The 11th Malaysia Plan and the denial of income inequality

For reasons best known to himself, the chairman of the Malaysian Rubber Board who happens to be the MP for Jasin, asked the government whether the gap between the rich and the poor was widening in Malaysia. The government’s response was: “No way!”

The government’s response was that Malaysia uses the Gini coefficient to measure income inequality and that the Gini for 2014 is 0.421, which is smaller than the Gini for 2012 (0.431) and for 2009 (0.441). The claim is “lower Gini, therefore lower inequality”.

Yet those who monitor such data know that in 1989, the Gini coefficient was 0.422. So, if the Gini coefficient were the only measure of inequality, the government would have to say that the inequality in 2014 was the same as it was 25 years ago.

[NOTE: Per the Gini coefficient, we are less unequal now than in 1970: 0.513.]

The government did mention another indicator: the ratio of the income of the bottom 40% to the top 20% of households. This is a less abstract measure and can be expressed in street terms.

The 40/20 ratio in 2009 was 1:6.94, while in 2014 it was 1:6.18. In street talk, in 2009 the average income of the top 40% of households was seven times higher than that of the bottom 40% and in 2014 the disparity improved to six times.

I could not find published ratios for all Malaysians (“overall”). I was able to find the ratio for Bumiputera (Table 2.5 in Jomo, K.S. and Wee, C.H., 2014. Malaysia@50. Petaling Jaya: SIRD).

For the period 1970–2009, the lowest ratio for Bumiputera was 1987: 5.36. (In 2009 the ratio for Bumiputera was 6.90, which is nearly equal to the 6.94 (overall) cited by the government for 2009).

The difference between 1987: 5.36 (Bumiputera) and 2014: 6.18 (overall) indicates inequality has worsened in the last 27 years.

Simply put, in 1987 the income of the rich was five times more than the income of the poor. And 27 years later, in 2014, the income of the rich is six times that of the poor.

If you’re still not convinced the Gini is an inferior measure, here’s another illustration based on published data.

In 2012, the Gini coefficient for Bumiputera and Chinese was nearly the same, at 0.421 and 0.422 respectively. The near identical Gini coefficients suggest that income inequality was the same for Bumiputera and Chinese. But it wasn’t.

This is a graph of data from Table 1.5 in the 2012 Household Income and Basic Amenities Survey report published by the Department of Statistics.

Though the Gini coefficients are the same for the Bumiputera and the Chinese, the chart shows that income inequality within each ethnic group is very different: the income of 26.3% of Bumiputera households was below RM2,000 per month, while only 13.8% of Chinese households were in the same class.

The discrepancy is also clear at the top end: the income of 12.3% of Bumiputera households was RM8,000 or higher, while – with the same Gini coefficient – the corresponding figure for Chinese households was 23.2%.

The Malaysian Human Development Report 2014 (MHDR) agrees in stronger terms.

MHDR says: “The income disparity between the top 20% and bottom 40% of households when measured in absolute terms, has actually increased during the period of 1970-2012. For instance, the income gap between the rich and the poor jumped 13 times from RM659 in 1970 to RM10,312 in 2012” (page 44).

The MHDR also says: “The total wealth of the richest 40 Malaysians [in 2012] is equivalent to 22% of the country’s GDP, an increase from 15.7% in 2006. In relative terms, Malaysia’s 40 richest individuals are in fact much wealthier than the top 40 richest individuals from the United States, Singapore or Thailand” (page 49).

Do you agree the Gini coefficient is a poor measure of income inequality? More importantly, do you think the government is right to claim that the gap in income between the rich and the poor has not widened in Malaysia?

No member of the government wants to admit increasing inequality because it is an indicator of political capture of the state by the rich.

Oxfam, the British charity, in a paper published in January 2014, said “disparities in wealth and income result from “political capture”, in which the wealthy use their economic power to make sure “the rules bend to favour the rich, often to the detriment of everyone else. The consequences include the erosion of democratic governance, the pulling apart of social cohesion, and the vanishing of equal opportunities for all”.

The data shows that income inequality has worsened in the last twenty five years. The framers of the 11MP deny this. Who will benefit from the 11MP? The rubber tapper or the chairman of the rubber board? – April 23, 2015.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.