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Ethnic Inequality and Poverty in Malaysia Since 1969

Malaysia’s colonial legacy left both high inequality—with a marked ethnic/racial dimension—and high poverty—with an especially high incidence of poverty among the ethnic majority, the Malay people and other (non-Malay) “Bumiputera.” And ethnic inequality was somewhat neglected as a policy issue in the 12 years or so after the county’s Independence in 1957.

Ethnic riots broke out in Malaysia in 1969, prompting a national effort at affirmative action favoring the Bumiputera. The main policy instrument was the New Economic Policy (NEP). Its twin aims of Malaysia’s were ethnic redistribution and poverty reduction. The Bumiputera were to receive favorable treatment in access to education, housing, public-sector hiring, and corporate share ownership. The NEP lasted 20 years. To varying degrees, successive governments have intervened against ethnic inequality. The policy has been controversial, with both ardent supporters and critics (seemingly correlated, though imperfectly, with ethnicity).

Since 1969, Malaysia’s official poverty measures indicate one of the fastest long-term rates of poverty reduction in the world, due to both economic growth and falling inequality. Indeed the official poverty rate has gone from about 50% to virtually zero. Judged by Malaysia’s poverty line, the only country I know that has had as seen a faster rate of poverty reduction over the longer-term is neighboring Thailand. (Yes, they both beat China in terms of the pace of decline in the poverty rate, though not, of course, in terms of the count of numbers of poor.)

As an aside, I am not convinced that Malaysia has virtually eliminated poverty. The current official poverty line is almost certainly too low by prevailing standards of what “poverty” means in a country such as Malaysia. I take up this issue in another blog post, which can be found here.

Malaysia can also claim more success than most countries in managing inequality. The Gini index of household incomes fell from 0.51 in 1970 to 0.40 in 2016. This was due to progress in reducing ethnic inequality. For developing countries as a whole, average inequality has been roughly unchanged over a similar period.

Did ethnic inequality fall since 1969 and was that a key factor in the country’s success in reducing poverty and in managing inequality? Thankfully, we have data from 18 reasonably comparable, nationally representative, household surveys to draw on in addressing that question, though the historical tabulations are rather limited, and the micro data are not publically available.

A natural question to ask of the available data is how much ethnic inequality fell, and how much that contributed to poverty reduction. My new NBER working paper, “Ethnic Inequality and Poverty in Malaysia since 1969″, tries to answer these questions. (My research for the paper was done while visiting the Ungku Aziz Centre in the Faculty of Economics, University of Malaya in January 2019. Many thanks to the Faculty for their hospitality.)

The paper provides new measures of ethnic inequality spanning 50 years. These show a large reduction in relative ethnic inequality. And the decline in the national Gini index is fully accountable to the country’s progress in reducing the Gini index of between-group inequality (see Figure below). Nonetheless, the ethnic differential in growth rates has not been enough to attenuate the large absolute gaps in mean incomes by ethnicity, given the extent of the initial ethnic inequality. Relative ethnic inequality has fallen, but absolute ethnic inequality has risen.

Importantly, I find no sign in the data of a robust effect of the growth process on inequality within ethnic groups. It is not the case, for example, that the higher growth rate for the Bumiputera in the wake of the NEP was shared unevenly among the Bumiputera when one defines “uneven” in terms of proportionate changes. However, that growth did come with rising absolute inequality.  Nor do I find any sign that the policy efforts to reduce ethnic inequality came at a cost to the overall rate of growth, though this is an issue that merits further research.

The paper also finds that Malaysia’s success in reducing income inequality over the last 50 years played a non-negligible role in the country’s success at reducing poverty, in combination with economic growth.  Using the official poverty measures, about 10% of the overall rate of poverty reduction is accountable to reduced inequality in average incomes between the main ethnic groups. However, overall economic growth has been the more important driver quantitatively. Changes in the ethnic composition of the population tended to be poverty increasing, though this effect turns out to be small.

While the reduction in ethnic inequality has not been as quantitatively important to poverty reduction as overall growth that does not imply that ethnic redistribution is a blunt tool against poverty in this setting. Nor do the facts that both ethnic inequality and poverty have been reduced substantially imply that ethnic inequality no longer matters to poverty. Indeed, the paper finds quite sizable elasticities of national poverty to inequality-reducing ethnic redistribution. And the elasticities have stayed high—indeed, they have increased—through this period of ethnic redistribution and poverty reduction spanning 50 years.

In short: Malaysia’s long-term effort to reduce ethnic/racial disparities in living standards has played an important role in its ability to manage overall relative inequality. That effort has also helped reduce absolute poverty, although on that score overall economic growth has been more important. However, the potential gains to poor Malaysians from progress toward ethnic equality do not appear to have been exhausted. Going forward, even small reductions, or increases, in ethnic inequality can still matter.