The Disturbing Growth Of Income Inequality Economics Essay

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In a paper entitled 'Educational and Income Inequality in Malaysia', Rahmah Ismail claimed that inequality in educational attainment may contribute to inequality in income distribution. Students, both in urban and rural areas, must be able to reach the provision of better and more efficient services in our education system. This, in return, can enhance our ability to produce local skilled talents. Malaysia has been moving up the industrialisation development chain from one that is labour-intensive to that which is capital and technology-intensive. Consequently, this development alters the pattern of demand for labour required by the industries by raising the demand for skilled and highly educated workers as the economy moves up the value chain. Incentives for the development of intellectual properties in the area of information and communication technology (ICT), biotechnology and high-value adding manufacturing, including in sourcing of high-value adding processes and out-sourcing of low-value adding processes are now given priority. This profound shift in the government's macroeconomic policy will result in structural changes required in the economy, as we cannot compete using the old industrial economy. Though Malaysia has been producing thousands of graduates every year, it is not far-fetched to state that our education system is not up to mark and neither are the vast graduates produced by the system. Since the supply of this type of skilled talents lagged behind their demand, then these skilled workers were able to command an increasing premium over unskilled workers. At the same time, the divergence of the wages of skilled and unskilled workers is said to be enhanced by the massive entry of unskilled foreign labour into the Malaysian economy that dampened the wages of unskilled labour. Malaysia can no longer rely on cheap labour and low cost of production. We can only compete on quality and perceived value. To be able to do this successfully, we need to reduce inefficiency and wastage while focusing on improving productivity. We need to focus on the priorities that can ensure success, that is, growth with equity. Unequal income distribution is not conducive for promoting social cohesion and providing an acceptable level of quality of life for all Malaysians. It is also not consistent with our aspiration of becoming a high-income and high value-added economy model envisaged in the New Economic Model (NEM) which was unveiled by the Prime Minister recently. After all, one of the key thrusts of NEM is to promote inclusiveness which will enable all communities to contribute to and share in the wealth of the country.

Educational System : Why Malaysian FDI Drops

Newspaper article


Luring FDI Flows into Malaysia By Quah Boon Huat

Remaining attractive to FDI: For a start, tackle the issues of institutional inefficiencies and labour skills mismatch.

AMONG the various forms of capital flows, foreign direct investment (FDI) gets the most attention. It is one of the most reliable components of capital flows and is widely regarded as having a stronger positive impact on economic development and growth than any other.

The direct effects of FDI on the host economy include job creation, capital accumulation, technology transfers, and trade flows. Its indirect effects - the technological externalities - include higher productivity gains for domestic firms.

The UNCTAD World Investment Report 2006 revealed that global FDI inflows rose substantially by 29% to US$916bil in 2005, while South, East and South-East Asia saw a 19% rise to US$165bil during the same year, which was itself a new high.

Against this backdrop of higher global and regional FDI growth, Malaysia's inward FDI dipped 14% to US$3.97bil in 2005, the only Asean country to register a decline. The report generated much debate about the competitiveness of Malaysia's investment climate.

A closer analysis of the UNCTAD report, however, shows that the massive FDI increase largely reflected a significant increase in cross-border mergers and acquisitions (M&As).

M&As may not necessarily result in any immediate additions to investment or employment. Their growth was fuelled by the investments of collective investment funds (e.g. private equity and hedge funds), which typically have a short time horizon in contrast to Greenfield FDI projects by the traditional multinational companies(MNCs).

Also, Malaysia has been very selective with regard to the type of FDI to admit. FDI projects that were lower down the value chain and largely dependent on cheap labour were turned away.

In fact, quite a number of such projects ended up being located in neighbouring countries, this being one possible reason why they did better than Malaysia in the FDI rankings.

Notwithstanding the above, Malaysia needs to intensify its efforts to attract more FDI of the right kind. The Ninth Malaysia Plan forecasts economic growth during the period 2006-2010 to average at 6% per cent per annum. To perform at its potential level, the Malaysian economy needs to grow at an estimated rate of 6.5% per cent per annum. An increase in inward FDI could thus help.

FDI also has an important role of keeping the economic pie growing, and any decline in FDI inflows would be felt not only economically but also socio-politically. Empirical studies overseas have shown that economic, social and political factors are important determinants of FDI inflows. It cannot be very much different in the case of Malaysia.

One factor that does matter a lot to foreign direct investors when making location choices is the quality of the domestic institutional environment.

For the effective, smooth and efficient functioning of the economy, issues like economic freedom, good governance, judicial credibility and effectiveness and transparency are important.

The government won the 2004 general elections on the back of pre-election promises to, among other things:

• combat corruption and improve the quality of government services;

• enhance parliamentary democracy;

• respect the separation of powers under the constitution;

• respect the rule of law; and,

• set up a first class governance system.

These issues need to be tackled in the long term, and the government will need all the political will it can muster to keep the efforts sustained. Negative perceptions about Malaysia's institutional efficiency will no doubt continue to persist and maybe even strengthen if events like the recent approved permits (APs) issue continue to find their way into the limelight.

Human resource development (HRD) is another key factor that determines the volume of FDI inflows. An enhanced HRD increases the attractiveness of a country's investment climate, as it both upgrades the skill level of the workforce and improves the socio-political climate in the country.

It is possible that FDI inflows will in turn boost HRD in the host economy since MNCs themselves can be active providers of education and training. There could thus be complementary effects that lead to a virtuous circle of HRD and FDI.

The Ninth Malaysia Plan recognizes quality of human capital as a key determinant in the achievement of the Plan's goals and objectives. There are however flaws in the education system which needs to be revamped. Rote learning, pressure to pass exams, and an emphasis on uniformity are the norm.

For the economy to move up the value chain, attributes such as creativity, risk taking, entrepreneurship, and adaptability are necessary. Only an education system that promotes problem-solving skills, communication, and teamwork can inculcate these types of attributes.

The quality of teaching also needs to be seriously looked into. This would require increasing the motivation and stature of the teaching profession.

Besides the aforementioned two factors - the institutional environment and HRD.

Other factors that affect FDI flows include infrastructure availability, quality of the banking system, characteristics of trade and competition policy and public security. We should also add policy consistency and predictability to the list.

It should be noted, however, that being able to lure new FDI flows into Malaysia is only half the game. Integrating FDI into the host economy as well as putting in place policies that can increase its economic impact is just as important.