Download Keynote Address by Tan Sri Datuk Dr. Kamal Salih

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Text of Keynote Address at the Official Launch of The
Malaysian Human Development Report, by Tan Sri Datuk Dr.
Kamal Salih, at Pacific Regency Hotel, Kuala Lumpur, at 9am
25th November 2014.
Ms. Michelle Gyles-McDonnough
Resident Representative,
United Nations Development Programme,
Malaysia,
My two distinguished co-authors,
Dr. Muhammed Abdul Khalid and Dr. Lee Hwok-aun,
Tan Sri Tan Sri, Datuk Datuk,
Members of the Media,
Ladies and Gentlemen.
Assalamualaikum
and a very good morning to all,
I am pleased to deliver the keynote address this morning on the
occasion of the double Launch of the UNDP Global Human
Development Report 2014 and the first Malaysian Human
Development Report (MHDR), and would like to thank the UNDP
Representative Office in Kuala Lumpur, particularly Ms. Michele
McDonough for this honor. While the Malaysian Report was to all
intents and purposes completed a year ago, it was destined perhaps
that editorial and other circumstances had intervened and led to this
timing of its release today to coincide with the launch of the Global
Human Development Report. Fortuitous perhaps, but in this way it
makes it possible to locate the findings of the Malaysian Report
against the comparative framework of the current state of global
progress in human development.
I feel the release of the MHDR today could not come at a better time;
the current debate in Parliament on Budget 2015 which coincidently
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is coming to a vote later today, the launch of Dr. Muhammed’s book
entitled the Color of Inequality last week, the continuing round of
dialogue and consultations both within government, the opposition
parties and civil society on the state of the economy in the context of
national unity, and the work of the EPU to frame the Eleventh
Malaysia Plan to be introduced sometime next year as the final leg of
the national mission to achieve developed status by 2020, together
with this Report all should contribute to a better understanding of
what needs to be done by all stakeholders and ordinary citizens
concerned with the future direction of the country.
My sense of the state we are in Malaysia today and of the unfolding
scenario is that we are now facing a critical juncture in planning for
the future of our nation, and that all issues of policy are on the table
to chart a new course for the economy going forward. As noted by
Tengku Razaleigh Hamzah in his letter to members of the Dewan
Rakyat in the current 2015 Budget debate, “The critical issues
involved are of a structural nature not easily tackled via routine
annual provisions”. We have endeavored to address these issues in
this first Malaysian Human Development Report that we are
launching this morning through a rigorous analysis of the data
available to us so as to better inform the policy debates regarding our
national direction free of biases, obfuscations and myth-making for
political gains. We hope the facts duly digested will prevail over
prejudice in order to achieve a more just society and guarantee the
welfare, safety and well being of our future generations.
Ladies and Gentlemen,
As already noted by Michele, the Report we are launching this
morning is the result of a commission by the UNDP and EPU to the
three of us, Dr. Muhammed Abdul Khalid, Dr. Lee Hwok Aun and
myself, to review the performance of the Malaysian economy over
the last forty years or so since the introduction of the New Economic
Policy (or the NEP) along the theme of inclusive growth, and to make
recommendations for a new generation of policies for economic
growth and a more equitable development implied by that theme. I
don’t for a minute purport to be all-inclusive in this Keynote Address
outlining this 300-some pages of the Malaysian Human Development
Report on Inclusive Growth; I can’t possibly do that in the time I
have, but would like to highlight some significant findings for your
intellectual titillation this morning.
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Ladies and Gentlemen,
The challenge for Malaysia in adopting the inclusive growth approach
is the peculiarity of the country’s political economy which attaches a
significant ethnic dimension to development policy. This was the
underlying problem addressed by the NEP at its inception. For
decades since then, Malaysia managed to maintain a respectable level
of GDP growth; transformed its profile from a primary goods
producer to exporter of manufactured products; reduced poverty and
income inequality, raised education and health attainments, and
moderated ethnic disparities. Despite four recessions including the
Asian Financial Crisis of 1997-8 economic growth has been sustained
and shared through consecutive implementation of the three core
development policies which began with the NEP, followed by the
National Development Policy (NDP) and National Vision Policy
(NVP). The problem over the decades involved has not been with the
intent nor the content of the NEP and its successors but the manner
of their implementation, which have produced new inequalities,
poverties and vulnerabilities in the development process. While no
further progress has been made in reducing inequality in income
distribution over the last decade, the NEP had resulted instaed in
creating a culture of dependency, corruption and racial envy.
The incorporation of “inclusiveness” in the New Economic Model (the
NEM) by referring to the bottom 40%, in our opinion and based on
the analysis we had undertaken, only partly solves the problem.
Policymakers have also to address the issue of vertical and horizontal
equity in development policy. Reliance on the market’s tricklingdown process without addressing institutional issues, corruption and
rent-seeking behavior will not suffice to achieve the goals of
economic growth and reduced inequalities derived from it. In my
view, a piecemeal and project-oriented approach will not do the job;
only a comprehensive reform of policies and institutions will set the
course of the country’s development in its proper path onwards to
economic growth and social justice.
Development economists are now grappling with a new macromicroeconomics of development around the concepts of endogenous
growth, the merits of pro-poor growth, the role of asset inequality in
a balanced growth strategy, and the complex mechanism of growth3
inequality-poverty interactions in the development process. All seek
a new economic paradigm including the role of government and the
third sector to deal with the central issues of economic growth and
social inequalities at the global and national scales. Economic
development is all about growth and inequality, and the institutions
and incentives that determine how one leads to the other with
consequences beyond the realm of the market. This is the new
normal in economic policy, replacing the Washington Consensus that
has dominated development thinking and practice for the last three
decades.
In this Report we define inclusive growth as comprising equitable
distribution of benefits of economic growth and of social spending
across distinct income groups and the poor irrespective of their
group membership; involving robust generation of broadly accessible
opportunity for economic participation and safeguards for the
vulnerable; and inclusion of citizens in policy formulation and
implementation, aimed towards minimising social exclusion and
increasing social cohesion.
We need to adopt a multidisciplinary and multidimensional
approach, encompassing economic, social, political and legal
elements, and highlighting regional, gender, ethnic and other aspects
of relative inequality and deprivation. For this purpose we
developed a new economic paradigm to understand the impact of
economic growth on households by decomposing household fiscal
capabilities, or purchasing power, into four components: i) wealth
effects to capture income flows from asset ownership in terms of
profit, dividends, rental and other passive income sources, ii)
disposal income of households after tax, iii) access to credit for
investment and/or consumption and iv) government transfers or
subsidies. This framework serves as a basis for both the statistical
analysis of the data available to us, as well as in designing policies
and programs to achieve inclusive development.
Ladies and Gentlemen,
Malaysia’s growth from 1971 to 2012 meets partly the inclusive
criteria outlined above to a considerable degree, although the
inclusiveness in policy formulation may be open to question. The
evidence includes reduction in poverty rates, high growth rates for
low-income households, reduced inequality on a national scale and
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between regions, diminished interethnic and intra-ethnic disparities,
robust and resilient growth driven by private investments, and
lessened unemployment across all ethnicities.
But, the Malaysian development experience is like football, a game of
two halves. Development in the first twenty years, formally under
the aegis of the NEP is manifest in a rapid decline in household
poverty, rising average incomes with GDP per capita quadrupling
over the period, growth of bumiputera equity rising to 23% of total
equity ownership, while employment participation in the modern
sectors accelerated along with the growth of the bumiputera middle
class, while the Gini coefficient for income disparities declined.
Malaysia’s socioeconomic progress however slowed down since the
1997 Asian financial crisis. Notably, our GDP growth rate fell below
the average growth rate per annum of 7-8% to as low as 4.5% in
2004 (though has since recovered to 6%). The bumiputera equity
target is still short of the 30% target, while Malaysia is still stuck in
persisting inequalities at a level still far from the standards of a
developed nation, in income class, regional, gender and ethnic
dimensions, and lagging development of human capability, and of
institutions fostering inclusiveness and effective governance. Social
exclusion, barriers to social mobility and economic insecurity
continue to stand in development tension against the objective of
greater inclusiveness sought through all development vision and
plans.
The international context lends perspective to the rate of
improvement in socioeconomic development in Malaysia. The
country’s Human Development Index (HDI) score has continuously
climbed, but its HDI ranking has remained static—within the 50-55th
rank since 1980. The nation is expanding the capabilities of its people
on the whole, as reflected in the average income, education and
health outcomes that constitute the HDI. However, Malaysia has yet
to break through to the upper strata of countries with very high
human development levels, lower income inequality, social
inclusiveness and equitable opportunities and outcomes. The latest
Global Human Development Report for 2014breleased today along
with the MHDR puts Malaysia at the 62nd position among 187
countries and territories in terms of the Composite Human
Development Index, which averages the country’s indicator for life
expectancy at birth, expected years of schooling, and mean years of
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schooling along with GNI per capita on a Purchasing Power Parity
basis. The HDI index for Malaysia, which has been trending up since
1980, has reached the value of .773 (out of a maximum 1.0) this year,
better than Thailand, the Phillipines and the average for the whole of
East Asia and the Pacific. However, the new Inequality-adjusted HDI
has not been calculated, which takes into account inequality in all the
three dimensions by discounting the shortfall from the average
measure achieved and reduced as a percentage deficit of the original
HDI.
So, while this “global” comparative measure is commendable as far as
Malaysia is concerned, other dimensions of human development in
Malaysia as presented in our Report suggest that our struggle to
achieve developed status with justice remains unfinished, while new
challenges have surfaced. Income and capability poverty among
Bumiputera1 minorities remains high, and pockets of marginalization
prevail, in both rural and urban areas. In addition, the income gap in
absolute terms has been increasing while the relative income gap has
remained stagnant in the past two decades. Asset inequality shows
wider gaps with inequality in asset ownership nearly double that of
income. In the labour market, contrasting workforce profiles and
preferential practices in public and private sectors indicate that
ethnicity exerts influence over employment, posing questions
towards inclusiveness in workplaces. Women’s participation in the
labour market remains exceptionally low even when compared to
neighbouring developing countries of lesser income levels, and
gender inequalities overall warrant specific analyses and policy
considerations.
Among our keys findings, we also observe that the head of
household’s education, gender and ethnicity correspond with
household income. Relative household income deprivation is more
acute among households headed by persons with less formal
education, especially if attaining primary schooling or less,
underscoring the importance of education to inclusive growth.
Women-headed households and Bumiputera minorities of Sabah and
Sarawak, as well as the Orang Asli of Peninsular Malaysia, are also
more heavily concentrated in lower strata, indicating lack of
inclusion of these distinct groups in reaping gains of growth and
development.
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Consideration of human capability draws out some insight into the
state of inclusive growth. Development attainments across our range
of indicators show East Malaysia trailing the Peninsular. Crucially,
Sarawak lags behind the Peninsular by much greater margins than
indicated by the state’s rather low official poverty rate. We also
observe that rural areas of Sabah and Sarawak are, in capability
terms, even further behind rural Peninsular Malaysia, compared to
the corresponding urban-to-urban disparities. Educational inequity
continues to be salient, not just in terms of access and enrolment but
also quality of schooling. Our findings raise important implications
for policies to uplift capacities, improve outcomes, and provide social
protection for the relatively deprived and vulnerable.
Ladies and Gentlemen,
Inclusive growth entails lifting households out of poverty and
facilitating upward, especially inter-generational, mobility through
graduation to middle class status. This Report noted that median
income profile of the NEP generation improved more rapidly than
that of the earlier generation and even the post-NEP generation,
though the median levels of incomes are higher for the latter. In
other words middle class formation was fastest during the
implementation of the NEP in the twenty-year period involved, but
evidently not since in the liberal and globalization era after the Asian
Financial Crisis of 1997. However, throughout entire period till now,
the size of the middle class, defined in income terms by the World
Bank as those households positioned between 20% of the median
income, has remained relatively small for Malaysia, trending around
the 20% level when in comparison in the typical developed country
situation the percentage is closer to 50-55%.
A telling aspect of inclusive growth is the status of the middle class in
terms of the composition of its fiscal capability. While the bottom
50% has wages/salaries making up 97% of their purchasing power,
the upper part of the middle class would exhibit a similar pattern to
the upper 50% with contribution from wealth effects approaching
11% and increasing as they climb the income ladder. In other words,
on the basis of household fiscal capability Malaysia essentially
exhibits a two-class social stratification, with inequality diminishing
between ethnicities but within-group income gaps rising more and
more to obliterate the NEP-based ethnic classification as a relevant
issue of equity in development. Income inequalities then become
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essentially a question of class. This would be good news for some,
while not so for others!
The decomposition of household fiscal capability in the above new
economic paradigm also brings out the importance of assets in
differentiating the lower from the upper classes, and need to
introduce opportunities for the lower- to middle-income groups to
acquire assets, whether physical (think housing or property) or
financial, or intangible like a Ph.D! Ownership of assets is a powerful
enabler in social and economic progress, and the lack of it can
seriously impede economic and socio-mobility.
In this regard, 63% of Malaysian households compared to 43% of
those in urban areas have no financial assets. In 2012 households
with income below the median level derive the bulk that is 97 per
cent of their income from wages or self-employment. Of the middle
and upper income classes, about 11-14% of their household income
come from asset holding. As de Soto, a Peruvian economist, has said
decades ago, and Felda settlers have proven over the last forty years,
ownership of assets is a significant determinant of success and
economic security in a capitalistic market-driven economy. And the
French economist Thomas Pickety further showed recently citing
American statistics, when the rate of return to capital (in order
words, monetizeable or financial assets) exceed the growth per
capita of real output, the level of inequality in terms of income within
an economy will tend to rise. I wish to hazard a guess that this is
what probably has been happening in Malaysia over the past three
decades leading to our current state of economic inequality.
Ladies and Gentlemen,
Another significant finding regarding inclusive growth in the MHDR
study that merits some airing here is the relationship between
growth, productivity and wage levels.
Our national competitiveness model posits that the role of factor
inputs, productivity, international trade, foreign capital, and
government expenditure, coupled with prudent management of the
external debt position, have cumulatively supported Malaysia’s
economic performance through this period. However, a growth
diagnostic analysis of the Malaysian economic profile confirms that
low-productivity labour and total factor productivity are the crucial
binding constraints to sustainable economic growth.
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Our Report makes reference to a World Bank study in 2008, as
stressed by the Nobel Laureat in economics Paul Krugman regarding
the Asian “economic miracle”, Malaysia’s economic growth over the
two decades after the ending of the NEP had largely been due to the
contribution of factor inputs ie, capital and labor, and that
contribution of labour productivity, skills and total factor
productivity is to GDP growth over the 1987-2007 period
Thus overcoming constraints to labour productivity improvements
only goes part of the way to fostering inclusive growth for Malaysia.
In fact, to understand this we have to go beyond growth performance
to cover the role of institutions, in particular shortcomings in
coordination and dynamism both the public and private sectors. The
roles of small and medium enterprises (SMEs) and the informal
economy are critical to inclusive growth in Malaysia.
Through the new household economic paradigm in our Study, it is
possible to demonstrate the possible relationships among social and
economic processes at the household level underlying the impact of
labour skill premiums through more pervasive education levels of
the workforce and of positive transfers in the three Latin American
countries studied by Lustig et. al., (2013). As another illustration, the
failure of the prevailing credit system and its inability to satisfy loan
demands from the SME and poor sectors of the economy that cannot
access formal credit channels or do not have sufficient collateral
(essentially asset based financial or physical) against which to
borrow. If the SME sector does not have access to external funds for
investment, the capacity to raise investment per worker, and thereby
productivity and income from wages and self-employment, the
economic status of the bottom 50% of households will seriously be
impaired.
Ladies and Gentlemen,
There are several policy options available to reduce inequality and
achieve equitable and inclusive growth. The Report undertook some
simulations in response to policy interventions, and found that
imposition of a minimum wage potentially improves inequality,
based on the changes in the Gini coefficient, by about seven per cent,
while compulsory secondary education stands to reduce inequality
by up to four per cent. Government transfers, depending on the
amount, tend to have marginal effect on overall inequality.
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Rationalization of subsidies has impacts at several levels. When
shifting to an equity-based scheme in place of the current
consumption-based system, our policy simulations showed that
equity-based subsidy targeting have implications not just on income
distribution but also on the cost to government and therefore savings
in government expenditure.
Reform of the tax system to be more conducive to labour income
rather than capital would also a necessary part of the new inclusive
growth strategy, as is incentives for companies to adopt a
productivity-indexed compensation and bonus system in both the
private and public sector.
Other reforms we include in the MHDR covers labour market reform
to reduce discrimination on ethnic gender or regional terms through
an Equal Opportunity Act, the introduction of social policy covering
labour, women and childrens’ rights, as well new safety net
provisions such as employment and medical emergency cover for the
lower income groups, the disabled and other vulnerable subgroups.
Despite momentous attainment in uplifting the socioeconomic status
of Malaysians overall, poverty rates vary markedly among diverse
Bumiputera communities, with the ethnic minorities both in
Peninsular Malaysia as well as Sabah and Sarawak having the highest
incidences. The majority of ethnic minorities are found to have
predominated in the lower rungs of the economic ladders where
most are self-employed largely in primary and low-income sectors.
While there has been an increase in the recruitment of Bumiputera
minorities from Sabah and Sarawak in public service at the federal
level, the numbers are still disproportionately low. This civil service
imbalance can lead to increased racial polarisation and perceived
discrimination.
From the educational point of view, issues of accessibility and quality
of education have long plagued ethnic minority students. This has led
to poor academic performances and alarmingly low admission rates
to public and private universities, distribution of scholarships and
enrolment in professional degree programmes, complicating their
prospects in lucrative economic sectors.
We also call for a new inclusive development strategy is introduced
by adopting a bottom-up approach of decentralized growth. This
would create urban agglomerations by concentrating activities to
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produce the necessary economic density for rapid and inclusive
growth. It was found that per capita GDP growth is accompanied by
increased urbanization, but it would also lead to the spread of
economic activities to rural areas. It is interesting to note that a
decentralized growth strategy has never been fully tested in this
country.
At the same time this study argues that the implementation of the
Government Transformation Programme (GTP) may help the country
improve its level of competitiveness and delivery of public services.
However, a delivery system for public services will only be effective if
it is built upon a good procurement policy, accountability and
transparency that can minimise wastage and leakages in public
expenditures.
In addition to addressing environmental sustainability, including the
utilisation of natural resources, the MHDR seeks fiscal sustainability
at the federal level and new initiatives to reform of the fiscalfederalism practiced in in Malaysian to improve fiscal capacity of
states to achieve decentralised and inclusive development in
Malaysia. At On fiscal federalism, this study affirms that the absence
of decentralised public fiscal allocation has become a point of
contention. With excessive centralisation, especially on public fiscal
allocation, local aspirations are much more difficult to achieve, giving
rise to a “one-size-fits-all” prescription from the centre (federal).
The Report emphasizes emphasises that the current mechanism for
redistributing income is weak and subject to leakages and wastage,
while the contribution of the private sector to private delivery of
public goods are imperative and can play a key role in mitigating the
social costs that can arise from private development.
We assert that the above institutional issues need to be addressed in
the institutional reform process—mainly to support improvement in
income distribution, raise the share of wages in relation to profits in
national value-added income as well as to provide social safety nets
for the poor and marginalised groups in Malaysia.
This study also emphasises that the concept of equality has moved
beyond mere “formal equality” into “substantive equality” where
equality has to be contextualised, drawing upon values such as
human dignity, distributive justice and equal participation. This has
implications for the legal framework. Our inclusiveness framework
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presented in this Report discusses a number of constitutional and
legal issues either directly or indirectly that influence inclusivity.
These include for affirmative action in the Constitution, and legal
protection of women, children, indigenous, workers and disabled
peoples’ rights. Overall, Malaysia has significant laws to promote and
regulate rights and issues related to the less fortunate and vulnerable
people including women, indigenous, workers as well as the disable
people. There have been several cases testing the application of these
laws and their assurance of equality in various issues.
Ladies and gentlemen,
I hope I have managed to convey to you in the last half hour the
essence of the Malaysian Human Development Report we are
launching today. Policy making is a politically hazardous business.
Lee Smolin, a theoretical physicist wrote in the introduction to his
book The Trouble with Physics,
“[Yet] there is something enobling about our search for
the divine. And also something humanizing, which is
reflected in each of the paths people have discovered to
take us to deeper levels of truth.
Some seek
transcendence in meditation or prayer; others seek it in
service to their fellow human beings; still others, the
ones lucky enough to have the talent (and I might add,
the opportunity) seek transcendence in the practice of an
art (my emphasis added).
Policy making is such an art. But without an accurate picture
of the problems and mechanisms involved, albeit some are
completely unknowable, it is not possible to attain effective
and impactful policy. We hope that this MHDR study will
contribute some to the formulation of the next generation of
policies to achieved the goals of inclusive growth in our goal
achieving developed status in 2020.
In preparing this Report, we were fortunate to have been provided
with the largest set of unprocessed data as well as unpublished
statistics from government agencies and institutions in particular the
Malaysian Statistics Department, that had not been accessible to
non-official entities before. This had enabled us to analyze deeper
into the development experience of this country over the last forty
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years since the implementation of the New Economic Policy in 1971.
In the process we hope to have been able to set the record straight,
and to separate the myths from the reality regarding the impact of
the development policy. We would like to record our sincere thanks
to all the government officials concerned who had extended the team
so much cooperation and assistance with regard to the data.
I would also like to take this opportunity to thank our collaborators,
including the ten background paper writers listed in the leading
pages of the Report who may immediately recognize their
contribution to this study.
I want also to include in this
acknowledgement the inputs we gained from other researchers and
CSO participants in our three consultations as well as feedback from
government agencies during the preparation of this document.
Finally, we would like to record our thanks to the sponsors of this
project, the Economic Planning Unit and the United Nations
Development Program, for the commitment and cooperation
extended to us to successfully complete the Report. We are
particularly grateful for the degree of independence given to the
team in conducting its work not normally accorded to such officiallysponsored research.
Thank you.
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