While governments and policymakers throughout the world maintain cooperative and united spirit in their attempt to calm financial market routs and avert a global recession, I urge the same degree of attention and urgency to be held on fighting poverty. As the world economy enters a more turbulent period, more people would suffer from poverty as a result of rising prices of basic commodities to falling victims of job cuts and business losses.

In the first of my economic policy and poverty eradication assessment series, I will explain that the poverty problem is not as deceptively simple as defined by development economists and aid agencies (e.g., the World Bank, the United Nations), i.e., based on measurement of absolute poverty, a country’s per capita income, gross domestic product. I also think that Malaysians are increasingly exposed to declining standards of living and deprivation of basic public services. Some observable examples include deteriorating and inconsistent standards of education, healthcare services and public transportation services.

 

To put in context, the Malaysia New Economic Policy (NEP) was introduced after the May 13, 1969  riots to eradicate poverty and redistribute economic wealth to the poor, particularly targeted at rural Malays or Bumiputera. Subsequent Malaysia Economic Plans, the National Development Policy (1990-2000), complemented by the Vision 2020 agenda, have been based on similar principles to reduce poverty and inequality through economic restructuring and wealth redistribution.

 

In fulfilling the NEP pledges to reduce and eradicate poverty, the government appeared to achieve its targets, e.g., poverty fell to 15.1% households, below the 16.7% set in the NEP for 1990. The incidence of poverty among households was markedly reduced from 49.3% to 15% in 1970 Peninsular Malaysia; from 58.3% to 34.3% in 1976 Sabah; from 56.5% to 21% in 1976 Sarawak ; and to 17.1% for the whole country[1]. Subsequently in 1999, the poverty incidence for Malaysia was further reduced to 7.5%[2]. Malaysia also received a glowing report from the United Nations Development Programme (UNDP) that poverty in Malaysia fell from 7.5% to 5.1% in 2002.

 

With the NEP’s success and praises from international development agencies, the ruling government has been using the NEP as a means of winning political support from the Malays and/orother Bumiputera. Unfortunately, many had failed to question the benefits of the NEP to the poor whilst focusing on steering racial divides. This diverts attention from the core objectives of the NEP in terms of eliminating the identification of ethnicity with economic function and promoting racial harmony. Sadly, the government and the opposition are often engulfed in race-based politics instead of questioning the worsening distribution of wealth from the 1990[3] and the problem of rural as well as urban poverty.

 

After almost 50 years of numerous ethnic-based measures in favour of Bumiputera, the signs of failure are emerging fast with (1) Malays’ growing disaffection of the ruling party, Barisan Nasional; (2) criticisms from former ministers of how the concept of Malay Supremacy benefited a small number of Malays; and (3) controversies whether the NEP had achieved or yet to achieve its 30% Bumiputera corporate equity participation in the economy. Importantly, official economic figures on poverty reduction and measurement need to be interpreted with an understanding of how poverty had been defined and measured.

 

While many countries succeeded in reducing poverty, the UNDP reported a disturbing trend of income-share downturn[4]. Between the mid 1960s and mid 1990s, the poorest 20% of the world’s population experienced income-share downturn from 2.3% to 1.4%, while the richest 20% saw share increase from 70% to 85%. Coupled with high inflation, Malaysia is not immune to this trend and it is likely that the gap between the rich and the poor has been widening despite increase in per capita incomes.

 

There is non consensus or official academic research on the poverty line in Malaysia . For example, the recommended poverty line was RM500 per month and static measurement of poverty in rural areas failed to account for migration of population to cities. The measurement of absolute poverty and per capita income had not considered social and psychological issues. The predominant focus on the reduction of absolute poverty brings to the fore the central challenge for policymakers to reconcile growth and efficiency with poverty reduction. While it is politically justifiable for international development and aid agencies (e.g., the World Bank and the UNDP) to tackle inequality through an overarching objective of poverty reduction, policy decisions at the country-level need to measure growth and reduction of social equality as parallel objectives of poverty eradication.

 

The NEP and subsequent ethnic based economic policies fail to consider long-term wealth creation, and dynamics of multiracial and socio-economic contexts of the country, e.g., complementary strengths and economic contribution of other races or all Malaysians. An interventionist approach to redistributing wealth (e.g., government budgets and quotas for Bumiputera) only fulfils short term perception of the most equitable and efficient policies. Redistributive transfers are not sustainable as market forces would prevail and correct artificially adjusted general equilibrium. The government must act now for the national interest and economic well being of all Malaysian citizens, particularly the poor and disadvantaged.

 

Neither general metrics of poverty nor equity is adequate: both individually and jointly are liable to induce strategic errors[5]. Economic policy formulation must consider how to reduce poverty and build Malaysia ’s capacity for wealth creation; and what the alternative social and economic policies are that need to be jointly developed and considered. The focus on short run poverty reduction is misguided by redistribution and economic restructuring without considering competition and productive inputs in the economy and the interplay of global economic forces. There is also research evidence that while more equal societies grow faster, intervention through redistribution and equalizing changes can be detrimental to standards of living and national unity[6].

 

To illustrate, the 30% Bumiputera equity target is misplaced without really addressing the problem of social inequality and wealth generation for Malays or Bumiputera. This target does not consider the absolute number of Bumiputera particularly the poor who had benefited, which obscures potential share ownership by a few privileged individuals. With exclusive practices based on ethnicity, investors and stock markets would shun inefficient allocation of resources, and markets would adjust prices accordingly forcing downward pressure on stock prices. Further, wealth sustainability is questionable as a company’s share price and performance depends upon top management competence rather than selective or preferential allocation, e.g., closed tenders and quotas.

 

Similarly, the NEP quotas for scholarships and higher education admissions have long run negative effects on human capital development in the country. One argument is that extending financial capital to human capital may allow for the better use of the human potential of Bumiputera and address educational inequality of the poor. But education privileges through a quota or insular system defeat formative students’ development of enterprise and survival skills for success in the real world. Not to mention, the absence of competition and quality controls would only lead to inefficiency losses with an adverse equilibrium effect on human capital stocks.

 

In brief, redistributive policies such as the NEP should account for the returns function within an economy. By focusing on achieving quotas and emphasizing inequality through redistribution, non-Malays and other Malaysian citizens are restricted from productive participation in the economy which would benefit the nation on the whole. Redistribution also promotes private returns to education rather than social returns for human capital development. For example, the highly educated are globally mobile and likely to migrate with skill shortages and attractive opportunities in richer economies.

 

Importantly, redistributive mechanisms fail to capitalise on efficiency gains from non-Malays and potential cross-cultural diversity for innovation. There is systematic empirical evidence that under increasing social returns to education, redistributing education from the highly educated to the less educated, while enhancing equity, unambiguously reduces efficiency and therefore reinforces stagnation in developing a pool of skilled people [7].

 

There is also a common misconception that wealth generation and poverty eradication can be achieved through a major fiscal stimulus and development of mega projects. Of course, government can bring down absolute poverty (e.g., create jobs and increase national spending through debts) or possibly eliminate it by increasing current household consumption at the expense of future consumption (e.g., relaxing EPF contributions), redistribute both from the current and from the majority of the economy to those who are currently poor (e.g., increase borrowings and subsidies). Such redistributions and short-term payoffs in terms of poverty reduction may fail quite predictably – even affecting future economic growth and competitiveness. The government should be responsible that current excesses and expenditures would have to be borne by our children, grand children and future generations. Examples abound of such narrow economic focus and failure to balance economic policy in the short run with inequality and poverty, and long run effects on standards of living (e.g., North African nations, Venezuela ).

 

National economic policy, poverty eradication and prosperity through growth are inextricably linked to socio-cultural dynamics of a country and global market forces. The NEP with its emphasis on one segment of the population at the expense of future growth and opportunities for the overall population may be justifiable as a temporary measure. Sadly, after more than 50 years of independence and decades of discriminatory policies, the NEP had failed to distribute (create) wealth for the Malays and Bumiputera, and achieve national unity and cohesion between different races. Even amongst Malays, social disintegration is taking place and fundamentally, the redistributive mechanism is an inappropriate banner of poverty eradication for all Malaysians. For the benefit of Malaysia, the government and the opposition must engage in more intellectual debates and work together to demonstrate social and economic value to the people particularly how the current Malaysia Economic Plan and the Industrial Master Plan are aligned to support development strategies for not just the Bumiputera, but for all Malaysian citizens as well, especially for the disadvantaged and poor of our society.
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Dr. Teck Yong Eng is Professor and Director of Centre for Research in Management at Bournemouth University . His writing covers economic development and strategy issues and has appeared in business management and strategy journals.

[1] Government of Malaysia , Sixth Malaysia Plan, p.11.

[2] Government of Malaysia , The Third Outline Perspective Plan, p. 50.

[3] Malaysia 1991. The second outline perspective Plan, 1991-2000. Kuala Lumpur : National Printing Department.

[4] United Nations Development Programme (1996) Economic growth and human development. Human development report. New York : Oxford University Press.

[5] Collier, P. & Dercon, S. (2006) The complementarities of poverty reduction, equity, and growth : a perspective on the World Development Report. Economic Development & Cultural Change, 223-236.

[6] For e.g. see: Pinckney, T.C. & Kimuyu, P.K. (1994) Land tenure reform in east Africa : good, bad or unimportant. Journal of African Business, 3(1), 1-28; Banerjee, A. & Duflo, E. (2003) Inequality and growth: what can the data say? Journal of Economic Growth, 8(3), 267-299.

[7] See e.g.: Belzil, C. & Hansen, J. (2002) Unobserved ability and the return to schooling. Econometrica, 70(5), 2075-2091. Soderbom et al. (2006) The dynamics of returns to education in Kenyan and Tanzanian manufacturing. Oxford Bulletin of Economics and Statistics, 68, June, 261-288.