Towards Inclusive Development for Malaysia

Kamal Salih

23rd February 2015

In the Malaysia Human Development Report 2014 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 minimizing social exclusion and increasing social cohesion. For the purpose of the Eleventh Malaysia Plan, we need a new second generation set of policies which aim at inclusive development.

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 New Economic Policy (NEP) at its inception which was based on the notion of redistribution with growth.  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 had produced new inequalities, poverties and vulnerabilities in the development process. 

Malaysia’s socioeconomic progress 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. This now 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 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.

Income and other human capability disparities among Bumiputera  minorities remain high, and pockets of marginalization prevail, in both rural and urban areas. Thus, 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. 

Going forward,  the issue of racial inequality of incomes addressed by the NEP and its successor policies over the last four decades has now been overtaken by intra-ethnic income disparities which cut across the board, whereby the income gap in absolute terms has been increasing while the relative income gap has remained stagnant in the past two decades. According to the statistics inter-ethnic income disparities have declined, while intra-ethnic inequalities now have risen, contributing to 95% of total income inequalities among Malaysian households.  So, the question is now no longer a question of reducing inter-ethnic imbalances but a question of class differences and non-ethnic issues based on merit and needs.  This means that social justice will best be served by a more inclusive approach to development strategy.

The incorporation of “inclusiveness” in the New Economic Model (the NEM) by referring to the bottom 40%, in our opinion and based on the MHDR analysis we had undertaken, only partly solves the problem. An additional major focus for the next decade is how to expand the middle class by adopting policies addressed at the middle 40% of households. 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.

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 had developed a new economic paradigm in the Report 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.

Economic development is all about growth, inequality and the achievement of social justice. This requires reform of the institutions and incentives that determine how government, the private sector and society as a whole are engaged in the development process with consequences beyond the realm of the market.  This is the new normal in economic policy, replacing the Washington Consensus that had dominated development thinking and practice for the last three decades.  Achieving social justice through economic growth in our country is no longer an issue of ethnic imbalances but a question of class.  This is the challenge of inclusive development that we must address in the coming decade.