilution in wealth derived from land ownership. On average, the tax amounted to 33% of households' property value. However, tax on the property of the top 5,000 households was more than 70%.
    • Lastly, the commercialisation of agriculture and the rise of tenant unions led to lower rents and stronger tenancy rights.

  3. Reduction in compensation for top executives and increase in employee benefits
    • The executive bonus at the five leading electric power companies plunged from 28 times of average income per capita in 1936 to 1.5 times in 1955. Moreover, bonuses paid to directors in the leading manufacturing firms fell to 2% in the 1960s, compared with 6% in the 1930s and the top 10 shareholders no longer held directorship positions by 1947.
    • As lifetime employment became a hallmark of Japanese human resource management, the top managerial positions were progressively filled with long-term employees who tended to promote the welfare of the employees more than corporate shareholders.
    • Single-enterprise unions, which constituted blue-collar employees, white-collar employees and middle level managers, were established. Hence by the 1970s, corporations' management regularly consulted with unions over personnel matters such as wages and other fringe benefits.
    • Changes in corporate governance and union structure resulted in lower dividend rates, less concentration of shares among individual shareholders and more equal inter-firm, as well as intra-firm wage distributions.
One of the major factors that made income disparity reduction efforts in Japan so effective was that the Japanese government approached the issue of income inequality on a two-dimensional basis - stock and flow, whereby the two are interrelated. In general, by reducing the stock element, flows are simultaneously reduced as well. For instance, in the case of land redistribution, by reducing the concentration of land ownership (stock), concentration of rent received (flow) from that land was simultaneously reduced. Similarly, when concentration of equity ownership (stock) was reduced, the concentration of dividend income (flow) also fell correspondingly.

Thus, by implementing policies that in nature redistributed assets, income derived from these assets was inevitably reduced. Such policies include the aforementioned land redistribution policies and the dissolution of zaibatsu ownership. Additionally, policies that prevented the transfer of wealth to future generations were also implemented. In 1947, new inheritance laws abolished primogeniture and mandated the division of assets among children and spouse. Subsequently, the government initiated highly progressive estate and gift taxes that made inter-generational transfer of wealth much more difficult.

While reducing concentration of stock mitigated the level of income disparity arising from flows, the Japanese government also strove to deal with the flow element. Some examples of this include capping dividend rates, allowing single-enterprise unions to ensure that rights of employees were well preserved and implementing a progressive tax system that prevented the accumulation of wealth in the fashion prior to the World Wars.

Hence, it is clear that the Japanese government implemented its redistributive policies in a systematic fashion. Having established this, the more important issue within the context of this discussion lies with whether or not these policies promoted equality at the expense of economic growth. If this were the case, then, the reduction in income concentration would be nothing to shout about. Hence, it is important to examine Japan's achievements in terms of economic growth.

Notable achievements in economic growth

Despite popular belief that there is always a trade-off between equality and growth, Japan's experience proves this view untrue. Figure 10 below shows Japan's per capita GDP growth during her high growth period, ie from post-World War 2 up until 1973 and figure 11, shows the income share of the top 5% in Japan for the corresponding period. In this case, the percentage change in the income share of the top 5% is used as a representative of the degree of income concentration in the Japanese economy. Since the income share of the top 5% in Japan remained relatively stable in the face of sustained and robust economic growth, this shows that contrary to popular belief amongst Malaysian politicians and policymakers, economic growth and increasing income equality can go hand-in-hand.

Figure 10: Japan per Capita GDP Growth

Figure 11: Japan Income Share of Top 5%

Moreover, in Japan's case, surprise of all surprises, it was when her economy was experiencing a protracted slump or also known as no-growth, that the income concentration or rising inequality began to increase. Figure 12 below shows the rising share of the income of the top 5% after Japan's asset bubble burst in 1991. Of course, the increasing degree of income concentration cannot and should not be attributed solely to the economic slowdown. But other evidence clearly shows that the unprecedented and sustained economic slump in the Nineties led to rising inequality - see figure 13. As a result of the economic slump, the number of Japanese families with no savings skyrocketed from less than 5% before 1990 to more than 20% a few years ago.

Figure 12: Japan Income Share of Top 5%

Figure 13: Percentage of Households with Zero Savings

What is even more worrying for those Malaysian politicians, policymakers and simplistic observers who naively argue in favour of redistribution policies like the NEP is that, as a result of a lost decade, the Japanese government had to implement policies that were expansionary in nature to mitigate the extent of the slowdown, which ironically in turn, led to higher income concentration levels. Such policies include the gradual reduction in the personal income tax rate from 75% to 37% and the lowering of capital gains tax. The rationale behind the adoption of such policies was to promote individual effort, to let the private sector be the engine of growth again and to revitalise the Tokyo stock market.

Conclusion drawn from the examination of Japan

Although it has been argued that Malaysia has enjoyed high growth rates in spite of the NEP, figure 14 below proves this view untrue. As shown in figure 14, both Japan and Malaysia began economic development from a relatively low base. In Japan's case, it is because World War 2 left her economy in dismal conditions. As for Malaysia, it is because her economic development efforts began relatively later than Japan's. However, while Japan has achieved tremendous success in economic development, figure 14 shows the extent to which Malaysia lags behind Japan. The time periods selected for the comparison of Japan and Malaysia differ; 1950-1987 for Japan and 1960-1997 for Malaysia. This is because Japan began economic development post-World War 2, while Malaysia began her development post-independence.

Figure 14: GDP per Capita Japan & Malaysia

*$-1990 international Geary-Khamis dollars

The comparison between the performances of the Japanese economy and Malaysian economy further emphasises the fact that income equality does not necessarily need be at the expense of lower economic growth or more importantly, that higher economic growth need not necessarily lead to worsening inequality. As mentioned above, Japan achieved much success in reducing the level of income concentration, and subsequently, maintained it at relatively low levels.

Having established that Japan has achieved much success in ensuring income equality, coupled with high growth rates, what then are the lessons that can be drawn? Similar to the purpose of examining the cases of China and Taiwan, the purpose of evaluating Japan's experience is not to imply that her growth model can or should be replicated in Malaysia, but rather, it is to prove that contrary to popular belief among Malaysians and Malaysian politicians, rising inequality has less to do with economic growth in itself than the government policies implemented.


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