TRENDS IN INCOME INEQUALITY AND STRATEGIES FOR MORE EQUITABLE GROWTH BY DR SULOCHANA NAIR

2 OUTLINE INTRODUCTION WHY IS IT IMPORTANT TO TALK ABOUT INEQUALITY TRENDS IN INCOME INEQUALITY CAUSES FOR CONCERN STRATEGIES FOR MORE EQUITABLE GROWTH

3 Introduction : Key issues concerning income distribution a) Distribution of what –distribution of current monetary (private) income- normally pre tax sometimes post tax and subsidy b) Distribution among whom –household vs individual gender implications c) Distribution within which unit-society or nation

4 Need to Widen Dimensions of Inequality Intra household income distribution-gender implications Post tax income Impact of state transfers Include social incomes (ie goods and services provided by the state

5 Need to Widen Dimensions of Inequality Need to include future incomes by adding current asset distributions Distribution of capabilities or functioning of basic needs goods and services or of human achievements Examine distribution of more direct measures of well being –health nutrition and happiness

6 Need to Widen Dimensions of Income Inequality A broader approach to distribution is needed-eg access to education –is a major influence on future household incomes may also affect the rate of growth

7 Need to Widen Dimensions of Income Inequality Inequality to health services can be more important than inequality in incomes as life may depend on it Also Question of functional income –ie distribution between profits wages rents

8 Distribution among whom Individuals – Households groups Relevant distribution is that among groups not individuals such as the distribution between groups of different ethnicities, religions, regions or races- Vertical inequality as opposed to Horizontal Inequality -Frances Stewart.

9 Vertical Inequality – measures of distribution among households or individuals Horizontal Inequality –between culturally defined groups. –causes of conflict, multi dimensional with political social and economic elements – affects individual well being and social stability

10 Income distribution Concerns in Malaysia Malaysian development strategy of the 70s emphasized growth with distribution Recognized that equitable growth between races was necessary for social stability and participation of poor in the process of development a key element of the NEP

11 Income distribution Concerns in Malaysia Policy efforts geared to reduce poverty and economic differences between the Malays and Chinese Income distribution as policy concern first mentioned in the 4 th Malaysia Plan in 1981

12 Income distribution Concerns in Malaysia Malaysia's efforts to reduce poverty and ethnic differentials have had an positive impact on income inequality Poverty reduction strategies which emphasized increasing income levels of the poor at a faster rate than rest of the population contributed significantly to reducing inter ethnic income inequalities

13 Income Distribution and Development Income distribution is important for development as –it influences cohesion of society –determines the extent of poverty for any given average per capita income –affects the poverty reducing effects of growth –Impacts people’s health

14 Why important to talk about income inequality Income Inequality has remerged a a policy concern in developing countries in the nineties a with greater attention being paid to causes of inequality a The relationship between poverty and inequality

15 Why important to talk about income inequality Long term objective of poverty eradication contingent upon reducing income inequalities Positive correlation between high income inequality and poverty levels Higher income inequality may reduce growth rates and make it more difficult to reduce poverty

16 Why important to talk about income inequality Sensitivity of poverty to growth is depends on a country’s income distribution Distribution of income has a significant impact on rates of growth with more equal societies growing faster than less equal ones Even if benefits of growth are spread in society higher income inequality would result in the poor having a smaller share of the benefits thus slowing down poverty reduction.

17 Why important to talk about income inequality Average health status of a society depends on its income distribution status Societies with more unequal distributions have lower life expectancies An equitable distribution of income as well as the achievement of social goals are essential aspects of development over and above economic growth

18 Why important to talk about income inequality Income distribution pertinent in addressing poverty challenges. In 1999 Malaysia had the highest income disparity in the Asia Pacific region with income disparity ratios of 11.7% between the richest 20% and the poorest 20% of the population.

19 Incidence Of Poverty by State (%) State More Developed Johor Melaka Negeri Sembilan Perak Pulau Pinang Selangor Wilayah Persekutuan Kuala Lumpur Less Developed Kedah Kelantan Pahang Perlis Sabah Sarawak Terengganu Malaysia Notes: 2 Includes Wilayah Persekutuan Labuan. 1 Includes Wilayah Persekutuan Putrajaya.

20 Incidence of Poverty (%) Total Urban Rural

21 Total Households (’000) TotalUrbanRural , , , , , ,737.7

22 Number of Poor Households (’000) TotalUrbanRural

23 Incidence of Hardcore Poverty (%) TotalUrbanRural

24 Number of Hardcore-Poor Households (’000) TotalUrban Rural

25 MEAN MONTHLY GROSS HOUSEHOLD INCOME BY ETHNIC GROUP, 1999 AND 2002 Ethnic Group Bumiputera 1,9842,376 Chinese 3,456 4,279 Indians2,702 3,044 Others 1,371 2,165 Malaysia 2,472 3,011

26 MEAN MONTHLY GROSS HOUSEHOLD INCOME BY SECTOR, 1999 AND 2002 (Ringgit Malaysia) Urban 3,103 3,652 Rural 1,718 1,729

27 Average Annual Growth Rate (%), Ethnic Group Bumiputra6.2 Chinese 7.4 Indian4.1 Others16.5 Malaysia6.8 Urban5.6 Rural0.2

28 Malaysia: Urban/Rural Distribution of Household Income, Mean (RM) All ,167 2,020 2,606 2,472 Urban (U ,114 1,039 1,617 2,589 3,357 3,103 Rural (R) ,326 1,704 1,718 Disparity Ratio (U/R)

29 Malaysia: Mean and Proportion of Income Shares Of Total Monthly Gross Household Income of Top 20 percent, Middle 40 percent and Bottom 40 percent of Households Mean RM (Proportion %)  Top 20% 1,877 2,938 2,925 5,020 6, ) (53.5) (50.0) (51.3) (50.5) (51.3)  Middle 40% ,037 1,777 2,204 - (32.7) (33.8) (35.5) (35.0) (35.5) (35.2)  Bottom 40% ( (11.9) (12.7) (14.5) (13.7) ( 14.0) (13.5)  Top 20% /  Bottom 20%

30 Malaysia: Distribution of Household Income by Ethnicity, Mean (RM) Overall ,167 2,020 2,472 Bumiputera ,604 1,984 Chinese ,086 1,012 1,631 2,890 3,456 Indian ,209 2,140 2,702 Others 1,304 1,798 1,395 1,816 1,775 2, ,284 1,371

31 Malaysia Income Disparity Ratios by Ethnic Groups Chinese/Bumiputra (C/B) Indian/ Bumiputra (I/B) Chinese /Indian (C/I)

32 INCOME STRATA ACCORDING TO ETHNIC GROUP Income Group BumiputraChineseIndianBumiputraChineseIndian Top 20% 13, Middle 40% Bottom 40%

33 ETHNIC COMPOSITION OF HOUSEHOLDS IN THE TOP 20%, MIDDLE 40% AND BOTTOM 40 INCOME GROUPS 1997 BOTTOM 40% MIDDLE 40%TOP 20% BUMIPUTRA CHINESE INDIANS OTHERS MEAN MONTHLY INCOME

34 Malaysia: Gini Coefficient By Region, Region Peninsula r Malaysia Sabah Sarawak Malaysi a