A few weeks ago, the Khazanah Research Institute launched a report, called The State of Households 2018 (SOH2018): Different Realities. SOH2018 covers a wide range of topics, including, but not limited to, household income disparities across states, women labour force participation, foreign workers and the evolution of Malaysian household income in parallel with the evolution of the structure of the economy.
These topics, in and of themselves, are worth many columns apiece. I would encourage everyone to read the SOH2018 report. There are gems of insight throughout the report. For me, the most interesting finding was the widening gap — close to double — between the incomes of the top 20% households (T20) and the middle 40% and bottom 40% (M40 and B40) in Malaysia over the past two decades.
This absolute gap between the T20 and the M40/B40 has widened in spite of the reduction in the Gini coefficient, the most commonly used global measurement for income inequality. To reconcile these facts, we need to understand that the gap between the T20 and M40/B40 is measured in absolute terms, while the Gini coefficient measures relative inequality.
To illustrate the difference, I will borrow an example from the lead author of SOH2018, Allen Ng. Supposed we had two Malaysians, A and B, who earn RM1,000 and RM100 respectively. Over time, A’s income grew five times to RM5,000 while B’s income grew 10 times to RM1,000. From a relative perspective, which the Gini coefficient measures, the difference in income has dropped as the richer individual, A, saw a fivefold increase in income, whereas the poorer individual, B, saw a tenfold increase in income. However, from an absolute perspective, the original gap between A and B was RM900; now, it is RM4,000.
Going back to the findings from the SOH2018 report, perhaps the most fascinating thing about this near-doubling of the income gap between the T20 and M40/B40 is how it has changed over time. After the Black Monday crash in October 1987 and after the 1997/98 Asian financial crisis, the gap between the household incomes of the T20 and M40/B40 actually declined. From an absolute perspective, those crises were harsher on the higher-income households.
However, after the 2008 global financial crisis (GFC), the gap did not decrease like it had in previous crises. Instead, it widened even further. The GFC, based on this date, seemed like it had disproportionately impacted lower-income and middle-income households vis-à-vis high-income households.
The SOH2018 does not address this reversal of fortunes, but I suspect it has something to do with the fact that quantitative easing measures around the world and fiscal stimulus packages unleashed commodity and credit cycles that tended to support firms that employed individuals from higher-income households. These include people who worked as chartered accountants, strategy consultants, investment bankers, investment professionals, lawyers and so on.
This then brings us to the more important question — if this gap shows no sign of narrowing, even after a financial crisis that historically tended to close the gap, how do we start thinking of improving the state of inequality in Malaysia?
The surface level answer is typically “we must ensure that all Malaysians have equal opportunity, based on merit, to succeed”. Yes, while that is true, it is quite clear that the opportunities available for Malaysians to succeed are strongly correlated to their household incomes. In short, meritocratic opportunities are hereditary.
Singapore’s Deputy Prime Minister Tharman Shanmugaratnam acknowledged as such in a recent interview with the Institute of Policy Studies in Singapore. He stated, “It’s in the nature of a meritocracy, it’s in the nature of succeeding in social mobility, that it gets more difficult over time, because those who succeed try to help their children and those who haven’t succeeded find that the odds increase against them doing well in life.”
To be clear, there is nothing immoral about parents who try their best to help their children succeed. We would all do the same. For the most part, parents are simply giving their children the best chance at a better life. Meritocracy does cause inequality over time, but it is nowhere near being the type of socially corrosive cause that also drives inequality around the world such as, as economist Lant Pritchett puts it, “absolute deprivation, abusive power, rigged markets and unearned privilege.”
Nevertheless, as equality of opportunity becomes more and more unequal, the threat to Malaysia’s future becomes ever more pressing. In his book, The Secret of Our Success, cultural anthropologist Joseph Henrich, a professor of human evolutionary biology at Harvard, argues that it is the “collective brains” of our species operating over generations that explains our fancy technologies and massive ecological success. It is not some innate inventive power that we have or even the best creative abilities of individual brains.
Henrich adds that our “collective brains arise from a number of synergies created by the sharing of information among individuals”. Now, suppose we consider Malaysia as a “tribe” and, as such, Malaysia has its own sets of social norms that give it its collective brain. If the development of Malaysia’s collective brain is dependent on greater interconnectedness between all Malaysians, then this unequal opportunity to access our collective brain impedes our national development.
Furthermore, as Henrich points out, tribes or groups can lose part of their collective brain or their collective know-how and never regain it. He cites the case of the Tasmanian man in Australia as an example. The Tasmanians begin to lose valuable tools and technology because, while their individual brains remain the same size as other homo sapiens, their collective brain became severed. Consequently, they were not able to maintain as much collective know-how as a group.
In the long run, if more and more Malaysians do not have the same types of opportunities to access and improve Malaysia’s collective brain, our collective brain will stagnate and even shrink. Opportunities are strongly correlated, especially over time, with household income and wealth — the wider our income gaps, the wider our access to opportunities in education, internships, travel and social networks, and to our collective Malaysian brain.
The solution to this is not straightforward. Just because we reduce the income gap does not mean we solve the problem. Indeed, there is no magic silver bullet that will solve all of the issues with regard to inequality of income or opportunity. We should stop searching for such a solution. Instead, we should be prepared to invest in a holistic way to address inequality in society.
As Tharman puts it, “It means that we have to work harder at keeping mobility going by starting earlier in life, in fact starting even in the prenatal months before a child is born, starting very early in life and continuing through life to intervene to help people to do well for themselves. It requires a consistent effort in early childhood, through the school years and in work life, investing in people at regular intervals and taking very seriously the idea that everyone can grow.”
He is right. Superficial efforts at finding a silver bullet will only hinder the type of comprehensive solution that Tharman describes. And therefore, it is, indeed, the responsibility of all Malaysians — with our collective brain — to find a comprehensive set of solutions to ensure the sustainability and development of our collective brain, lest it shrinks.
Failure to do so may mean a reduction of inequality by mass-mobilisation warfare, transformative revolutions, state collapse and catastrophic plagues, which have historically been the most common levellers in society, as argued by Princeton historian Walter Scheidel in his book, The Great Leveler. Surely we can find a more peaceful way to preserve our collective brain.
Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division