Kamal Salih MHDR2013 MHDR 2013 UNDP
Text of Keynote Address at the Official Launch of The Malaysian Human Development Report, by Tan Sri Datuk Dr. Kamal Salih, at Pacific Regency Hotel, Kuala Lumpur, at 9am 25th November 2014.
Ms Michelle Gyles-McDonnough
Resident Representative,
United Nations Development Programme,
Malaysia,
My two distinguished co-authors,
Dr Muhammed Abdul Khalid and Dr. Lee Hwok-aun,
Tan Sri Tan Sri, Datuk Datuk,
Members of the Media,
Ladies and Gentlemen.
Assalamualaikum and a very good morning to all,
I am pleased to deliver the keynote address this morning on the occasion of the double Launch of the UNDP Global Human Development Report 2014 and the first Malaysian Human Development Report (MHDR), and would like to thank the UNDP Representative Office in Kuala Lumpur, particularly Ms. Michele McDonough for this honor. While the Malaysian Report was to all intents and purposes completed a year ago, it was destined perhaps that editorial and other circumstances had intervened and led to this timing of its release today to coincide with the launch of the Global Human Development Report. Fortuitous perhaps, but in this way it makes it possible to locate the findings of the Malaysian Report against the comparative framework of the current state of global progress in human development.
I feel the release of the MHDR today could not come at a better time; the current debate in Parliament on Budget 2015 which coincidently is coming to a vote later today, the launch of Dr. Muhammed’s book entitled the Color of Inequality last week, the continuing round of dialogue and consultations both within government, the opposition parties and civil society on the state of the economy in the context of national unity, and the work of the EPU to frame the Eleventh Malaysia Plan to be introduced sometime next year as the final leg of the national mission to achieve developed status by 2020, together with this Report all should contribute to a better understanding of what needs to be done by all stakeholders and ordinary citizens concerned with the future direction of the country.
My sense of the state we are in Malaysia today and of the unfolding scenario is that we are now facing a critical juncture
in planning for the future of our nation, and that all issues of policy are on the table to chart a new course for the economy going forward. As noted by Tengku Razaleigh Hamzah in his letter to members of the Dewan Rakyat in the current 2015 Budget debate, “The critical issues involved are of a structural nature not easily tackled via routine annual provisions”. We have endeavored to address these issues in this first Malaysian Human Development Report that we are launching this morning through a rigorous analysis of the data available to us so as to better inform the policy debates regarding our national direction free of biases, obfuscations and myth-making for political gains. We hope the facts duly digested will prevail over prejudice in order to achieve a more just society and guarantee the welfare, safety and well being of our future generations.
Ladies and Gentlemen,
As already noted by Michele, the Report we are launching this morning is the result of a commission by the UNDP and EPU to the three of us, Dr. Muhammed Abdul Khalid, Dr. Lee Hwok Aun and myself, to review the performance of the Malaysian economy over the last forty years or so since the introduction of the New Economic Policy (or the NEP) along the theme of inclusive growth, and to make recommendations for a new generation of policies for economic growth and a more equitable development implied by that theme. I don’t for a minute purport to be all-inclusive in this Keynote Address outlining this 300-some pages of the Malaysian Human Development Report on Inclusive Growth; I can’t possibly do that in the time I have, but would like to highlight some significant findings for your intellectual titillation this morning.
Ladies and Gentlemen,
The challenge for Malaysia in adopting the inclusive growth approach is the peculiarity of the country’s political economy which attaches a significant ethnic dimension to development policy. This was the underlying problem addressed by the NEP at its inception. For decades since then, Malaysia managed to maintain a respectable level of GDP growth; transformed its profile from a primary goods producer to exporter of manufactured products; reduced poverty and income inequality, raised education and health attainments, and moderated ethnic disparities.
Despite four recessions including the Asian Financial Crisis of 1997-8 economic growth has been sustained and shared through consecutive implementation of the three core development policies which began with the NEP, followed by the National Development Policy (NDP) and National Vision Policy (NVP). The problem over the decades involved has not been with the intent nor the content of the NEP and its successors but the manner of their implementation, which have produced new inequalities, poverties and vulnerabilities in the development process. While no further progress has been made in reducing inequality in income distribution over the last decade, the NEP had resulted instead in creating a culture of dependency, corruption and racial envy.
The incorporation of “inclusiveness” in the New Economic Model (the NEM) by referring to the bottom 40%, in our opinion and based on the analysis we had undertaken, only partly solves the problem. Policymakers have also to address the issue of vertical and horizontal equity in development policy. Reliance on the market’s trickling-down process without addressing institutional issues, corruption and rent-seeking behavior will not suffice to achieve the goals of economic growth and reduced inequalities derived from it. In my view, a piecemeal and project-oriented approach will not do the job; only a comprehensive reform of policies and institutions will set the course of the country’s development in its proper path onwards to economic growth and social justice.
Development economists are now grappling with a new macro-microeconomics of development around the concepts of endogenous growth, the merits of pro-poor growth, the role of asset inequality in a balanced growth strategy, and the complex mechanism of growth-inequality-poverty interactions in the development process. All seek a new economic paradigm including the role of government and the third sector to deal with the central issues of economic growth and social inequalities at the global and national scales. Economic development is all about growth and inequality, and the institutions and incentives that determine how one leads to the other with consequences beyond the realm of the market. This is the new normal in economic policy, replacing the Washington Consensus that has dominated development thinking and practice for the last three decades.
In this Report we define inclusive growth as comprising equitable distribution of benefits of economic growth and of social spending across distinct income groups and the poor irrespective of their group membership; involving robust generation of broadly accessible opportunity for economic participation and safeguards for the vulnerable; and inclusion of citizens in policy formulation and implementation, aimed towards minimising social exclusion and increasing social cohesion.
We need to adopt a multidisciplinary and multidimensional approach, encompassing economic, social, political and legal elements, and highlighting regional, gender, ethnic and other aspects of relative inequality and deprivation. For this purpose we developed a new economic paradigm to understand the impact of economic growth on households by decomposing household fiscal capabilities, or purchasing power, into four components: i) wealth effects to capture income flows from asset ownership in terms of profit, dividends, rental and other passive income sources, ii) disposal income of households after tax, iii) access to credit for investment and/or consumption and iv) government transfers or subsidies. This framework serves as a basis for both the statistical analysis of the data available to us, as well as in designing policies and programs to achieve inclusive development.
Ladies and Gentlemen,
Malaysia’s growth from 1971 to 2012 meets partly the inclusive criteria outlined above to a considerable degree, although the inclusiveness in policy formulation may be open to question. The evidence includes reduction in poverty rates, high growth rates for low-income households, reduced inequality on a national scale and between regions, diminished interethnic and intra-ethnic disparities, robust and resilient growth driven by private investments, and lessened unemployment across all ethnicities.
But, the Malaysian development experience is like football, a game of two halves. Development in the first twenty years, formally under the aegis of the NEP is manifest in a rapid decline in household poverty, rising average incomes with GDP per capita quadrupling over the period, growth of bumiputera equity rising to 23% of total equity ownership, while employment participation in the modern sectors accelerated along with the growth of the bumiputera middle class, while the Gini coefficient for income disparities declined.
Malaysia’s socioeconomic progress however slowed down since the 1997 Asian financial crisis. Notably, our GDP growth rate fell below the average growth rate per annum of 7-8% to as low as 4.5% in 2004 (though has since recovered to 6%). The bumiputera equity target is still short of the 30% target, while Malaysia is still stuck in persisting inequalities at a level still far from the standards of a developed nation, in income class, regional, gender and ethnic dimensions, and lagging development of human capability, and of institutions fostering inclusiveness and effective governance. Social exclusion, barriers to social mobility and economic insecurity continue to stand in development tension against the objective of greater inclusiveness sought through all development vision and plans.
The international context lends perspective to the rate of improvement in socioeconomic development in Malaysia. The country’s Human Development Index (HDI) score has continuously climbed, but its HDI ranking has remained static—within the 50-55th rank since 1980. The nation is expanding the capabilities of its people on the whole, as reflected in the average income, education and health outcomes that constitute the HDI. However, Malaysia has yet to break through to the upper strata of countries with very high human development levels, lower income inequality, social inclusiveness and equitable opportunities and outcomes. The latest Global Human Development Report for 2014 released today along with the MHDR puts Malaysia at the 62nd position among 187 countries and territories in terms of the Composite Human Development Index, which averages the country’s indicator for life expectancy at birth, expected years of schooling, and mean years of schooling along with GNI per capita on a Purchasing Power Parity basis. The HDI index for Malaysia, which has been trending up since 1980, has reached the value of .773 (out of a maximum 1.0) this year, better than Thailand, the Phillipines and the average for the whole of East Asia and the Pacific. However, the new Inequality-adjusted HDI has not been calculated, which takes into account inequality in all the three dimensions by discounting the shortfall from the average measure achieved and reduced as a percentage deficit of the original HDI.
So, while this “global” comparative measure is commendable as far as Malaysia is concerned, other dimensions of human development in Malaysia as presented in our Report suggest that our struggle to achieve developed status with justice remains unfinished, while new challenges have surfaced. Income and capability poverty among Bumiputera[1] minorities remains high, and pockets of marginalization prevail, in both rural and urban areas. In addition, the income gap in absolute terms has been increasing while the relative income gap has remained stagnant in the past two decades. Asset inequality shows wider gaps with inequality in asset ownership nearly double that of income. In the labour market, contrasting workforce profiles and preferential practices in public and private sectors indicate that ethnicity exerts influence over employment, posing questions towards inclusiveness in workplaces. Women’s participation in the labour market remains exceptionally low even when compared to neighbouring developing countries of lesser income levels, and gender inequalities overall warrant specific analyses and policy considerations.
Among our keys findings, we also observe that the head of household’s education, gender and ethnicity correspond with household income. Relative household income deprivation is more acute among households headed by persons with less formal education, especially if attaining primary schooling or less, underscoring the importance of education to inclusive growth. Women-headed households and Bumiputera minorities of Sabah and Sarawak, as well as the Orang Asli of Peninsular Malaysia, are also more heavily concentrated in lower strata, indicating lack of inclusion of these distinct groups in reaping gains of growth and development.
Consideration of human capability draws out some insight into the state of inclusive growth. Development attainments across our range of indicators show East Malaysia trailing the Peninsular. Crucially, Sarawak lags behind the Peninsular by much greater margins than indicated by the state’s rather low official poverty rate. We also observe that rural areas of Sabah and Sarawak are, in capability terms, even further behind rural Peninsular Malaysia, compared to the corresponding urban-to-urban disparities. Educational inequity continues to be salient, not just in terms of access and enrollment but also quality of schooling. Our findings raise important implications for policies to uplift capacities, improve outcomes, and provide social protection for the relatively deprived and vulnerable.
Ladies and Gentlemen,
Kamal Salih MHDR2013 MHDR 2013 UNDP
Inclusive growth entails lifting households out of poverty and facilitating upward, especially inter-generational, mobility through graduation to middle class status. This Report noted that median income profile of the NEP generation improved more rapidly than that of the earlier generation and even the post-NEP generation, though the median levels of incomes are higher for the latter. In other words middle class formation was fastest during the implementation of the NEP in the twenty-year period involved, but evidently not since in the liberal and globalization era after the Asian Financial Crisis of 1997. However, throughout entire period till now, the size of the middle class, defined in income terms by the World Bank as those households positioned between 20% of the median income, has remained relatively small for Malaysia, trending around the 20% level when in comparison in the typical developed country situation the percentage is closer to 50-55%.
A telling aspect of inclusive growth is the status of the middle class in terms of the composition of its fiscal capability. While the bottom 50% has wages/salaries making up 97% of their purchasing power, the upper part of the middle class would exhibit a similar pattern to the upper 50% with contribution from wealth effects approaching 11% and increasing as they climb the income ladder. In other words, on the basis of household fiscal capability Malaysia essentially exhibits a two-class social stratification, with inequality diminishing between ethnicities but within-group income gaps rising more and more to obliterate the NEP-based ethnic classification as a relevant issue of equity in development. Income inequalities then become essentially a question of class. This would be good news for some, while not so for others!
The decomposition of household fiscal capability in the above new economic paradigm also brings out the importance of assets in differentiating the lower from the upper classes, and need to introduce opportunities for the lower- to middle-income groups to acquire assets, whether physical (think housing or property) or financial, or intangible like a Ph.D! Ownership of assets is a powerful enabler in social and economic progress, and the lack of it can seriously impede economic and socio-mobility.
In this regard, 63% of Malaysian households compared to 43% of those in urban areas have no financial assets. In 2012 households with income below the median level derive the bulk that is 97 per cent of their income from wages or self-employment. Of the middle and upper income classes, about 11-14% of their household income come from asset holding. As de Soto, a Peruvian economist, has said decades ago, and Felda settlers have proven over the last forty years, ownership of assets is a significant determinant of success and economic security in a capitalistic market-driven economy. And the French economist Thomas Pickety further showed recently citing American statistics, when the rate of return to capital (in order words, monetizeable or financial assets) exceed the growth per capita of real output, the level of inequality in terms of income within an economy will tend to rise. I wish to hazard a guess that this is what probably has been happening in Malaysia over the past three decades leading to our current state of economic inequality.
Ladies and Gentlemen,
Another significant finding regarding inclusive growth in the MHDR study that merits some airing here is the relationship between growth, productivity and wage levels.
Our national competitiveness model posits that the role of factor inputs, productivity, international trade, foreign capital, and government expenditure, coupled with prudent management of the external debt position, have cumulatively supported Malaysia’s economic performance through this period. However, a growth diagnostic analysis of the Malaysian economic profile confirms that low-productivity labour and total factor productivity are the crucial binding constraints to sustainable economic growth.
Our Report makes reference to a World Bank study in 2008, as stressed by the Nobel Laureat in economics Paul Krugman regarding the Asian “economic miracle”, Malaysia’s economic growth over the two decades after the ending of the NEP had largely been due to the contribution of factor inputs ie, capital and labor, and that contribution of labour productivity, skills and total factor productivity is to GDP growth over the 1987-2007 period is low. Wage shares in gross national output at 32% in 2012 also is low compared to that of other advanced countries. With the wage-productivity gap secularly increasing over the years, policies toward a high-wage economy would be more relevant and should be considered now than previously when reaching developed status in 2020 and beyond, especially when the salary gap between the high end jobs are compared to the lower end jobs is so stark!
Thus overcoming constraints to labour productivity improvements only goes part of the way to fostering inclusive growth for Malaysia. In fact, to understand this we have to go beyond growth performance to cover the role of institutions, in particular shortcomings in coordination and dynamism both the public and private sectors. The roles of small and medium enterprises (SMEs) and the informal economy are critical to inclusive growth in Malaysia.
Through the new household economic paradigm in our Study, it is possible to demonstrate the possible relationships among social and economic processes at the household level underlying the impact of labour skill premiums through more pervasive education levels of the workforce and of positive transfers, as shown in the three Latin American countries studied by Lustig et. al., (2013). As another illustration, the failure of the prevailing credit system and its inability to satisfy loan demands from the SME and poor sectors of the economy that cannot access formal credit channels or do not have sufficient collateral (essentially asset based financial or physical) against which to borrow. If the SME sector does not have access to external funds for investment, the capacity to raise investment per worker, and thereby productivity and income from wages and self-employment, the economic status of the bottom 50% of households will seriously be impaired.
Ladies and Gentlemen,
There are several policy options available to reduce inequality and achieve equitable and inclusive growth. The Report undertook some simulations in response to policy interventions, and found that imposition of a minimum wage potentially improves inequality, based on the changes in the Gini coefficient, by about seven per cent, while compulsory secondary education stands to reduce inequality by up to four per cent. Government transfers, depending on the amount, tend to have marginal effect on overall inequality.
Rationalization of subsidies has impacts at several levels. When shifting to an equity-based scheme in place of the current consumption-based system, our policy simulations showed that equity-based subsidy targeting have implications not just on income distribution but also on the cost to government and therefore savings in government expenditure.
Reform of the tax system to be more conducive to labour income rather than capital would also a necessary part of the new inclusive growth strategy, as is incentives for companies to adopt a productivity-indexed compensation and bonus system in both the private and public sector.
Other reforms we include in the MHDR covers labour market reform to reduce discrimination on ethnic gender or regional terms through an Equal Opportunity Act, the introduction of social policy covering labour, women and childrens’ rights, as well new safety net provisions such as employment and medical emergency cover for the lower income groups, the disabled and other vulnerable subgroups.
Despite momentous attainment in uplifting the socioeconomic status of Malaysians overall, poverty rates vary markedly among diverse Bumiputera communities, with the ethnic minorities both in Peninsular Malaysia as well as Sabah and Sarawak having the highest incidences. The majority of ethnic minorities are found to have predominated in the lower rungs of the economic ladders where most are self-employed largely in primary and low-income sectors.
While there has been an increase in the recruitment of Bumiputera minorities from Sabah and Sarawak in public service at the federal level, the numbers are still disproportionately low. This civil service imbalance can lead to increased racial polarisation and perceived discrimination.
From the educational point of view, issues of accessibility and quality of education have long plagued ethnic minority students. This has led to poor academic performances and alarmingly low admission rates to public and private universities, distribution of scholarships and enrollment in professional degree programmes, complicating their prospects in lucrative economic sectors.
We also call for a new inclusive development strategy is introduced by adopting a bottom-up approach of decentralized growth. This would create urban agglomerations by concentrating activities to produce the necessary economic density for rapid and inclusive growth. It was found that per capita GDP growth is accompanied by increased urbanization, but it would also lead to the spread of economic activities to rural areas. It is interesting to note that a decentralized growth strategy has never been fully tested in this country.
At the same time this study argues that the implementation of the Government Transformation Programme (GTP) may help the country improve its level of competitiveness and delivery of public services. However, a delivery system for public services will only be effective if it is built upon a good procurement policy, accountability and transparency that can minimise wastage and leakages in public expenditures.
In addition to addressing environmental sustainability, including the utilisation of natural resources, the MHDR seeks fiscal sustainability at the federal level and new initiatives to reform of the fiscal- federalism practiced in in Malaysian to improve fiscal capacity of states to achieve decentralised and inclusive development in Malaysia. At On fiscal federalism, this study affirms that the absence of decentralised public fiscal allocation has become a point of contention. With excessive centralisation, especially on public fiscal allocation, local aspirations are much more difficult to achieve, giving rise to a “one-size-fits-all” prescription from the centre (federal).
The Report emphasizes emphasises that the current mechanism for redistributing income is weak and subject to leakages and wastage, while the contribution of the private sector to private delivery of public goods are imperative and can play a key role in mitigating the social costs that can arise from private development.
We assert that the above institutional issues need to be addressed in the institutional reform process—mainly to support improvement in income distribution, raise the share of wages in relation to profits in national value-added income as well as to provide social safety nets for the poor and marginalised groups in Malaysia.
This study also emphasises that the concept of equality has moved beyond mere “formal equality” into “substantive equality” where equality has to be contextualised, drawing upon values such as human dignity, distributive justice and equal participation. This has implications for the legal framework. Our inclusiveness framework presented in this Report discusses a number of constitutional and legal issues either directly or indirectly that influence inclusivity. These include for affirmative action in the Constitution, and legal protection of women, children, indigenous, workers and disabled peoples’ rights. Overall, Malaysia has significant laws to promote and regulate rights and issues related to the less fortunate and vulnerable people including women, indigenous, workers as well as the disable people. There have been several cases testing the application of these laws and their assurance of equality in various issues.
Ladies and gentlemen,
I hope I have managed to convey to you in the last half hour the essence of the Malaysian Human Development Report we are launching today. Policy making is a politically hazardous business. Lee Smolin, a theoretical physicist wrote in the introduction to his book The Trouble with Physics,
“[Yet] there is something enobling about our search for the divine. And also something humanizing, which is reflected in each of the paths people have discovered to take us to deeper levels of truth. Some seek transcendence in meditation or prayer; others seek it in service to their fellow human beings; still others, the ones lucky enough to have the talent (and I might add, the opportunity) seek transcendence in the practice of an art (my emphasis added).
Policy making is such an art. It also about power, the power to do the right thing. And it is about political will, the will to see it through. But without an accurate picture of the problems and mechanisms involved, albeit some are completely unknowable, it is not possible to attain effective and impactful policy. We hope that this MHDR study will contribute some to the formulation of the next generation of policies to achieve the goals of inclusive growth in our desire to attain developed status in 2020.
In preparing this Report, we were fortunate to have been provided with the largest set of unprocessed data as well as unpublished statistics from government agencies and institutions in particular the Malaysian Statistics Department, that had not been accessible to non-official entities before. This had enabled us to analyze deeper into the development experience of this country over the last forty years since the implementation of the New Economic Policy in 1971. In the process we hope to have been able to set the record straight, and to separate the myths from the reality regarding the impact of the development policy. We would like to record our sincere thanks to all the government officials concerned who had extended the team so much cooperation and assistance with regard to the data.
I would also like to take this opportunity to thank our collaborators, including the thirteen background paper writers listed in the leading pages of the Report who may immediately recognize their contribution to this study. I want also to include in this acknowledgement the inputs we gained from other researchers and CSO participants in our three consultations as well as feedback from government agencies during the preparation of this document. I also would like to acknowledge the sterling work of our research assistant team in successfully completing this Report.
Finally, we would like to record our thanks to the sponsors of this project, the Economic Planning Unit and the United Nations Development Program, for the commitment and cooperation extended to us to successfully complete the Report. We are particularly grateful for the degree of independence given to the team in conducting its work not normally accorded to such officially-sponsored research.
Thank you.
You can download the report here.
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