Saturday, February 5, 2011

The Inequality Wildcard

To continue with the matter of the economic factors that is triggering off the socio-political unrest in Tunisia and Egypt, in addition to the issue of unemployment, we have to also be mindful of the issue of income inequality or, the growing gap between the rich and the poor.

The matter of the rich-poor gap is beyond the mandate of economic planners. This is a matter that falls squarely in the domain of political leaders.

Economic planners can merely point out the dangers of the rich-poor gap. But, greedy and avaricious political leaders who are interested in making themselves, their family and crony friends rich will ignore the warning of the hapless economists.

This rich-poor gap is increasing in Malaysia.

Of course, the rich-poor gap is not unique to Malaysia. In fast-developing economies like China and Vietnam the gap will increase very fast before narrowing over time. But, countries like China and Vietnam are unleashing years of languid development. There is a sense of being in a hurry.

In contrast, Malaysia is at an economic developmental crossroad. Too expensive to be in labour-intensive activities and, yet, not skilled enough to get into high value-added and innovative knowledge-based activities.

In Malaysia's current position, the rich-poor gap is discomfiting. Unless Malaysia's political leaders address this issue urgently, this rich-poor gap may cause socio-political tension over time.

My biggest fear is that such tension will be distorted by stupid Malaysian politicians who will frame the issue in terms of race when the issue is actually one of poor ethics and abusive governance.

Anyway, read what Kenneth Rogoff has written in the sidelines of the Davos summit here


walla said...

Income gaps exist in any economy and are a reflection of economic and other activities building on accumulated advantages.

What is important is to permeate society with means and opportunities for citizens to work according to their capability to earn according to their labour, thereby removing any excuse to use inequality and disparity as sufficient reason to make unjustifiable demands which in turn will contaminate the motive force of progress in economies.

The universal means is education. The best opportunities are global. Tapping global opportunities requires globally relevant education as a bridge to new ideas and methods.

A country whose citizens have to seek pricey but under-resourced private education in order to stay globally relevant only says its government has set priorities constructed on skewed arguments unsupported by a reality demanded by the world's markets whose importance to the survival of that country's future is the more the smaller the country.

That we have let our economy come to this stage where we are trapped in the limbo of middle-income but rising costs speaks volumes about our political leadership.

If others even smaller have been able to surmount such an insuperable hurdle, we should have been able to do no less. Yet we have succeeded in failing.

And we continue to fail year after year except for the occasional lip-serviced public-relations exercises. This leaves but one conclusion - the situation will continue as it is because the status quo of indifferent performance and achievement is being maintained for fear of rocking the political boat and thus sinking private agendas.

Since the citizens already know this, those who can have been taking upon themselves to go their own way.

However, they will only achieve sub-par results from the national viewpoint because the effort is individual-scaled so that the risks are not spread into teams because they are not formed under any national framework owing to some racial blueprint, or if formed, subject to political interference. Such has been happening for the last three decades.

There is one other prosaic observation. The young which come out of our education system don't know that they don't know. There is no sense of danger about their futures and thus no urgency to make haste to close their knowledge gaps. Some will dismiss this as individually attitudinal. Nonetheless, it aggregates to a society that soon enough will become oblivious of where we actually stand in terms of the capabilities needed to stay globally relevant.

Such a situation must be reformed quickly so that market demand for real value-adding updates can be raised that will attract investments in real-world education which will in turn help create new means to make fresh opportunities.

It will also erode the platform for political wildcards to make nationally divisive statements.

hishamh said...

I don't think the numbers support an increasing income inequality gap - thankfully so, because it's bad enough as it is.

There's been some progress, but not enough to make a dent in the gap. And the big failure of the ETP and NEM is addressing this distributional issue, of making sure that benefits of higher investment are spread more evenly through society.

I'm leery of the all-out pursuit of a GNI number, if all it benefits are corporates.

Part of the problem (beyond what walla has said) is I think that the balance between labour/capital bargaining power has been too much on the side of capital - this has been a global problem for the last three decades, but is more pernicious in our case simply because of the pre-existing income gap.

How to address this is something I quite frankly don't know.

de minimis said...

One key factor to reduce the income gap is education. We need young Malaysians to acquire skill sets that make them employable. The people in economic and investment planning need to with people in education. It's a human capital production line.

But, Malaysian politicians like to imagine that they are very clever. So, all the good plans prepared are distorted by short-term political goals. This is a problem. How to reduce political interference with economic and educational planning.

hishamh said...

Something just occurred to me yesterday while thinking about this - is our tax code the problem?

I attended a course on tax and wealth last month, and it turns out that Malaysia is one of the very few countries in the world that does not tax capital gains. With the piddling exception of RPGT (which is time constrained), any profits from sales of assets be it shares, property or whole companies does not attract a tax liability.

In real terms that means those with capital have a huge advantage in building and growing their wealth - it's a well known issue in economics that initial endowments matter, even in a fully competitive economy.

I think I'll start researching this - need to see the correlations between taxation of capital gains and Gini numbers across the globe.

de minimis said...

Interesting point, bro hishamh

hishamh said...

Seems like I'm on to something. And we're not alone either - great article on the same issue in Singapore - they don't tax capital gains either.

walla said...

(coughs) a laffer curve effect in capital gains taxation.

hishamh said...

Good links Walla - I came across a similar point during my search. The NBER paper is interesting, especially the data on capital gains income distribution.

Very few papers on the relationship between capital gains taxes and income inequality though. Most concentrate on either taxpayer behaviour or govt revenue.