For 2014, inequality is undeniably the buzzword in public policy domain, largely thanks to Thomas Picketty's unlikely bestseller, "Capital in the 21st Century".
Solving inequality has been propounded to the forefront of most political and intellectual debates, replacing the paradigm of poverty eradication which even for Malaysia has reached its end (with the exception of some chronically under-developed states like Sabah and Sarawak).
Arguably, the Malaysian government has also paid attention to the issue of inequality by implementing certain policies of redistributive nature, like the cash transfer via the BR1M programme.
However, to see inequality merely from the perspective of "income inequality" avoids the larger question, which is what are the consequences of inequality?
The discourse on inequality will not be complete, let alone constructive, if this dimension of the problem is sidelined. While the word "inequality" itself invites moral judgement, the issue cannot be seen as simple as that.
Pigeonholing the problem into a moral argument will result in often intractable polemical ideological debates, forming the left, right and centre of Western politics as we know it.
Not only that, in the overarching framework of neoliberal capitalism where most democracies reside, denouncing inequality "just for the sake of it" would be cast off as "poor envy".
This is because the tenets of modern capitalism implies the inherence of inequality, as Picketty's study that covers long term inequality in the 20th century demonstrated. Some would even argue – wrongly, as I opined – that inequality is a price to be paid for progress, in simple neoclassical terms.
The costs of inequality
So, if we take a step away from the position that inequality has to be viewed solely from the lenses of income inequality, what do we need to examine then? The cost of it, actually.
For if the cost of inequality is proven to be socially, economically and invariably politically detrimental, the marginal cost of not tackling it, also increases. The grounds to do something about inequality are no longer just moral, but also a matter of exigency.
To begin with, based on the exponential absolute income growth of the top 20% of Malaysian households, the country is seeing the rise of a super-rich cohort that enlarges the income gap in a staggering margin.
According to the Malaysia Human Development Report 2013 (HDP 2013), the total wealth of the top 40 richest in Malaysia constituted 22.4% of the national GDP in 2012.
This might trigger a phenomenon termed "Trickle-Down Consumption" by Bertrand and Morse. The model proposes that the consumption of the middle income earners is "particularly responsive" to the top income earners.
As the wealthy consumed more elastic and visible goods and services -ostensibly due to their capability to do so-, the middle income earners also tend to spend more too to keep up with the high income cohort through "higher" and "visible" spending.
This could result in debt and even bankruptcies, supported by the findings of the paper that a positive relationship existed in the United States between the number of personal bankruptcy filings in a state and the top income levels of that state.
Nevertheless, the externalised yearning for social recognition and materialistic pursuit should not be summarised as the only and inadvertent damage caused by an unequal society.
Frank and Levine in their theory of Expenditure Cascades provide a less "choice-driven" aspect of expenditure and consumption.
The model of Expenditure Cascades postulates that the consumption of the wealthy will trigger increased spending in social classes directly below them (be it out of choice or necessity, or both), and the effect rippled down to the bottom of the economic ladder, the most vulnerable group since they have little disposable income to begin with.
The theory corresponds to findings that observed saving rates had declined in countries with rising inequalities.
The theory is not hard to comprehend. A relatable example would be the bidding up of housing prices by the wealthy, as well as the sprouting of enterprises catering to the level of expenditure expected of affluent neighbourhoods.
These consumption-driven expenditures will exert enormous financial and social pressure to the lower income groups, especially the urban middle class due to their physical proximity to the wealthy.
While not tested empirically, one should not discount the applicability of these two models in Malaysia seeing that the country also suffers from high levels of household debt (86.8% of the GDP in 2012) and a worrying bankruptcy rate, with 60 people declared bankrupted daily .
Examining the components of loans and reasons of bankruptcy filing would reveal that housing, vehicle and personal loans are primarily responsible, intuitively, for "visible" and "necessity" spending, or both.
The problem also led to increased urban poverty in Malaysia, which can be assessed by the incidence of relative poverty in the country that stands at 20% in 2012.
Tellingly, in conformity to the theories of Trickle-Down Consumption and Expenditure Cascades, relative poverty in Malaysia is consistently higher in urban areas as compared to the rural ones, from 1989 to 2012.
Above all, even from the aspect of growth, the Organisation for Economic Cooperation and Development (OECD) has found out that, through a cross-country study, the cost of rising inequality also comes in the form of growth.
The report states that rising inequality has costs more than 10 percentage points off growth in countries like Mexico, New Zealand, Sweden, Finland and Norway over the past two decades. For the GDP-obsessed, this should come as a warning too.
Time for structural reforms for the Malaysian economy
The New Economic Policy (NEP) and its multiple incarnations, despite its significant social engineering and poverty eradiation achievements, have not been able to reform the Malaysian economy's predisposition towards inequality.
This structural deficiency while able to promote income growth at all strata of households, also allowed the same level of income gap growth between the different classes throughout the years.
This culminated in the absolute income gap growing larger and larger for the top earners vis-à-vis the lower ones, resulting in the palpable effects of inequality to surface as has happened in recent years.
This also poses significant challenges for social mobility, as the gap widens, the chances of closing it narrows.
The inequality problem of Malaysia's economy has to be taken out of the income paradigm so that policy thinking is not confined to cash transfers.
The burning questions of wealth and wages inequality, regional imbalance, statist involvement in the economy, monopolisation, economy financialisation and the real property glut have to be addressed and rectified because they not only are potentially among the biggest contributors for Malaysia's inequality, but also structures in perpetuation of it.
Without charting an inclusive way forward, this blind pursuit of Gross National Income(GNI) target of US$15,000 (RM53,500) per capita by 2020, which has no bearings on inequality whatsoever, will only prompt one question: at what costs?
In a nation as fragmented as ours, recent racial unrests on prices and housing projects might suggests it is something we would not want to find out.
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