Wednesday, November 29, 2006

Ethnic Group Income Disparity Ratio

It has always been put forward that a "huge gap" in the income disparity ratio between ethnic groups is one of the key rationales for extending the New Economic Policy in favour of Bumiputeras. I've written on the fallacy of such a policy in its ability to assist poor Bumiputeras. However, I thought we should re-look again at the official statistics provided by the Government to determine if it provides the true picture.

In the 9th Malaysia Plan, it was put forward that "the income disparity ratio between Bumiputera and Chinese narrowed from 1:1.74 in 1999 to 1:1.64 in 2004, while the ratio between Bumiputera and Indians also reduced from 1:1.36 to 1:1.27."

Professor K S Jomo, in his paper written in September 2004, "The New Economic Policy (NEP) and Interethnic Relations in Malaysia" for United Nations Research Institute for Social Development (UNRISD), put forward that
...with the average Malay fertility rate about double the Chinese rate at the end of the 1980s, and with the Indian rate slightly higher than the Chinese, it is also quite possible that per capita Malay income levels will continue to remain low, and poverty correspondingly high, simply due to larger household sizes.
Well this basically means, hopefully in simpler terms, is that there are proportionately more young Malays than other ethnic groups who have yet to join the workforce. And because their numbers form part of the total population which brings down the average income level, they may have distorted the actual income disparity between the various ethnic groups.

In other words, since there are proportionately more non-income generating young Malays, it is likely that the average income level of bumiputeras is lowered more than it should be, relative to that of the other ethnic groups.

What I did next was a little number crunching based on population numbers extracted from the 7th, 8th and 9th Malaysia Plan. (Those interested in actual numbers, can email me).
  • Firstly, I assumed that all Malaysians under the age of 15 have not joined the workforce, and hence do not earn any income.

  • Secondly, I obtained the total income generated by the respective ethnic groups.

  • Thirdly, instead of dividing the income generated by bumiputeras by the total bumiputera population, I divided the income by the population less the those aged 15 and below. I apply the similar formula to the other ethnic groups.
As a result, by removing the population under the age of 15 in the calculation of per capita income of the various ethnic groups, the income disparity ratio between Bumiputeras with Chinese and Indians, is reduced significantly to 1.34 and 1.11 respectively. If we were to increase the age group which is removed from calculation to 20, the income disparity ratio will drop even further.

Click table to enlarge.

It is hence clear that while income disparity continues to exist even after adjusting the methodology for income disparity ratio calculations, the disparity between the ethnic groups is no longer glaring. Compare this to the other indicators such as urban-rural income disparity ratio which worsened from 1.81 in 1999 to 2.11 in 2004 as well as the consistently deteriorating intra-ethnic income disparity ratio (blogged here).

Hence the argument that the income disparity ratio between the various ethnic communities being substantially big and serious is no longer as relevant. And the income disparity ratio today is a far cry from the days of independence whereby it was 2.16 and 1.71 between the Bumiputeras with the Chinese and Indians respectively.

The crux of the NEP is hence misguided in its core focus on inter-ethnic income disparity, when the Government should instead be placing greater emphasis in halting the much more urgent and serious deterioration of rural-urban as well as intra-ethnic income disparity.
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