Thursday, November 27, 2014

MALAYSIA:::Addressing Malaysia’s inequality problem

Economic growth is good. However, like anything good, overindulgence and foolishness can land us in trouble. High-income nation with high inequality is a silent and unseen troublemaker like high cholesterol and high blood pressure. We must not ignore the adverse effects of high inequality in our eager pursuit of high-income nation status. The World Economic Forum recently recognised inequality as the no.1 global concern in its Global Agenda 2015.
High Income Nation status is pointless to 80% employed and self-employed Malaysians who earn below RM3,000 a month. Their low earnings contribute to the high level of income inequality, ie. the highly skewed distribution of income. A small number of Malaysians earn tens or hundreds of thousands or even millions of ringgit a month.
Malaysia’s Gini coefficient index is among the highest in the region and has remained relatively stagnant at above 0.4 since the late 1980s as pointed out by Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah during a Budget 2014 Focus Group meeting to address income inequality on August 3, 2013.
As concerned and conscientious citizens, we call on the government to take urgent and affirmative action to reduce the high level of inequality in Malaysia. To get the ball rolling, we propose policy actions in 9 key areas for the government to consider. The government should also consider dedicating the revenue it receives from Petronas towards the effort to reduce inequality.
1. Set Gini index or other appropriate measures of inequality as a national target.
Unlike GDP growth components, actions and progress made in reducing inequality are not summarised and presented as a single number. GDP, GNI, ETP, GTP, EPP, NKEA, NKRA, etc. do not address the costs of inequality to the country. Costs of inequality include unemployment, crime, poverty, distrustful and uncaring society, racial disharmony, health and social problems as well depleting social goods.
A measure of inequality should be made a national target and the progress communicated to the rakyat just like GDP growth and income per capita. What gets measured gets done. We propose that Gini index for Malaysia be reduced to below 0.35 by 2020 as the national target.
2. Use a progressive measure of poverty.
Consolidate the various poverty definitions and thresholds in use into one that meets leading global standards and practices. Instead of using the Poverty Line Income (PLI) based on absolute poverty, we propose the government uses relative poverty measures with a threshold of 60% of median household income with appropriate adjustments for family size. Currently that translates into RM1,200 for a single person, RM2,000 for a married household with no children, additional RM300 for the first 2 children each, another RM200 each for the next 2 children and RM100 for each subsequent children.
3. Provide equal access to education opportunities and improve the connectivity between local labour force and human resource requirements.
Full board primary school for children of the poor: students in secondary Sekolah Berasrama Penuh (SBP) such as MRSM today are mainly children of middle- and upper-class parents with good primary education. We need primary school SBPs to help children of rural and urban poor families improve their chances of entering secondary and tertiary education. The government can use alternative delivery systems for this such as empowering social entrepreneurs to deliver the service through social enterprises.
Vocational and polytechnic education and training: the government should target an intake of at least 100,000 students by 2020. This is important to diversify and upgrade the skills of our labour force of which 75% are currently holding SPM certificates and below.
Public universities: the government should increase the annual intake from 200,000 currently to a minimum of 400,000 students by 2020. Various studies and research has proven that tertiary education can help reduce inequality.
4. Ensure decent jobs and fair wages for citizens. As a principle, no person in full-time employment should be in poverty.
Set a minimum wage of RM1,350 for 2015 and target RM1,850 by 2020 in order to achieve the 40% CE/GDP ratio proposed by Minister in charge of Economic Planning Datuk Sri Abdul Wahid Omar. With GNI target of RM1.7 trillion by 2020, this proposed amount should be the minimum wage set by the government. This amount is 10% higher than our proposed relative poverty threshold (RM1,200). An annual increase of 6.5% from the 2015 minimum wage will reach the minimum wage of RM1,850 by 2020.
Capping top executives’ pay. Companies should be discouraged from the practices of paying top level executives more than 50 times the median or average wage. This can be achieved through tax disincentives.
Recognise the collective rights of workers. Clauses in the Trade Unions Act should be revised to empower Trade Unions and Malaysia should ratify the ILO convention.
Limit the use of foreign workers in certain industries. The government should increase the foreign worker levy to RM5,000 and set limits on foreign worker employment by industry. The government may allow 100% foreign workers for genuine domestic maids. However, there should be zero foreign workers in the service and manufacturing, a maximum 30% for construction and 50% for agro based/plantation industry.
5. Affordable housing. As a principle, every citizen should be given the opportunity to own a house fit for living. The government has invested large sums of money in fostering and supporting the culture of innovation including social innovation. What better way of getting the return on investment than finding innovative ways to deliver affordable homes to the rakyat?
As a first step, the government should consolidate all current housing agencies and SPVs into one national housing authority. This will enable better management and greater economies of scale.
The government should tighten RPGT and financing for second and subsequent home purchase and foreign purchase to curb speculation and stabilise the market. The government should also provide assistance to enable first time buyers to purchase affordable houses.
Alternatively, the government could empower housing associations to build affordable houses and empower local state governments to find solutions together with housing associations and social entrepreneurs to provide affordable housing in their respective areas.
6. Develop the people or social sector to help tackle poverty and social problems, provide goods and services at affordable prices and create social innovation to help reduce inequality.
The Malaysian private sector has been enjoying a wide range of supports, incentives, privileges, access to finance, development programmes, Public Private Partnership (PPP) schemes, etc. provided or assisted by the government. Similarly, the government should help develop, support and incentivise the social sector.
As a first step, the government should recognise the social sector in its own right rather than just a balancing item as the informal sector. In line with global efforts to develop the social sector, the government should introduce various measures, schemes and incentives to develop the sector including funds for social innovation and access to social finance. This includes a proper development of the microfinance sector.
7. Social transfers
Cash transfers to help alleviate poverty through hand-outs should be based on clear need, guidelines and targeted outcomes. The income level that qualifies for cash hand-outs should be tied to poverty threshold. Proper targeted outcomes, guidelines, measures and means testing should be established prior to execution.
Alternatively, assistance to the poor can be achieved through alternative delivery systems such as the empowering social entrepreneurs to help alleviate poverty via social enterprises.
8. Good governance and fight against corruption
Corruption and weak governance are among the main root causes of high inequality. The government should step up efforts to fight corruption including implementing higher budget allocation and taking radical steps to expose and punish corruptors.
The government, public sector and private sector should observe and be guided as far as possible by the governance, integrity and transparency principles and guidelines advocated by the UN Global Compact, Transparency International and Global Financial Integrity.
9. Fiscal measures and incentives
Capital Gain Tax and Inheritance Tax have been proven to play a significant role in closing the income disparities between rich and poor in addition to bringing additional tax revenue to the government.
Additionally the government can introduce various fiscal incentives to encourage the haves of the country to contribute towards the improvement of the well-being of the have-nots.
Reducing inequality will be more difficult compared to creating growth. BLINDSPOT proposes a special unit led by a competent minister reporting to a Parliamentary Select Committee for Inequality be created to champion the cause. The unit should have sufficient clout and be given the power to execute across different ministries to ensure that inequality is reduced. We envisage an annual budget of 8% of GDP is required; an incremental of 5% of GDP from the current allocations.
Government, private sector and the rakyat should make a concerted effort to tackle income and wealth inequality. Among others, this calls for stimulating and constructive economic and social discourses, and non-partisan or bi-partisan collaboration to reach consensus on potentially new economic goals and philosophy.
BLINDSPOT urges all Malaysian think tanks, policy makers, academicians and activists to evaluate these proposals and contribute towards the cause as much as possible, in order to create a better Malaysia not only for us, but for generations to come. We hope that these proposals will help break the vicious cycle of inequality and shift Malaysia into a virtuous cycle of equitable and harmonious economy. – November 24, 2014.

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