This lecture was given on the 23rd November 2013 at Universiti Kebangsaan Malaysia.
The theme was on the subject of the crisis of development thinking and practice associated with the neo-liberal development thesis and the alternative schools of thought in the so called post-development search for a new economic paradigm. The lecture examined the Malaysian case study as reported in the recently launched Malaysia Human Development Report in order to derive a new economic paradigm based along islamic economic principles and the social solidarity economy as a means to achieve economic growth with social justice.
“Development and Inequalities:In Search of a New Economic Paradigm using the Malaysian Case.”
By Kamal Salih
Abstract
Development thinking is in the throes of a crisis in search of a new economic paradigm to deal with the so-called post-development issues in the world economy. The Lecture will focus on the relationship between income growth, inequalities and poverty reduction as the core problematique of development. Using data from the Malaysian experience of the last forty years since the introduction of the New Economic Policy in 1970, the author seeks to elaborate on a New Economic Paradigm to explain the impact of economic growth on poverty reduction and its distribution effects and vice versa. At issue is the need to incorporate assets (and credit) as a crucial factor in determining development (encompassing economic growth) and inequalities (income and the social reproduction of class). It concludes with the assertion that the “paradox of development” is rooted in the system, and foreshadows a new discourse on the Islamic Economic Model as a way to resolve the impasse in development studies.
1. Introduction
I am personally delighted to be giving this Ninth Ishak Shaari Lecture to honour the memory of a friend and colleague whom I remember fondly, and whose body of work during his suddenly foreshortened career I had admired. My most significant recollection was when I commissioned him early in his career and Jomo Sundaram to undertake a case study of uneven development at the village level in 1978 as part of a UNCRD multi-country comparative study on Unbalanced Growth and Local–level Development. Together with inputs from the late Khoo Kay Jin, Mei Ling Young, Halim Salleh and the late Hashim Yaacob, I produced a volume that unfortunately was not formally published except as a UNCRD in-house monograph (Kamal Salih, 1979). It would have otherwise served as a fitting Feschrift for the late Ishak Shaari. Even at that time in the early part of his career, Ishak had already shown, intellectually and as praxis, his passion for the issues of development, distribution and poverty.
This bit of personal history properly situates the topic of my lecture this morning; as a tribute to him for which this series is named, and as a contribution to the task of constructing a new “development paradigm”, using the Malaysian case as the empirical platform to articulate the issues of development and inequalities.
Development thinking is in the throes of a crisis in search of a new economic paradigm1 to deal with the so-called post-development issues in the world economy. This needs some definition and discussion of the so-called development “impasse” in the context of the evolution of development thought or discourse over the last few decades. In this search for a way out of this development impasse, in theory and practice, two competing theories will be brought out, namely, the neoliberal approach versus the “post-development” discourse, both essentially anti-development, taking on a globalist stance currently to the theory of development.
The lecture will be structured in the following manner. In the next section, I will undertake a brief review of this so-called post-development crisis, going through the various phases in the evolution of development thought, or paradigm, in order to underpin the issues in the current debate. In section 3, I will focus on the relationship between income growth, inequalities and poverty reduction as the core problematique of development, by citing other studies that had engaged with this problem.
In section 4, using data from the Malaysian experience of the last forty years since the introduction of the New Economic Policy in 1970, the author seeks to elaborate on a New Economic Paradigm to explain the impact of economic growth on poverty reduction and its distribution effects and vice versa. The analysis of data adduced from four decades of Malaysian development experience by the decomposition of household purchasing power or fiscal capability as informed by this new economic paradigm, brings out the need to incorporate assets (and credit) as a crucial factor in determining development, encompassing economic growth, as it impacts on inequalities in income and the social reproduction of class and relative poverty. While economic growth has led in many developing countries including Malaysia to dramatic reductions of absolute poverty the persistence of income inequalities (and relative and new forms of poverty) needs to be explained in a new development paradigm that goes beyond market fundamentalism and globalization.
This is discussed in the concluding section 5 in terms of a “failure of system”, in particular the prevailing capitalist system, that leads to the “paradox of development” in which the neoliberal and globalist paradigm of economic growth produce an unequal distribution of the benefits from the development experience, and suggest an Islamic Economic Model (IEM) under the aegis of an Islamic worldview and economic system as an alternative development discourse and practice to solve the paradox of economic growth and social justice.
2. Post-Development Crisis: A Brief Review
At the outset, I need to explain what is meant by this “post-development” crisis, in order to set the grounds for new thinking on development. According to Pieterse (2008, p.5):
“Development is a strange field. Development practice, policy and studies are all flourishing. … Yet for quite some time the field has been said to be in crisis, impasse, or passé. Part of this is a crisis of ideologies, which reflects a wider paradigm crisis – of neomarxism and dependency theory as well as Keynesianism and welfare politics. There have been plenty of critical positions but no coherent ideological response to the neoliberal turn. The crisis is further due to changing circumstances including development failures, the growing role of international financial institutions, and conflicts in developing countries.”
But why “post-development”? Pieterse (ibid) again:
Globalization and regionalization are overtaking the standard unit of development, the nation. International institutions and market forces overtake the role of the state, the conventional agent of development. The classic aim of development, modernization or catching up with advanced countries, is in question because modernization is no longer an obvious ambition. Modernity no longer seems so attractive in view of ecological problems, the consequences of technological change and many other problems. Westernization no longer seems compelling in a time of revaluing local culture and cultural diversity. In view of the idea of multiple modernities, the question is modernization towards which modernity? Several development decades have not measured up to expectations, especially in Africa and parts of Latin America and South Asia. The universalist claims of neo-classical economics and [World Bank/IMF] structural adjustment policies have undermined the foundation of development studies, the notion that developing countries form a special case.
In view of this, it is legitimate to ask the question: doesn’t all this mean the end of development; in other words, that we are in a post-development crisis?
Schuurman (2000) had asserted earlier that a development impasse had occurred in the mid-80s with the triumph of neoliberal ideology launched by the adoption of Reaganism/Thatcherism as the political ideology of the right. In the process of over the next two decades, the old certainties about the idea of progress, the homogeneity of the developing world, and the role of the state in nation-building through institutional modernization in the image of and catching-up with the developed world, no longer apply to the contemporary world.2
Since the Second World War, the fertility of development thinking, and the practice of development as implied by “intentional social change in accordance with societal goals,” is due to its being problem-driven rather than theory-driven, and whose theories “ha(ve) been influenced by other social sciences more often than it has influenced them. Evolutionism, Marxism, neo-marxism, Keynesianism,
Structuralism, functionalism, neoclassical economics and post-structuralism are among the social science paradigms imported by development theories at different times” (Pieterse, op. cit., p.5).3
Table 1 summarizes these changing perspectives of development over the years from its roots in classical political economy and the impact of early industrialization and catch-up strategies in the nineteenth century and the colonial era in the early twentieth century. The winds of War heralded the rise of development economics and modernization theories in the first half of the 20th century. The prevailing Eurocentric view of development at the start of the Cold War led to a challenge from the Third World perspective through dependency theory and the push for auto-centric development. This then had engendered the New International Economic Order approach in development studies and world system theory in the sociology of development, which informed much of development research in the seventies and early eighties. The success of some countries to emerge as the semi-periphery led to a further revision of development thinking through the framework of uneven development on the left, and neoliberalism as its counterpart on the right.
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Table 1: Meanings of development over time
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Pieterse further showed in his review of evolving development paradigms their links to the neo-colonial structure of production of development knowledge, and the intellectual hegemony of the West, driven by these perspectives. He concludes here, quoting Hettne, that “the paradigms that are available in the intellectual market at the time shape the explanatory frameworks that inform development thinking”.4 Or, as put differently by Bellu (2011, p.7), with an eye
on creating “development recipes” which reflect different development paradigms:
The emphasis given to the different “ingredients”, both in the literature and in the development practice (policies, programmes, funding etc), reflects the different visions of what really matters in developing a socio-economic system. The various views on development paradigms encompass different visions about what type of development is desirable and how it is achievable.
I show below in Fig. 1 that development thinking as an activity morphs into a paradigm through a process of articulation through multiple levels of engagement and domains, with entry points at different stages of a non-linear process, producing the policies and strategies in a coherent manner to fashion a system of thought and practice (eg, capitalism, Islamic, socialism or “inclusive growth”) recognizable by a collective agency (a school of thought, a government, a development agency or a society) to achieve some commonly- (however arrived at) held goals or vision.
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| Figure 1: Making of a Development Paradigm |
The point about a post-development crisis, as we will argue, is the divergent almost opposed trends in development thinking, or paradigms used interchangeably here, between on the one hand those that see liberalized markets and a pro-business state as the best approach to economic growth and economic development (a “free market trickle-down growth” development paradigm, according to which, other development ingredients are of secondary importance), and on the other those supporting a larger role of the government, viewing growth as an ingredient of development only if associated with a somehow equitable distribution of income (the so-called “pro-poor (broad-based or balanced) growth” development paradigm) (Bellu, op cit. pp. 13-14).
In development circles (see for example, Stiglitz, 1998) the former is associated with the so-called Washington Consensus that had advocated globalization, privatization and trade liberalization, structural adjustments, price stability, control of budget deficits and increase of money supply to promote growth. Stiglitz (ibid) had been a strong critic of this position for its narrow focus, seeking a broader-based development paradigm beyond economic growth, which views development as representing a transformation of society. In this view, GDP growth is necessary but not sufficient to achieve development and freedom from hunger and poverty, and a more equitable income distribution. Among the first to promote the so-called post-Washington Consensus school, he advocates a new development economics and asks the question how to promote the new development agenda, ensuring that it more effectively challenges the reigning neoliberal paradigm.
The current state of play in this post-development debate received a jolt with the subprime crisis that led to the collapse of some of the most well known banks on Wall Street, whose fallout is still being felt with litigations and fines imposed on a number of “too big to fail” banks like JP Morgan. In the government bailouts and reregulation of the financial markets, the “neocon project” and small government movement (Tea Party) begun in the early eighties and the period bracketed by the two Bushes suffered a major setback. The challenge to the Washington Consensus begun by Stiglitz took a fresh turn, and development studies was rejuvenated.
In my view it is the counter-position of the neo-liberal paradigm versus the (global) uneven development perspective that had led to the post-development crisis we now face. (Some wag had said: …a fly in search of a windscreen!). Reports of the death of development (hence post-development) are to paraphrase Mark Twain greatly exaggerated: even Rist, who earlier in the first edition of his book had concurred with Walter Sachs that “time is ripe to write its obituary”, later in its third version admitted that “development is very much alive”.5 Critics of post-development theorists have sought an “alternative development”, cautioning against the proverbial throwing away the baby (development) with the bath water (western concept of progress based on economic growth, or economic theory in all its versions, capitalist or Marxist).
Amongst the “globalist” school, a raging debate had emerged between those such as mainstream economists and the UN and its bodies (including the World Bank) on the one hand who believed that the market-led globalization which saw rapid growth in the emerging economies and reductions in absolute poverty in parts of the developing world, and on the other the social activists, civil society organizations such as the environmentalists and human rights movement and the popular press who assert that capitalist globalization has merely benefitted the rich countries and the rich in the developing countries, leaving the poor at best as poor if not poorer. Stiglitz’s trenchant remark that the US had become a “government of the 1%, by the 1% and for the 1%!” summarizes it all (Stiglitz, 2012). Birdsall (2002, p. 3) draws the conclusion from this ongoing debate that, on balance between contradictory statistical evidence on a world scale, that globalization is not the cause, but neither is it the solution to world poverty and inequality, seeing the source of this in the asymmetrical global power relations between the advanced and developing economies.
New voices of dissent among development economists also began to be heard who seized on the new relevance, attacking the standard neoclassical competitive equilibrium model of growth on which the Washington Concensus was built, and began examining new economic thinking by debunking economics as it is taught through standard texts, and upon which much development policy had been based (see Keen, 2011; also, Rist, 2011; Roberts, 2013, and K. Polanyi Levitt, 2013). In constructing a new development paradigm, it pays considerable dividend to follow and examine this trend for new economic thinking in the search for a coherent alternative development paradigm to the neoliberal assault of the last three decades.
Amongst progressive social scientists, the search for a critical development theory (or theories) began in earnest (see the collection in Munck and O’Hearn, 1998) at more or less the same time as the emergence of the dissent amongst development economists against the Washington Consensus. Munck (1998) had concluded that, in deconstructing development discourses, the modernization and dependency theories “operate very much as binary opposites intricately intertwined in one another’s assumptions”, and “shared same aspirations toward development as a rational Western model of progress and…differed only on the means to achieve it …[T]he ‘impasse’ in development theory that this represents is, ultimately, about the limitations of the Enlightenment model and the modernist project.“ (p.203). He quoted Knippenberg and Schuurman that “Models of alternative or ‘other’ development which do not solve the problem of material scarcity are theoretical exercises with no practical value.” And he borrows from Hoogvelt to conclude that “Post-development theory and practice is different from anti-development sentiments in so far as it does not deny globalization or modernity but wants to find some ways of living with it and imaginatively transend it.” (Hoogvelt, 1996, p. 16).
We will leave this review of the discourse on development paradigms with a quotation from Schuurman, who said of the post-development crisis in development studies:
The very essence of development studies is a normative preoccupation with the poor, marginalized and exploited people in the South. In this sense, inequality rather than diversity or difference should be the main focus of development studies: inequality of access to power, to resources, to a human existence – in short, inequality of emancipation ... The challenge for development studies is to re-establish its continued relevance to study and to understand processes of exclusion, emancipation and development - not particularly by clinging to its once treasured paradigms, but by incorporating creatively the new Zeitgeist without giving up on its normative basis, ie the awareness that only with a universal morality of justice is there a future for humanity (2000, p.20).
In this respect, Birdsall and Pieterse are on the same page, in pointing out to the need to bring in politics into development discourse and praxis. We will return to a discussion of the new economic paradigm in the penultimate section below.
1. Growth-Inequality-Poverty Nexus: The Central Problematique of Development
The World Bank, their alumni (eg Stiglitz) and the United Nations (eg UNCTAD, UNDP, the Millenium Development Goals) and Asian Development Bank, have also begun their own search for alternative development paradigms and strategies though not totally abandoning but recombining the old “panaceas” in economic policy to better serve the developing countries (see for instance Easterly, 2001). In particular, the concept and strategy of “Inclusive Growth”, adopted by the World Bank and the United Nations Development Program, will be utilized as a platform for our discussion in the following section to launch our search for a new economic paradigm based on the Malaysian development experience.
In a recently completed study for the UNDP Human Development Report for Malaysia 2013 (UNDP, forthcoming), we have argued that the central issue of inclusive growth, the theme of the Report, is the mutual relationships between economic growth, inequality and poverty reduction. This triangular nexus sits at the core of an alternative development discourse whose further articulation and investigation could potentially generate policy reforms that would lead to a resolution of the post-development crisis that we have explored in the section above. This exploration both among development scholars and policy circles has already begun.
Disentangling the different “ingredients” of development and determining their cause-and-effect relations is a complex task, given the many dimensions of development. In determining the impact of growth on development, in particular on poverty and inequality, the qualification of growth as “broad-based” is of fundamental importance: only growth processes that include the large majority of individuals and households are assumed to be poverty reducing. However, it is not always clear whether this “broad- based” growth, in order to be considered “pro-poor” or equivalently “inclusive”, has to lead to a reduction of absolute poverty, as measured on the basis of some sort of “absolute” poverty line, or whether it also has to lead to a reduction of relative poverty, i.e. poverty measured on the basis of some sort of income or expenditure inequality index. This issue is reported in the literature as the debate on the definition of “pro-poor growth”.
Lopez (2004) summarizes the debate, identifying two definitions of pro-poor growth:
1) focuses solely on the link between poverty and growth: growth is pro-poor if it reduces poverty, where poverty is defined on the basis of some absolute criterion (Ravallion, 2004).
2) qualifies growth as “pro-poor only if, in the growth process, “the poor benefit proportionally more than the non-poor, i.e. growth results in a re-distribution in favour of the poor”; explicitly admitting that there may be growth processes that cannot be characterized as “pro-poor” even if they generate a reduction of poverty incidence. This means that it is not absolute poverty which matters, but relative poverty (Kakwani and Pernia (2000).
The definition provided by Kakwani and Pernia, while being more difficult to meet, looks more attractive in the long term as relative income inequality has implications for non-income aspects relevant to well-being, such as the position of each individual (or household) within the society; her/his empowerment, the actual, effective role and functioning of institutions, including the way participation and democracy effectively works. Strong income inequality may indeed lead to an erosion of the substance of any democratic institution, given the objective disparities of power of the different members of a society (Bellu, op. cit.). Analysing poverty and informing policy processes by making use of relative rather than absolute poverty, may also help to capture “...a wider range of factors such as powerlessness, survival, personal dignity, security, self-respect ...” (Carvalho and White, 1997).
In a recent study by IMF economists Balakrishnan, Steinberg, and Syed Murtaz (2013) inclusive growth is defined as growth which is not associated with an increase in inequality, following Rauniyar and Kanbur (2010). They in fact used the definition of growth as inclusive when it is not associated with a reduction in the income share of the bottom quintile of the income distribution for the purpose of their regression analysis of the effect of growth and income distribution on poverty reduction.
Untangling the complex cause-effect relationships within this triangular nexus of growth-distribution-poverty is decidedly part of the post-development debate we discussed in the earlier section. What actually has been the evidence of the positive (or negative) relationship between economic growth on inequality and poverty reduction?
This question had been raised as early as the 50s by Kuznets (1955) and resulted in the famous “Kuznets Curve”, which was adduced from available comparative national data, and longitudinal data for some countries having such statistics necessary for this analysis: that income inequality increases in the first phase of growth (what economists called divergence) as GDP per capita increases, and then after a certain level of development begins to converge to greater equity.
Almost two decades later, economists systematically started exploring the links between the growth of an economic system, which was essentially measured in terms of variation of GDP, and poverty reduction. Chenery and Ahluwalia (1974) at the World Bank pioneered these studies by proposing a model of “Redistribution with Growth” and underlined the importance of applying redistributive processes to growth, if poverty had to be reduced. This was the methodology adopted by the Malaysian government under the rubric of the New Economic Policy launched in 1971.
For over forty years, Kuznets curve had become one of the stylized facts of the study of income distribution. It was only recently that tests of the hypothesis based on much larger data sets (both across countries and over time for individual countries) have consistently refuted it. These studies were largely made possible by the compilation, in 1995-6, of the Deininger-Squire international inequality database (http://www.worldbank.org/growth/dddeisqu.htm), which contains 682 ‘high-quality’ observations (of Gini coefficients and quintile shares) for 108 countries.
Based on their own analysis, Deininger and Squire (1998), conclude that “our data provide little support for an inverted-U relationship between levels of income and inequality, when tested on a country-by-country basis, with no support for the existence of a Kuznets curve in about 90% of the countries investigated” (Deininger and Squire 1998, p.573). On the basis of the much more plentiful information available to today’s empirical researchers, then, there seems to be no support for the Kuznets hypothesis.
Nonetheless, according to Bellu (op.cit, p. 111) Kuznets was the one who underlined the need of what, almost forty years later, would be called “pro-poor growth”:
How can either the institutional and political framework of the underdeveloped societies or the processes of economic growth and industrialization be modified to favour a sustained rise to higher levels of economic performance and yet avoid the fatally simple remedy of an authoritarian regime that would use the population as cannon fodder in the fight for economic achievement? How to minimize the cost of transition and avoid paying the heavy price in internal tensions, in long-run inefficiency in providing means for satisfying wants of human beings as individuals which the inflation of political power represented by authoritarian regimes requires?”
Several authors have attempted to measure, both theoretically and empirically, the extent to which poverty reduction is related to growth and/or redistribution, ie testing for the “pro-poorness” of economic growth. For example, Datt and Ravallion (1992) divide poverty changes into three components respectively: as growth, inequality changes and a residual component. Kakwani (1993) works out the “growth elasticity of poverty”, i.e. the percentage change in poverty for a 1 percent growth in the mean income of the society, keeping the income distribution constant (as if everyone in the society received the same proportional change of its income).
Ravallion and Chen (1997) estimate, on the basis of a sample of less industrialised countries, that the “growth elasticity of poverty” was about -3, i.e. that a 1 percent increase (decrease) in the mean income reduces (increases) the “poverty incidence” by 3 percent. In Ravallion (2001) this figure was computed at -2.5, measuring a lower growth elasticity of poverty reduction at the turn of the new millennium.
It is however tougher to disentangle the effects of growth on income inequality, or relative poverty. Bourguignon (2003) provides the mathematical link between growth elasticity of poverty reduction and the initial inequality as well as the location of the poverty line in relation to mean incomes, by assuming that incomes are log-normally distributed. Under this assumption, the complete distribution of income is known, provided information on mean income and the Gini coefficient is available. Bourguignon also identifies a direct link between a permanent redistribution of income and the elasticity of poverty reduction w.r.t. growth. Redistributing income leads to an “acceleration” of poverty reduction for a given rate of economic growth, thanks to an increase in the elasticity of poverty reduction to growth associated with the redistributive process.
However, Ravallion (2001), analyzing a new data base at the World Bank on which income distribution for over 100 countries are computed, and after assembling a set of time series for 50 cases, came to the conclusion that “Given existing inequality, the income gains to the rich from distribution-neutral growth will of course be greater than the gains to the poor.” (p. 1808). Furthermore, Son and Kakwani (2008) work out a new “Poverty Equivalent Growth Rate” (PEGR) which embodies distributional concerns, and use it to classify growth patterns of eighty countries, finding that “... global growth processes have not generally been favourable to the poor. The global reduction in poverty would have been much greater if growth were generally positive and pro-poor”.
In his 2001 cross-country study of 99 countries already referred to above, Ravallion observed some patterns of poverty elasticities in different growth and inequality regimes (as shown in Figure 2 below, the countries are divided into four groups, with the number in each shown in the centre of the table). In the countries in which inequality is rising with growth in average living standards, poverty is falling on average. But it typically falls at a much slower rate than in countries experiencing more equitable growth. The median rate of decline in the proportion of the population living below US$1/day among countries with both rising average income and rising inequality was 1.3% per year. By contrast, the median rate of poverty reduction was seven times higher, at about 10% per year (-9.6%), among the countries that combined growth in average living standards and falling inequality.
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| Figure 2: Poverty Elasticities in Different Growth and Inequality Regimes |
Among contracting economies it also mattered greatly what was happening to inequality; when inequality was rising while average living standards fell, the poverty rate was rising by a dramatic 14% per year on average, while with falling inequality the poverty rate rose by less than 2% per annum.
Ravillion concluded that “[On] balance, the existing evidence using cross-country growth regressions appears to offer more support for the view that inequality is harmful to growth than the opposite view, which was the prevailing view in development economics for decades. That does not imply, however, that any reduction in inequality will enhance growth; indeed, it can have the opposite effect if it comes at the expense of other factors that are also known to matter to growth. Reducing inequality by adding further distortions to external trade or domestic economy will have ambiguous effects on growth and poverty reduction” (2001, p. 1809).
In the latest instalment on this data exercise, the study by IMF economists Balakrishnan et. al., op cit) using Penn World Tables involves a series of econometric analyses to regress poverty on income growth and inequality measured by the Gini coefficient for Asian and Latin American countries with those in the Middle East and Africa as controls. They also found that growth is in general pro-poor, leading to significant declines in poverty across all economies and time periods. Specifically, a 1 percent increase in real per capita income leads to about a 2 percent decline in the poverty headcount. However, a 1 percent increase in the Gini coefficient more or less directly offsets the beneficial impact on poverty reduction of the same increase in income. Moreover, inequality interacts with income, meaning that a higher level of inequality tends to reduce the impact of income growth on poverty reduction (pp. 9-10).
Patterns and trends in inequality around the world underscore the importance of inclusive growth and offer policy options for achieving it. The 2010 World Social Situation Report highlighted that, while income poverty has declined over the past decades, the number of undernourished persons in the world substantially increased (UNDESA, 2010). Over the long term, some of the most outstanding economic performers have sustained both robust growth and declining levels of inequality, most saliently South Korea and Taiwan (Birdsall, Ross and Sabot 1995). From the 1980s to 2005, among 114 countries with available data, inequality increased in 59 of them (51.7 per cent of the total) and decreased in 40 (35.1 per cent) (UNDESA, 2010).
Recent data, however, show contrasting trends across countries and regions, and point out the importance of looking at income disparities between the uppermost extremities and the rest. The 1980s and 1990s were largely characterized by rising inequality in most countries of the world, and in the majority of countries in all regions (UNCTAD, 1997). However, the post-2000 period has witnessed a variety of experiences, with inequality rising in major economies like the United States and China, and declining inequality in much of Africa and Latin America (UNCTAD, 2012). Furthermore, growth has been sustained in many countries that narrowed inequality. Growth does have an impact on poverty reduction, but those in the neighbourhood of the poverty line are vulnerable to cyclical growth and new forms of poverty emerging even during expansionary phases of an economy.
A study of Latin American countries (Lustig, N, Luis F. Lopez-Calva and E. Ortiz-Juarez 2013) showed that economic growth does have an impact on income distribution especially in Brazil, Argentina and Mexico in the first decade of the millennium. In Brazil for instance, they found that “During 1998-2009, Brazil’s Gini coefficient declined 5.4% from 0.592 to 0.537. During 2002-2009, the income of the bottom 10% grew at almost 7% per year, nearly 3 times the national average (2.5%), while that of the richest 10% grew only at 1.1% per year. Depending on the poverty line, between 50% and 60% of the decline in extreme poverty can be attributed to reduction in inequality. For the same reduction in extreme poverty, Brazil’s overall per capita income would have needed to grow an extra 4% per year. This result was largely attributed to increasing skills premium and progressive government transfers.
The International Monetary Fund (IMF) study by Balakrishnan, Steinberg, and Syed Murtaz (2013) referred to earlier, studying the experience of how pro-poor and inclusive Asia’s recent growth has been, and what factors have been driving these outcomes, finds that while poverty has fallen across the region over the last two decades, inequality has increased, dampening the impact of growth on poverty reduction (Figure 3b below). As a result, relative to other emerging and developing regions and to Asia’s own past, the recent period of growth has been both less inclusive and less pro-poor. The analysis suggests a number of policies that could help redress these trends and broaden the benefits of growth in Asia. These include fiscal policies to increase spending on health, education, and social safety nets; labour market reforms to boost the labour share of total income; and reforms to make financial systems more inclusive.
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| Figure 3: Income Inequalities Malaysia and Asia |
At the same time, many countries, especially advanced economies, recorded growing concentration of income and wealth in the top one per cent or even higher, and the increasing power of finance. The global financial crisis of 2008 has renewed attention to functional distribution – wage and profit shares of national income – with concern that declining wage shares and expanding profit shares correspond with the skewing of economic conditions toward serving short-term financial interests. Inclusive growth warrants attention to the balance of power between elites and masses, and between financial and productive economies.
It is of interest to note at this point the results of analysis undertaken by the UNDP NHDR Malaysia 2013 team regarding the impact of growth on poverty reduction in the country since the introduction of the New Economic Policy (NEP) in 1970 (UNDP, forthcoming: Chapter 3, p. 30)..6 The successful economic development witnessed in the past four decades resulted in the eradication of hardcore poverty via an increase in household income for the population; from 1970-2012, the average household income grew by 7.3% annually. Comparison by income class shows that the bottom 40% of income earners enjoyed the highest income growth (Table1). In the same period, the growth rate for the bottom 40% was 7.9%, higher than the 6.9% registered for the top 20% and the 7.5% for middle income households.
From the IMF study reported earlier, Malaysia’s Gini index however remained constant, neither increasing nor decreasing, which is consistent with the actual year by year Gini trend since 1992 (Fig. 3a).
In fact analysis of Malaysia’s income gap shows that the income share that accrued to the top one-tenth of the population in 2012 at 32% is higher than the income share controlled by the bottom half at 21.5%, and the gap between them has remained steady for the past three decades. Using data from HIS 2012, the analysis shows that the Palma ratio of income distribution of the top 10% to the bottom 40% in 2012 is about 2.16 times—not quite alarming but identical to the ratio in 1989. (Note: In very unequal societies, the ratio may be as high as seven). If we decompose the growth rate by ethnicity, the growth rate fits the objectives of a pro-poor strategy: the growth rate for the period of 1970-2012 is the highest among the poor of all ethnic groups, followed closely by the middle 40% of income earners, while the rich saw the slowest income growth. In fact, the growth rate for the poor was at its highest during the official period of the NEP (1970-1990), where it grew by more than 10%, or higher than 7.5% registered by the rich. In this manner then the Malaysian development experience would have met the pro-poor criteria set up by Kakwani and Pernia above.
Kamal Salih MHDR 2013 Development and Inequality Poverty new economic paradigm Ishak Shari poverty income wealth purchasing power household income ethnic wages
Kamal Salih MHDR 2013 Development and Inequality Poverty new economic paradigm Ishak Shari poverty income wealth purchasing power household income ethnic wages
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| Table 1: Income Growth by Income and Ethnicity |
It is clear then that the relationship between growth and income distribution is not always straightforward in its impact on poverty reduction. While poverty reduction and growth holding income inequality constant is positively correlated, the impact of income distribution policies can go both ways (positive and negative) on growth and poverty reduction, as implied in Fig, 4 below.
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| Figure 4: Elasticities in the Growth-Inequality-Poverty Nexus |
The arrow illustrates a possible path of the triple nexus whereby the north-easterly trend of positive income growth may lead to poverty reduction as a result of a positive change in income inequalities; but subsequently the economy may experience a contraction and doubles back on itself and reverses the previous poverty-reduction gains (maybe involving other vulnerable or new groups, eg retrenched workers) as well as marginally increase income disparities in the overall economy. The inequality sign in the diagram may be swapped, reflecting our uncertainty as to the direction of causality, which suggests the opposite effect, namely that the positive income growth will increase income inequality while poverty is reduced due to income transfers and an expansionary budget, but will later lead to government deficits with subsequent economic contraction. This is probably what has been happening in the Malaysian case in recent years, although there would be other mediating factors like a slowdown in export performance. The objective of government management of the economy is to proceed and remain in the target zone indicated in Fig. 4 above for as long as possible within the planning horizon, provided there is a strong relationship between economic growth and better income distribution (ie. lower Gini index). This is really the acid test for inclusive growth.
The interaction between these policy variables is mediated through social-economic and political processes that are still not properly understood. The Tenth Malaysia Plan Targets (2011-2015) for instance has made explicit the objectives of the New Economic Model the following targets: (1) Reduce the incidence of poverty from 3.8% in 2009 to 2.0% in 2015; (2) Increase the mean income of the bottom 40% households from RM1,440 in 2009 to RM2,300 in 2015; (3) Improve overall income inequality by reducing the Gini coefficient from 0.441 in 2009 to 0.420 in 2015; and additionally (4) Increase the percentage of bottom 40% households with SPM qualification and above from 30% in 2009 to 45% in 2015.
But these remain plan targets; the impact of economic growth and its development programmes on the nexus of growth-income distribution –poverty remain cloaked in mystery; at best, we have to rely on the experience of specific country cases. This is what we will turn to next.
Section 4: Towards a New Economic Paradigm Using the Malaysian Case
With the above discussions as our basis, is there something from the Malaysian experience of inclusive growth, whose central development issue is the triangular nexus of growth-income distribution-poverty reduction that might lead us to a reformulation of policies under a new development paradigm that might be instructive for us to achieve what Rist called “deep development”, or Roberts call for a “full economy”? At least, if anything, to explain the absence of movement in inequality as measured by the Gini coefficient for Malaysia since the end of the 90s after the Asian Financial Crisis, as we see in Fig. 3 above. Is it because growth was on average slower since the Asian Financial Crisis? Or is it due to the constraints on the government’s fiscal space, as Jomo Sundaram implied?7 Or are there something more insidious: institutional failure, corruption or state capture? These issues need to be investigated by development scholars as well as policy makers.
Malaysia’s achievements are a matter of record, as shown in Figure 5 which shows impact of the last forty-year period from the launch of the NEP, in respect of real GDP per capita, the incident of poverty (in percentage), Gini coefficient, and average real wages. Real GDP per capita is seen to have steadily increased over the period while the incidence of poverty has dramatically declined from 49% of total households in 1970 to 1.7% overall; the Gini coefficient further declined from 0.51 in 1970 to 0.43 in 2012, a drop of 15%, while the average real wages have relatively stayed flattish from 2002 onwards. The correlations between these averages need to be analysed from the point of view of the underline factors. Much remains to be fully understood to further inform government policies going forward into the new century especially in the area of human development as the ultimate goal of the development process.
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Figure 5: GDP per Capita, Poverty rate, Real wages, and Gini coefficient,
Malaysia 1970-2012 (Source(s): Economic Planning Unit (EPU) & Household Income Survey (HIS), 1989-2012.)
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To understand better the underlying processes behind these numbers the Stiglitz had pointed out the importance of going beyond growth figures to incorporate consumption rather than just production, wealth measures, and disaggregation of economic performance to the household level so as to better capture the development impact of economic growth. In the 2013 UNDP Report, we introduce a new conceptual framework, which we dubbed a New Economic Paradigm,8 which decomposes household fiscal capability (or purchasing power) into four components; wealth effects, disposable income, credit and transfers. This framework, which we describe in the section below, informs our analysis of data in the Report and enables us to better grasp the policy intervention and their impacts on inclusive growth in Malaysia.
The four components of the New Economic Paradigm are illustrated in Figure 6 below which combines not necessary additively into the household’s purchasing power. Wealth effects derived essentially from tangible assets such as land, property, buildings; financial assets including stocks and shares, savings, and equity in private enterprise including sole-proprietorships, as well as intangible assets such as skills, educational qualifications and patents. Disposable (household) income is represented by after tax income derived from salaries, wages, bonuses, remittances and other forms of remuneration from enterprise, summed over all household members actively employed. Credit on the other hand including personal consumption and business loans as well as from both banking and non-bank financial institutions including cooperatives, credit associations and other informal channels of microfinance. Finally, transfers are tax-financed or charitable contributions to the household in the form of grants, scholarships, subsidies, tax allowances, donations and other income based welfare contribution in both cash and kind, and contributions from other safety net contributions such as unemployment insurance.
Government policies, economic growth and also household processes will of course influence this decomposition of economic capability. The household is however, the basic unit of analysis, which can be aggregated into communities,territories and generations as higher levels of aggregation for analysis. Official statistics is not always easily decomposable into these components of household purchasing power, whether real or in nominal terms, though censuses of population and household income and expenditure surveys do capture household level data. They are however usually presented in more aggregated forms. The 2013 NHDR Report organizes the data analysis using this framework in order to capture the relationship between growth, income distribution and poverty in economic performance of Malaysia over the last 40 years since the NEP.
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| Figure 6: The New Economic Paradigm |
Equally important, this decomposition in the New Economic Paradigm will enable us to analyse development policies and programme components that impact on each of the four canonical categories as shown in Figure 7 below. From the analysis of the impact of development policies and programmes as well as the private sector activities including enterprise activities and the labour market will allow us to trace the Malaysian development experience to fine-tune new policy instruments and guide market forces. This will also enable us to adopt an institutional approach to human development that covers the respective roles of the public sector, the private sector and non-government organizations and other civil society organizations. The ultimate concern is to understand the dynamics and mechanism for the transmission of economic growth performance on the quality of life and human development as illustrated in Figure 8 below.
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Figure 7: The Policy Space in the New Economic Paradigm
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The diagram also demonstrates 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 the impact of positive transfers in the three Latin American countries studied by Lustig et. al., (2013). As another illustration, failure of the prevailing credit system is the 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.
As suggested by the Stiglitz Commission, the New Economic Paradigm we offer above as conceptual and policy framework for inclusive growth must incorporate productive as well as consumption capabilities at the household level and linked to wealth and their distribution in order to properly translate income performance at the national level into its impact on the standards of living and quality of life of the population (Figure 8).
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Figure 8: Processes According to Decomposition of Household Fiscal Capabilities in the Outcome Space of the New Economic Paradigm |
The impact of the macro-micro processes above can be heuristically illustrated in Figure 9 below which shows a stylized income distribution profile of households according to income class consumption power when decomposed according to the four categories of wealth effects (passive income), disposable income, credit and transfers at the household level. The share of total purchasing power among income classes is depicted in the vertical stacked bar on the left hand side, while the decomposition of the purchasing power by income class can be read off the right scale, with the order of the graphs following the class ranking. The vertical sum of each purchasing power component over the four income classes should add up to 100%.
The results of the statistical analysis in the 2013 NHDR Report of the composition of purchasing power can be seen in Figure 10 below, which shows the median of each component to total purchasing power by quintile. The purchasing power among the poor i.e. the bottom 40% is RM6,215, which is about 12% of the rich (the top 10%). The super-rich i.e. the top one per cent, meanwhile, has purchasing power amounting to RM137,370, which is 22 times higher than the poor, and 18 times than the median Malaysian. The wide gap is reflected in the relatively high Gini coefficient; the inequality in purchasing power for Malaysian individuals in 2009 stands at 0.45, which is nearly equivalent to the Gini of income (0.441).
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Figure 9: Stylized Share of Purchasing Power by Components and Income Class (%) |
The analysis reveals, as expected, that the purchasing power for the relatively poorer consist almost entirely of wages and self-employment income, with wealth effect and transfers constituting just three per cent of the total purchasing power (Figure 10). Among the rich and super-rich, the wealth effect has a higher contribution to purchasing power at about 13% and 14% respectively, while disposable income contributed the rest. Unsurprisingly, the share of transfers to the total purchasing power of the rich is practically zero.
A telling aspect is the status of the middle class in terms of the composition of its fiscal capability, the middle class being defined as those households positioned between 20% of the median income. 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 10% 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 framework 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. Following Muhammed’s (2011) approach and methodology in generating wealth distribution and inequality using HIS data, our analysis shows that the median wealth per capita in Malaysia for the year 2009 was RM113,644, and registered a 10% compounded growth during the period of 1989 to 2009. As with income, Chinese has the highest wealth per capita at about RM163,000, followed by the Indians at about RM110,612. The Malays on the other hand have slightly more than half (55%) of the Chinese wealth, while Others have 53% of the Chinese. Compared to the Malays, the average wealth per capita of non-Malay Bumiputeras is 87% of the Malays, or about RM78,278.
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Figure 10: Share of Purchasing Power Components by Income Class (Source: UNDP National Human Development Report Malaysia, in press. Department of Statistics HIS data., 2012.) |
The distribution of wealth, as expected, is extremely skewed (Figure 11). The overall distribution of wealth shows that the top 10% controls about 39% of the world’s total wealth, while the bottom 20% accounts for only 0.3%. The bottom 50%, meanwhile, accounts for only 14.2%. Interestingly, the wealth of Malaysia’s top 10% exceeds those of the bottom 70%, and about 12% of Malaysian households have no wealth. In fact, the wealth of the top one per cent is much higher than the whole of bottom 40% combined.
If the distribution of wealth is broken down to its components i.e. financial assets and property assets, the inequality of the former is more extreme compared to the latter. The financial asset inequality by groups shows that inequality in financial assets is equally high across all ethnicities and strata, although it is slightly higher among the Others, at a Gini coefficient of 0.82 (Figure 3.33). It has however decreased marginally in the past two decades for all ethnicities and strata, although among the Others and the rural Malaysians the inequality rate has climbed. The analysis using household data shows that 53% of Malaysian households has no financial assets, with rural households having the highest number of those without any financial assets (63%), compared to urban households (45%). Among ethnic groups, about 57% of non-Malay Bumiputeras and 55% of Malays have no financial assets, with the figure for the Chinese and Indians at 45% and 44% respectively. In other words, roughly one out of two Malays, non-Malay Bumiputeras, Chinese and Indians have no immediate liquid financial assets, making them vulnerable in the event of an income or employment shock.
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Figure 11: Wealth Distribution Share by Decile, 2009 (Source: Household Income Survey 2009, own calculations.) |
The search for new economic thinking, in the wake of the economic crisis of 2008 and the revolt against the Washington Consensus in development policy, enable us to explore and redefine traditional concepts and links between macro- and microeconomic foundations of development policy. There is also renewed concern and disquiet against the imperialism of economic ideas in development thinking and a shift towards other social science contributions in development policy making process.
Section 5: By Way of a Conclusion
At the recent Khazanah Malaysia Megatrends Forum 2013, the sovereign fund manager chose as their theme “Growth with Inclusion in an Age of Paradox”, an allusion to the contradictory dialectics of economic growth and inequalities. The contradiction is in the system! Economies and societies structures, past and present, have been characterized by various structures of inequality and exclusion. Capitalist economies are defined by ownership, power and livelihood disparities between capitalists and workers, which are instrumental to the system’s functioning and are internally reproduced. Capitalist systems are inherently unequal and exclusionary, and lack impetus to foster more inclusiveness.
The market fundamentalism underlying the neoliberal and globalist paradigm discounts the possibility that markets are characterized by power asymmetries and structural barriers to mobility which perpetuate inequality and exclusion. The stress on the process of exchange, based on an amoral stance toward initial endowments and deference to price signals and willing buyers and sellers, assumes away the difficult problems of persistent inequality and precludes grounds for redressing unequal opportunity and access (UNCTAD 2012: 31-32).
The pursuit of “free markets” is flawed and detrimental, and mainstream economics as has been taught had assumed the status of a “pseudo-religion” (Rist, 2013), and had been further discredited as ideological premises for pursuing development in the wake of the global financial crisis of 2008 and growing cognizance of increasing or persistently high inequality, economic insecurity and vulnerability of the poor to shocks and downturns.
While recent trends in the global economy have bred these conditions, some systemic roots run deeper. Stiglitz (2012) offers a framework for outlining the problems arising from high inequality. High inequality corresponds with sluggish or negative real wage growth, which attenuates consumption growth and cause aggregate demand deficiency, as well as spurring debt accumulation. Situations of high inequality also tend to correspond with concentration of power and ‘rent-seeking’ behaviour, which diverts resource away from productive activities and long-term interests. Markets are never devoid of rents, and strategic allocation of rents can play an effective role in development. However, when elites overpoweringly exert influence over policies, the economic system begins to revolve around securing their interests, saliently through deregulation and privatization, tax breaks and subsidies, and the promotion of short-term interest and financial gains over long-term improvements in real productivity. Financialization and labour market ‘flexibilization’ – among the mainstays of neoliberalism – are factors that have further decoupled finance from the real economy, widened gaps between management and the workforce, and promoted economic insecurity as a premise for setting policy.
Persistence of inequality across generations further entails diminishment of social channels of upward mobility – and notions of fairness. Chronic social exclusion of poor communities – in terms of access to and quality of education, health and infrastructure, job opportunities and democratic voice – confounds their capability to move upward, and raises questions about the fairness of the system. More generally, societies may experience widening mistrust of institutions including government itself and a sense of despondency toward the status quo and the prospects of positive change.
Rist had said, ’The definition of ‘development’ should not be based on what one thinks it is or what one wishes it to be, but on actual social practices and their consequences’” (2007). The jacket description of his new book, The Delusion of Economics, asserts that the construction of a new economic paradigm - pluralistic, ecologically compatible, grounded in reality - has now become a necessity.
P. Craig Roberts (2011) wrote in his book that “empty world” economic theory has failed on its own terms and that its application by policymakers has resulted in the failure of capitalism itself. Pursuing absolute advantage in cheap labor abroad, First World corporations have wrecked the prospects for First World labor, especially in the US, while concentrating income and wealth in a few hands. Financial deregulation has resulted in lost private pensions and homelessness. The cost to the US Treasury of gratuitous wars and bank bailouts threaten the social safety net, Social Security and Medicare. Western democracy and civil liberties are endangered by authoritarian responses to protests against the austerity that is being imposed on citizens in order to fund the wars and financial bailouts. Third World countries have had their economic development blocked by Western economic theories that do not reflect reality.
Is there an alternative way? A global movement for the establishment of a Social Solidarity Economy (SSE) provides one such alternative.9 While there are differences in interpretation of and perspectives on the SSE concept, and as applied in different territories, there was a broad consensus on the importance of inclusive growth, solidarity, cooperation and community development as an alternative to neoliberal approaches and economic models centred on self-interest, profit maximization and consumerism (Utting, 2013). Participants at the 5th RIPESS International Meeting on Social Solidarity Economy held in Manila in October 2013 had called on the Inter-Agency Task Force on Social and Solidarity Economy, recently established by 14 UN agencies to organize an annual meeting and to allow different SSE voices to be heard, and to heed the recommendations that emerged in recent civil society consultations when the UN begins to undertake the high-level processes associated with the post-2015 agenda to design the future Sustainable Development Goals to replace the Millennium Development Goals which is slated to end in 2015.
The ideas underlying the SSE approach have their precursors in the welfare states of Europe and the social democratic practices in Scandinavian countries that were developed since the nineteenth century. The attempt to export these ideas across the Atlantic especially to Latin America and parts of the developing world met with mixed results, at best only certain elements were adopted. But subsequent disaffection with the results of development approaches in the twentieth century as we discussed in this lecture has engendered new thinking towards alternative development models opposing the neoliberal diktat.
At the said conference above, as reported by Utting (ibid), Paul Singer said that SSE values and practices have existed for centuries, particularly among indigenous populations, and are now “finding spaces for expression in contemporary contexts of crisis, alienation and social movements activism”. Mike Lewis, co-author of The Resilience Imperative, suggested that the power of SSE lay in what has long been its dual approach: “resist and build”. To this he added a third imperative: the need to strategize: “[…] Focused intention and strategy is critical to expanding the space occupied by the values and actors of the solidarity economy.” As priorities for Action to leverage systemic change, he suggested focusing on three basic human needs—food, housing and energy—as well as three fundamental transitions:
1. from speculative finance to a financial system that serves people-centred production and exchange;
2. from privatization to community control of the commons; and
3. from the corporate imperative to maximize profits to maximizing mutual benefit through cooperation.
The principles underlying the Islamic economy are another possible alternative system to neoliberal capitalist model. Murad Hoffman (2011) said “the Islamic economy will not be, cannot be and does not want to be as profitable, or as competitive as the Western economy, because Islam does not treat man as an economic animal and is not merely for maximization of profits, optimization of production and minimization of costs, the capitalist mantras.” The question is: can the Islamic economic system, the precursor of modern capitalism, be modernized as an alternative paradigm to meet today’s needs? Murat Çizakça has examined this question in his book on Islamic Capitalism (2011). Can this project succeed, or has powerful forces been arrayed against it both from inside and outside the world of Islam to prevent it?
I think it is time to tread forward on a new path. Khurshid Ahmad started on such a mission thirty years ago. Even earlier than that, Ibn Taimiya had written the classic text on the Islamic economic state. Hadi Awang the President of PAS had introduce the concept of an Islamic Welfare State as the goal of the party’s struggle, replacing its earlier aim of establishing an Islamic State.
Many scholars are now reviewing the Islamic worldview with a view to make it even more relevant to today’s world consistent with the principles of Maqassid Shariah. And Islamic finance and banking is leading the way; already some scholars are anticipating some convergence with conventional banking, sans interest (Askari, Iqbal and Mirakhor, 2009; Askari, Iqbal, Krichene and Mirakhor, 2010). Beyond finance, and part of a larger movement to implement a socio-economic system consistent with Maqassid Syariah, I think an Islamic Economic Paradigm is possible to guide the development of the Muslim world, if not the whole world. I have started such a project.10 which hopefully will form part of a larger collaboration toward inserting the Islamic economic system into the search for a new development paradigm as a solution to the post-development crisis. Allahualam.
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