Malaysia - wealth gap along ethnic lines

Author: An Hodgson

Date published: 16 Apr 2007

In Malaysia, the ethnic Malay majority is trailing far behind the Chinese minority in terms of economic wealth. The government's policy aimed at addressing the economic imbalances has hampered the country's competitiveness, undermined investor confidence as well as leading to skill shortages and decelerating consumer spending.

Issue

Despite the government's policy of affirmative action, ethnic Malays who make up 60% of the population hold only 19% share of the Malaysian economy. The government has been giving concessions and subsidies to Malay businesses in many sectors, but this policy creates a restrictive business environment, undermines investor confidence and leads to skills shortages.

Importance

Malaysia has low poverty levels, but the wealth gap exists along ethnic lines:

With a population of 26.6 million in 2006, Malaysia is ethnically diverse with Malay, Chinese, Indian, Thai and Eurasian peoples;

The communities coexist in relative harmony, but the wealth gap among them is grave. Despite making up 60% of the population, Malays own just 19% of the economy, trailing far behind the minority ethnic Chinese, who make up only a quarter of the population but hold 40% of the economy;

In 1970, the government initiated an affirmative-action programme, which aims at addressing economic imbalances between Malays and other ethnic groups. At the time when the programme was launched, Malays held only 2.4% of the country's economy, compared to 27% by the Chinese;

The government has spent vast sums of state funds as well as awarding state contracts, concessions, subsidies and lucrative monopolies to Malay businesses. Malays are required to own at least 30% of businesses in many sectors. Furthermore, the government guarantees university places for Malay students and gives preference to Malays for government jobs;

Since the 1997-1998 Asian financial crisis, Malaysia's economic growth has been relatively sluggish. Real GDP growth averaged 5.4% per year during 1999-2006, lower than the average annual rate of 9.5% during 1990-1996.

Malaysia’s economic growth before and after the Asian financial crisis: 1990-2006

Source: Euromonitor International from the IMF and ADB

Implications

The wealth disparities and the affirmative action have a range of implications for businesses, the labour force and the larger economy:

The government's tight control over business ownership, requiring Malays to own at least 30% of every business, restricts foreign investment and undermines investor confidence. The government's preferential treatment to Malay businesses is also against the principles of an open economy, as it fails to create a level playing field for Malay and Chinese (and other ethnic) businesses;

Affirmative action has in effect shielded ethnic Malays from competition, making them less entrepreneurial in comparison to ethnic Chinese. As a result, only a fifth of all companies in Malaysia are Malay-owned. Meanwhile, many Malay businesses tend to sell government concessions to non-Malays for quick gains;

Thanks to the affirmative action policy, Malays do not face strong competition for either education or jobs whilst Chinese are normally not given the same opportunities. This has failed to produce a pool of educated and skilled workers who can compete on a global stage, leading to slow productivity growth and severe skill shortages especially in technology-oriented manufacturing;

As Chinese are not given equal access to higher education and employment, many of them go abroad to study and remain outside Malaysia to work. This “brain drain” of qualified and skilled Chinese workers has contributed to the problem of skills shortages;

Skills shortages will put downward pressures on income and wage increases because Malaysian workers and manufacturers cannot move up the value-added ladder of production and services. Per capita disposable income stood at RM10,215 in 2006, representing a 10.6% increase over 2000 in real terms;

Consumer spending will decelerate in line with slower income increases, which could in turn hurt economic growth. In 2006, private consumption was a major driver of economic expansion, contributing 3.5 percentage points to real GDP growth of 5.9% over a year earlier;

Although the affirmative action policy has succeeded in reducing poverty among Malays, it underlines the perception of serious ethnic tensions. This worries foreign investors because it insinuates a potentially unstable political and business environment. In neighbouring Indonesia, economic disparities had sparked anti-Chinese race riots in 1998 at the height of Asia's financial crisis;

Overall, the affirmative action policy has hampered the competitiveness of the Malaysian economy. Inflows of foreign direct investment fell from US$4.6 billion in 2004 to US$3.9 billion in 2006. Other Southeast Asian economies are enhancing their competitiveness and improving the quality of their labour force to attract greater FDI.

FDI inflows into selected Southeast Asian nations: 2005 and 2006

Source: UNCTAD and national statistics

Future scenarios

Economic growth is projected to decelerate to 5.4% in 2007 (from 5.9% in 2006) due to slower household spending and private investment.

Over the longer term, as articulated in the Ninth Malaysia Plan (issued in 2006), the government has set the target of moving up the value-added chain of production. In particular, it encourages Malaysian businesses and manufacturers to enter the fields of biotechnology and of information and communications technology. It proposes to revamp the education system, mostly by involving the private sector, in order to create a pool of skilled labour that can meet the requirements of higher value-added manufacturing and services.

The country aims to become a fully developed nation by 2020, and has set a target of raising the share of Malays in the economy to 30% (from the current share of 19%).