The costs of inequality: Not just a case of “poor envy”

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In 2014, “inequality” was undeniably the buzzword in the public policy domain, partly thanks to Thomas Picketty’s unlikely bestseller, Capital in the 21st Century. Arguably, the Malaysian government did take notice of the issue in implementing certain policies of a redistributive nature, such as cash transfers via the BR1M programme.

However, to see inequality merely as “income inequality” avoids the larger question: what are the consequences of inequality? The discourse on inequality will not be complete, let alone constructive, if this dimension of the problem is ignored. While the word “inequality” itself invites moral judgment, the issue cannot be seen to be as simple as that.

Pigeonholing the problem as a moral argument will result in often intractable polemical ideological debates, forming the left, right and centre of Western politics as we know it. Not only that, in the overarching framework of neoliberal capitalism within which most democracies reside, denouncing inequality “just for the sake of it” would be cast off as “poor envy”. This is because the tenets of modern capitalism imply the inherence of inequality, as Picketty’s study that covers long-term inequality in the 20th century demonstrated.

neoliberal capitalism within which most democracies reside, denouncing inequality “just for the sake of it” would be cast off as “poor envy”. This is because the tenets of modern capitalism imply the inherence of inequality, as Picketty’s study that covers long-term inequality in the 20th century demonstrated.

The costs of inequality

Stepping back from viewing inequality simply as income inequality, what question begs to be answered? The cost of it, actually; since if it is proven to be socially, economically and politically detrimental, the marginal cost of not tackling it also increases. The grounds of inequality appear no longer just as moral ones, but also become a matter of exigency.

As can be seen from the exponentialabsolute income growth of the top 20% of Malaysian households (Figure 1), the country is seeing the rise of a super-rich cohort, enlarging the income gap to a staggering margin. According to the Malaysia Human Development Report 2013 (HDP 2013), the total wealth of the top 40 richest in Malaysia constituted 22.4% of the national GDP in 20121.

This might trigger a phenomenon termed “Trickle-Down Consumption” by Bertrand and Morse2. The model proposes that the consumption of middle income earners is “particularly responsive” to top income earners. As the wealthy consume more elastic and visible goods and services – ostensibly due to their capability to do so – middle income earners also tend to spend more to keep up. This could result in debt and even bankruptcies, supported by the findings of the paper that a positive relationship existed in the US between the number of personal bankruptcy filings in a state and the top income levels there.

Nevertheless, the externalised yearning for social recognition and materialistic pursuit should not be summarised as the only and inadvertent damage caused by an unequal society. Frank and Levine in their theory of Expenditure Cascades3 provide a less “choice-driven” aspect of expenditure and consumption.

The model of Expenditure Cascades postulates that the consumption of the wealthy will trigger increased spending in social classes directly below them (be it out of choice or necessity, or both), and the effect ripples down to the bottom of the economic ladder. The theory corresponds to observations that saving rates have declined in countries with rising inequalities.

The theory is not hard to comprehend: a relatable example would be the bidding up of housing prices by the wealthy as well as the sprouting of enterprises catering to the level of expenditure expected of affluent neighbourhoods. These consumptiondriven expenditures will exert enormous financial and social pressure on lower income groups, especially the urban middle class, due to their physical proximity to the wealthy.

One would certainly not discount the applicability of these two models in Malaysia, seeing that the country also suffers from high levels of household debt (86.8% of the GDP in 20124) and a worrying bankruptcy rate, with 60 people declared bankrupted daily 5. Examining the components of loans and reasons of bankruptcy filing should reveal that housing, vehicle and personal loans are primarily responsible, intuitively, for “visible” and “necessity” spending, or both.

Homeless man in KL. Relative poverty in Malaysia is consistently higher in urban areas.

The problem also led to increased urban poverty in Malaysia, which can be assessed by the incidence of relative poverty6 in the country, which stands at 20% in 20127. Tellingly, in conformity to the theories of Trickle- Down Consumption and Expenditure Cascades, relative poverty in Malaysia is consistently higher in urban areas compared to rural ones from 1989 to 20128.

Above all, even from the aspect of growth, the Organisation for Economic Co-operation and Development (OECD) has found, through a crosscountry study, the cost of rising inequality also comes in the form of growth. The report states that rising inequality has cost more than 10 percentage points off growth in countries like Mexico, New Zealand, Sweden, Finland and Norway over the past two decades. For the GDP-obsessed, this should come as a warning too.

Time for structural reforms in the Malaysian economy

Figures 2 and 3 show that the New Economic Policy (NEP) and its multiple incarnations, despite their significant social engineering and poverty eradiation achievements, have not been able to reform the Malaysian economy’s predisposition towards inequality. This structural deficiency, while able to promote income growth at all strata of households, also allowed the same level of income gap growth between the different classes throughout the years.

The inequality problem in Malaysia’s economy has to be taken out of the income paradigm so that policy thinking is not confined to cash transfers. The burning questions of wealth9 and wages inequality 10, regional imbalance, statist involvement in the economy 11, monopolisation, economy financialisation and the real property glut have to be addressed and rectified because they are not only potentially among the biggest contributors to Malaysia’s inequality, but also structures in the perpetuation of it.

Without charting an inclusive way forward, this blind pursuit of Gross National Income (GNI) target of US$15,000 per capita by 2020, which has no bearings on inequality whatsoever, will only prompt one question: at what cost? In a nation as fragmented as ours, recent racial unrests based on prices and housing projects remind us that it is something we do not want to find out.

This culminated in the absolute income gap growing larger and larger for the top earners vis-à-vis the lower ones, resulting in the palpable effects of inequality to surface in recent years. This also poses significant challenges for social mobility – as the gap widens, the chance of closing it narrows.




1
This is not only a rising percentage, relative to 15.7% in 2009, but is also higher than our neighbours, Singapore (21.5%) and Thailand (13.1%).

2 Bertrand, M & Morse, A, 2013, “Trickle-Down Consumption,” NBER Working Paper No. 18883 NBER Working Paper Series.

3 https://www.aeaweb.org/annual_mtg_ papers/2007/0107_1300_0202.pdf

4 www.thestar.com.my/Business/Business-News/2014/03/20/Rising-household-debt-It-hits-newrecord- of-868-of-GDP-on-loans-for-properties-and-motor-vehicles/?style=biz

5 www.themalaymailonline.com/malaysia/article/those-facing-bankruptcy-told-to-seek-help-ofagencies

6 Defined as less than half of the median income, relative poverty is an increasingly popular measurement for poverty as it also covers the aspect of relative depravity. Relative depravity is observed to be more pronounced in urban poverty.

7 HDP 2013.

8 Ibid

9 Wealth is measured by real estate holdings (land and houses) and financial assets (savings and stocks), both components of which the lower income groups commands little. According to HDP 2013, in 2009, the lower 50% of households only controlled 14% of wealth, while the top 10% alone commanded 39%.

10 According to HDP 2013, productivity growth has outstripped wage growth in Malaysia, with wages only forming 33% of national income, significantly lower than in countries like China (48%), Japan (55%) and the UK (63%).

11 Government-linked companies (GLCs) in 2012 controlled 36% market capitalisation of Bursa Malaysia and 54% of the Kuala Lumpur Composite index. GLCs are not only omnipresent, but have a controlling stake in industries like utilities (93%), retail (73%), banking (60%) and transportation and warehousing (72%).


Nicholas Chan is a forensic scientist by education and a sociopolitical research analyst at Penang Institute by profession. While not mulling over police reforms, he ponders about the identity of Jack the Ripper.



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