Books & printed materials Economics

[2757] Reviewing The Colour of Inequality

With only about 200 pages , finishing The Colour of Inequality was easy. Written by Muhammad Abdul Khalid, the book is priced at MYR40, which is much more affordable and easier to read than the thick Capital in the 21st Century by Thomas Piketty. Just for the fun of it, I calculated that the Gini coefficient between the two is 30.7. For books discussing inequality, they are off to a good start. Capital, by the way, cost MYR167.

But more seriously, The Colour of Inequality has attracted the eyes of both sides of the political divide in Malaysia quite positively. Both Anwar Ibrahim in the Parliament and perhaps more ominously by Muhyiddin Yasin during the recent UMNO general assembly as a slow poke against Najib, gave the book a mention. I think in some ways this book will provide the ammunition to force Najib to make a u-turn from his more open policy in the past. Pemandu, which I take as the symbol of that openness drive despite whatever its flaws are, is already taking a backseat in local politics. I do hear less and less of Pemandu these days and furthermore, it is already branching outside of Malaysia to Tanzania, South Africa and India, in what appears to me a search for relevance and independence.

Coming back to the book, the extremely good part is the data shared especially those pertaining income and wealth ownership during colonial and early post-independence period in Malaya and Malaysia. The stress on the difference between income and wealth inequality is gold because whenever there is public discussion on inequality, not too many understand the difference and then mix the two up. As the book goes the mass market, hopefully it will help address the confusion that exists.

I would guess from the relatively heavy footnotes, these data are those you can find only by reading local academic papers, which can be tedious. The first chapters are full of these and the first half acts an overview or a summary of early labor, income and wealth studies in pre-1970s Malaya/Malaysia. There is a heavy focus on Malay ownership and so, I should really put it Malaya/Peninsular Malaysia instead. Sabah and Sarawak are largely, if ever, on the periphery of the author’s concerns.

Khalid puts a lot of blames on the British colonialists for creating inequality in Malaya. He zeroes in on the importation of foreign labors from China and India who worked on the most productive sectors in the economy while the Malays was left focused on the least productive ones, mostly agriculture.

He also blames the colonial government for focusing on developing urban areas populated mostly by non-Malays while ignoring the rural areas where the Malays (and Bumiputras) were. With all the facilities built in the cities, the infrastructure facilitated income and wealth growth, rocketing the well being of urban populations above their rural counterparts.

While the two factors (productive sectors and urban development) did contribute to the Malay/non-Malay gap, I am unprepared to blame the British for focusing on urban development. Even today, agglomeration remains a powerful drive for development. It is far more economical to build an MRT line in a city of more than 5 million than in a town of 100,000, for instance. The logic should hold 100 or 200 years ago while the British were developing Ipoh, Kuala Lumpur, Penang or Singapore instead of Pekan or Rantau Panjang, as it holds now.

From time to time, the thesis of The Myth of the Lazy Natives by Syed Hussein Al-Alatas appears, just to give you how strongly the author thinks of colonialism as the cause of inequality then. The thesis was the Malays refused to be manipulated by the colonial capitalist machines and thus remained rural, and largely outside the development of the modern Malayan economy. Regardless of the truth of Syed Hussein’s thesis, with the Malays remaining a rural society with a still agrarian economy that is less productive compared to other sectors (mining and cash crop like rubber) as Khalid mentioned, it contributed to the gap. Khalid also showed that the British prevented the Malays from participating in cash crop sector to protect the colonialists’ monopoly. There is a hint of Syed Hussein’s argument that the colonialists came and destroyed the Malay capitalist class by force and thus contributing to the Malays’ inability to compete in highly productive sectors.

For those who have never heard of The Myth of the Lazy Natives by Syed Hussein Alatas, it is one of those books you have to read if you want to understand Malaysian politics, Malay politics especially, better. I would think that particular Syed Hussein’s book is the Malaysian version of Edward Said’s Orientalism. I even think you should read Orientalism and The Myth side by side. That would make Syed Hussein’s criticism much sharper than you would realize rather than reading it alone. One particular idea I gathered reading The Myth and Orientalism together was that UMNO under Mahathir times (The Malay Dilemma and Revolusi Mental come to mind) imported various Orientalist caricature of the Orientals and specifically the Malays — laziness is one — and then used that generalization as the basis of UMNO’s policy to ”modernize” the Malays. I do not necessarily agree with all written in The Myth and sometimes, it does appear Syed Hussein was just making capitalism a scapegoat for far too many things beyond reasons, but he did make powerful criticism against colonialism and bringing in context into modern Malaysian politics.

Now, back to The Colour, the chapter on pre-independent Malaya-early Malaysia sets the stage for the New Economic Policy era. After a largely uncontroversial overview of history, the next chapters have a few to offer.

The author clearly sees the NEP as a success. He criticizes several works critical of the NEP along the way. Some criticisms make sense. By the end of it, the author laments what essentially the end of the NEP and advocates for a new one, in some fashion.

In supporting the NEP, Khalid makes a few points which I find hard to swallow.

One is how NEP has no negative impact on growth. This is a big assertion because he refuses to admit there is a trade-off between redistribution policy and economic growth. He argues despite the redistributive NEP, Malaysia continued to registered high growth together with its neighbors among others right up to the 1990s (if you have the book by your side, this happens on page 107). But the fact that Malaysia grew as fast as its neighbors says nothing about the efficacy of the NEP. In fact, it raises the question on the commonality between Southeast Asian countries and you can bet that not too many countries have their own NEP.

The no negative impact on growth story is also problematic because it does not consider the counter-factual. The counter-factual is that without the NEP, Malaysia could have grown faster and that the NEP caused Malaysia to grow only as fast as experienced. This counter-factual is as valid as his conclusion without further investigation. What Khalid did here is merely arguing by assertion. So, I do not think Khalid can write when he wrote with too much confidence. It requires more investigation at the very least.

His point about NEP has no negative impact on growth is complicated by his criticism against Tony Pua’s belief that the NEP discouraged foreign direct investment into Malaysia. Khalid replies on page 105 by highlighting that in the manufacturing sector, the government does not impose any Bumiputra equity requirement and allows 100% foreign ownership. This does blunts Tony’s point and the FDI did come in but it complicates Khalid’s own point on how the NEP does not impact growth. If he believes that the redistributive policy does not have any impact on growth, I would think it is unnecessary to raise this point. If there is no trade-off, there would have been no need for the exemption. The exemption did encourage manufacturing investment in Malaysia. It contributed immensely to Malaysian industrialization, which, was quite successful.

Perhaps I misunderstood his point, with his point being that the NEP is not as expansive as a lot of people thought it was and there were exemptions that avoided the NEP from becoming too much a barrier. If this is the case, then, yes, that would be a fair point. But he does not spend enough time and space in exploring these issues.

The point on manufacturing is relevant in other part of the book, which I think works against one of Khalid. And that point is about NEP’s success in cutting poverty down. I do believe the NEP did cut poverty down but my issue is that the author attributes the entire drop in Malaysia’s poverty rate to the NEP (page 92 and others) while ignoring other factors that might be as big as the NEP: the industrialization of Malaysia (remember the exemption of Bumiputra equity ownership in manufacturing) and Southeast Asia (this returns to my point that cross-sectional comparison of Southeast Asian national growth says nothing about the efficacy of NEP by itself).

Since manufacturing was exempted from the NEP, I am interested to know how much of the drop was due to the NEP and how much from industrialization that has little to do with the NEP since it was exempted. The industrialization aspect is particularly important because there were at least two events in Asia that contributed to Malaysian growth. One was China’s disastrous Great Leap Forward and Cultural Revolution that pushed capital and people out of China to Southeast Asia (and elsewhere), along with the appreciation of the Japanese yen in the 1980s that encouraged Japanese corporations to go out and establish bases in Southeast Asia, especially in Malaysia and Thailand, to cut cost and become more competitive. As a side point, Singapore gained tremendously from the events in China and that contributed to the rise of Singapore; it is not all about Lee Kuan Yew (or Mahathir). There was great transformation in Asia at that time yet, I think the book is giving the NEP all the credit for poverty reduction and essentially implicitly leading lay readers to believe that the Malaysian economy worked in vacuum when clearly, Malaysia has been a beneficiary of globalization.

Talking about poverty, there is also room for counter-factual which the author does not address. On page 111 and 112 among others, Khalid showed that the economic growth for the Bumiputras, Chinese and Indian communities were high and used that as an argument that the NEP does not hurt growth for other communities. But like how the NEP affected GDP growth, how did he know that the NEP did not lower non-Bumiputra growth to its recorded level? If there was no NEP then, what the growth would be? He cannot make his conclusion without answering those questions.

As you can see, I am quite skeptical of his argument that redistributive policy has no impact on growth. I think Malaysia can afford to commit to some redistributive policy but there is always some cost. The Colour is written in a way redistributive policy — the NEP — was cost-free and will be cost-free.

Because of these points, I feel the middle part of the book is an apologist work for the NEP rather than a critical evaluation. This of course does not negate the value of the first and the last parts of the book. The first part raises the value of history to provide context to the current situation and the latter about wealth gap and Khalid’s proposals to address it.

What I think the book does more convincingly is explaining the current wealth gap in Malaysia. The roles of inheritance, labor market discrimination, failure in the education system and the tax structure are pretty much uncontroversial and deserve the attention of the government. There is an econometric model at the end which results are in line with my expectations and other models that I have seen before. The model gives a sense of each factor contribution to income and wealth of a person and becomes the concrete basis of various proposals that the book has.

I have my own thoughts about the proposals but I figure I will write about that later.