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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1957 - 1970 (Part 7)


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

Conclusion from the 3 schools of thought

Figure 15: Income Share of Top 10% in US

Having examined the 3 schools of thought pertaining to the relationship between growth and inequality, it appears that there is no clear or simple cause-and-effect relationship between economic growth and income inequality. This is because the relationship between equality and growth constantly evolves according to the form of government policies implemented, as well as developments in the economic environment and prevailing conditions. For instance, in Kuznet's inverted-U hypothesis, he concluded that the trade-off between growth and equality is merely a short run syndrome and that in the long run, this trade-off dissipates. However, this conclusion was drawn from a study conducted on various countries during a specific time frame, ie from the 1880s up until the 1940s, when post-World War reconstruction efforts took place. For example, in the case of the US, the level of inequality fell dramatically in 1942 (see figure 15) and hovered at relatively low levels until 1979, where inequality started to rise again. In this case, the income share of the top 10% is used to represent the level of income concentration and thereby, the level of income inequality. By comparing figure 15 and table 20, it is evident that there is no simple relationship between the level of inequality and economic growth, since there was neither a drastic improvement nor deterioration in GDP growth post-1987, when inequality began to rise.

Table 20: Average GDP growth

Therefore, because there is no clear relationship between income inequality and economic growth, government concerns that higher growth rates may cause the income gap to widen are unjustified. Hence, instead of implementing the NEP, which sacrificed massive economic growth for little equality, other forms of redistributive policies that allow economic growth and equality to go hand-in-hand should be implemented.


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