By Anas Alam Faizli

First published in The Malaysian Insider

“They are simply lazy”

“His father is a Tan Sri”

“He knows someone from the inside”

“I made it purely out of effort; I worked hard to get where I am today”

These are some typical expressions that are sure to be heard in coffee chats, every time the topic of rich and poor is brought up. People have grown easily accustomed to brushing off the topic of inequality as welfarist or socialist. This happens even amongst supposedly “middle class” Malaysians, not realizing that they are in actuality, most likely top income earners and wealth owners. Households earning RM10,000 a month above already qualify as Top 4% Malaysians! In fact, while partisan voices continue their discourse in the racial imbalance tone, Malaysia has silently migrated into new battles, concerning intra-racial, income, and class-based imbalances.

It is often argued that the poor and the low income earners are plain lazy and do not work hard; that one earns what one deserves. This is not true. Many are simply unlucky, to be born to parents who lack education or skills to escape from the clutches of poverty. Some were born with disabilities and diseases, while some others live in flood-prone or hazardous places. On the other hand, we have sub-quality undeserving businessmen linked to political patrons, estate and fortune inheritors, and individuals plainly lucky to be placed in lucrative industries with high economic rent. Accusations like laziness then become hardly the issue. The rich can be lazy too!

There are those who do not deserve to be in poverty, just as there are those who do not deserve their wealth. The cases above are simple yet fitting examples to describe that not all poverty is a result of unwillingness for hard work, and not all wealth is a result of it. Thus, the fight against inequality is rather a fight to equalize opportunities so as to reach more equitable outcomes, not to distortively equalize outcomes. This is not a crusade against the rich, but a crusade to help the poor.

What’s the Big Deal with Inequality?

Inequality is very real, whether or not we have problems with the GINI coefficient as a measure. In fact, the attention regarded to inequality is very much driven by consequences of inequality, rather than pre-emptive. We can see real consequences to the society; including societal backlashes, power imbalances, effects on wages, effects on growth, crime and quality of living, to name a few. As long as the income and wealth inequality gap remain large and public investment for education, training, childcare and public infrastructure remain inadequate, progressive taxes and affirmative action in its true and productive spirit have a place within public policy. It is imperative that the richer within the society share the responsibility of helping the poor; in the bigger picture, it is actually in their interest to do so, as they too will feel the consequences of inequality.

The Fallacy of the Free Market

In any discourse of inequality and the rich and poor, the “free market” will almost immediately arise. The basic tenant of a free market is well described by the “Invisible Hand” coined by 18th century economist, Adam Smith. It argues that prices, and thus distribution of goods, services, labour, capital goods, land and human skills are all determined by market forces, or this “hand” that cannot physically be seen. Proponents of this market-based allocation system are naturally against increased forms of government intervention like transfers, donations, taxes, subsidies and benefits. To put simply, they believe that letting the market run its course freely will reach desirable market equilibriums in the fairest manner, thus achieving productivity and wealth for a nation.
The marketplace does have some elements of arguable fairness; hard work will get you higher income, and laziness will be punished. Jobs, goods and wages are “naturally” supplied to and demanded by society, according to their needs and capabilities, instead of government allocation which is dangerously prone to over or under budgeting.

However, one must note critically that the fairness of the marketplace should not be exaggerated. Market forces can be “brutally unsentimental”, as put by Jeffrey Sachs. Pockets of failures in the market are impossible to deny because not everyone in the economy starts from the same baseline. Endowments like wealth, opportunities, or physical health vary extremely amongst people within the system. While some manage to climb out of low income brackets and make it, as a result of opportunities and big breaks, others remain pressed in a vicious downward cycle. Indeed, not everyone gets a big break.

The Taxation Antagonist

The most common proponents of the free market are libertarians; whose ethical core is liberty. They hold the best economic outcomes will only prevail when each individual is left free to act economically and live without an authority governing their economic decisions. Individuals are in no way held responsible to the society, other than to be respectful towards the liberty and property of others. The government’s sole responsibility is to only maintain law and order such as protection of private property. Extreme libertarians even hold that there is no requirement for government to build infrastructures, road or highways; such should be left to market forces because the need for them itself is incentive enough for someone to build them.

Libertarians are like “taxation antagonists”. Amongst other forms of government intervention, libertarians reject governments promoting fairness and efficiency through a system of taxation. Tax is regarded as just another form of government extortion; de-motivating those who work hard while potentially over compensating those who don’t.

In summary, libertarians hold that free market is the only way economic allocations are done “democratically”; hence it is the savior of democracy and enough on its own to ensure prosperity. Therefore, talk of government intervention in helping the poor will also become a point of contention in the books of libertarians.

Malaysian Libertarians

Many quarters have easily discarded the New Economic Policy (NEP) in hindsight, but it arguably did its job to almost eliminate poverty; reducing it from 50% in 1970 to the current 3.8%. Previously poor now form middle class and professional Malaysians.

Unfortunately, there is nothing to be proud of with the NEP mid 90s onwards. Rampant corruption, leakages and a breakdown in the integrity system demonstrated by those within the government have further worsened the situation. Perhaps this frustration in the government is behind the mushrooming of libertarian ideologies in Malaysia.

Is Libertarianism for Malaysia? We can first answer this by revisiting typical problems of missing a government sector. There is the question of who will provide public and common goods. We also do not need more than one police force, firemen, or court of law competing against each other. Without the government, who will then take care of the environment, regulate moral hazards, ensure individuals do not hurt each other, and protect the sovereign rights of Malaysians? Reducing government role is perhaps agreeable, but its total elimination has grave repercussions.

We then approach the issue of poverty. In all its admirable intentions of rewarding hard work and reducing influence of corrupt governments, libertarianism leaves too much room for an upward continuity of wealth and a downward spiral of poverty. As argued earlier, people start from different baselines. Holders of wealth are in the position to continue leveraging on existing wealth, to create more wealth- they can hardly be blamed as they are only incentivized and allowed to do so! It is worse when wealth comes from extracting economic rent, rather than the creating of true values that ultimately increases the size of the economic pie.

Consequently, the levers of power will be in the hands of corporations and the wealthy, which will have a bigger say in public policies, thus countering the libertarians’ intended “democracy”. Unlike the government of the day, boards of directors are not voted in by the people. Their fear of how a socialist nation will lead to fascism can also happen in free market except under the disguise corporate power. The free market failure then becomes as much political as economic!

Now imagine this “free market” is Malaysia, with one of the highest inequality levels in Asia (measured by GINI). The helpless poor will be left drowning in the currents of this market force, contending against the rich. This is exactly where a true, free, and liberal form of the market may not be able to generate the pristine intended outcomes it initially set out to do.

The Pakatan Rakyat Manifesto: A Manifesto for its Time

Political preference aside, there is cause to applaud the recent Pakatan Rakyat Manifesto. Tackling core economic issues, its four pillars hit home the concerns of the common rakyat; fraternity of the people, the people’s economy, people’s well-being and people’s government. In Malaysia, the published absolute poverty number may be low, but in relative terms, many rakyat including daily creation of urban poor are effectively impoverished by demanding cost of housing and living that are unmatched by salary levels, high indebtedness, and low productivity levels due to limited skills and education.

For the government to maintain relevance in the face of libertarian claims, government interventions need to be tactical. If the government’s stance is pro-business, it must be backed-up with robust social safety nets to hoist up and bring along poor households in the sprint towards growth and wealth creation. If the focus is the rakyat, care must be put to ensure business appetite is not suppressed. Such aspirations will be impossible to achieve without policies such as those proposed by the PR Manifesto; such as expanded educational opportunities (by making tertiary education free), reduction in the cost of living (utilities and tolls), targeted instead of blanket subsidies, and an upward pressure towards wages and salaries that are currently depressed by influx of foreign labour.

We have yet to see what Barisan Nasional has to promise with its manifesto but as a start, it should be more defined than its 2008 one; "to grow the economy" and start quantifying them. In fact, growing the economy is really a given.

Uplifting the Poor: Leveling the Playing Field

This is no plan to pull a modern-day Robin Hood, robbing the rich off of their hard work to reassign some wealth to the poor. The rich may be reached out to, to shoulder some responsibility to raise the level of education, health and productivity of the poor. Imagine the difference between a community with a billionaire worth RM40 billion and lots of poor people, versus one with 400 households worth RM10.0 million each. We might not love to pay tax but we accept its legitimacy as long as it is properly enacted into law and is used properly. This by no means entails slacking off on the part of the poor. Opportunities are provided, but they still need to be capitalized upon. The idea is a bigger economic pie and an unleashing of further values that the poorer population could have produced and Malaysia could have enjoyed.

Putting all these into consideration, where does it leave libertarianism, minimal taxes to the rich and businesses, and the free market? Need bigger government roles necessarily mean bigger inefficiencies, and more corruption? Welfare states in Scandinavia have ranked higher than America in terms of the Human Development Index (HDI). At the same time, Scandinavian nations are among the most equal nations, high in governance and control over corruption, despite the bigger size of their government.

Ultimately, a healthy economy is a mixed economy, in which both the government and market forces both play their role. The exact balance remains an ongoing battle; but it’s good to start with unraveling the realities of inequality. Inequality is neither a hobby for anti-capitalist activists, nor development economists looking for the next trendy topic for their thesis. It’s true that government intervention in the shapes and sizes that they take form, may have distortive capabilities, but the “lazy poor and the hardworking rich” is a myth. For a better Malaysia, we have no choice but to continue our strive for productivity albeit with a new focus; inclusiveness.

Otherwise, Malaysia will be dragging its feet into the future, carrying the baggage of the past policies and its repercussions.

“A statesman is he who thinks in the future generations, and a politician is he who thinks in the upcoming elections.” – Abraham Lincoln

* Anas Alam Faizli is an oil and gas professional. He is pursuing a post-graduate doctorate, executive director of TFTN and tweets at @aafaizli

By Anas Alam Faizli

Education was institutionalized to formalize the process of knowledge acquisition and research in man’s quest for understanding. Earliest universities in the history of mankind namely Al-Azhar, Bologna, Oxford, Palencia, Cambridge and University of Naples (world’s first public university, 1224) have one thing in common; they were built by notable early world civilizations as institutions of research, discourse, learning, proliferation of knowledge and documentation. This contrasts largely from the role of universities today as institutions of human capital accreditation, qualification, and most unfortunately, business and profits.

Ibnu Khaldun, father of historiography, sociology and economics, in his work Prolegomenon (Muqaddimah) argued that the government would only gain strength and sovereignty through its citizens. This strength can only be sustained by wealth, which can only be acquired through human capital development (education), which in turn can only be achieved by justice and inclusiveness for all. Aristotle too proposed “Education should be one and the same for all.” A system that discriminates, in our case, based on household economic ability, can and will rile an unhealthy imbalance in the quality of the resulting labour force and society. These form the basis of our argument here.

In America, the individual funds his higher education while many European countries have public-funded institutions of higher learning. The latter is the best for Malaysia. Our societal and economic progression (or digression) does not depend on any one factor, but on the interaction of economic, social and political factors over a long period of time. Let’s first look at some realities that we need to contend with to understand why the Malaysian government should fund higher education.

Reality #1: Society benefits from education

We can never truly measure the immense positive externalities derived from an educated society. Outcomes of university education and research continuously found the progress of mankind. In developing Malaysia, higher education is an impetus for establishing a civic-minded society, highly skilled manpower and competitive value proposition for capital and production. Investing in education may cost the society tax Ringgits, but the consequences in failing to do so will be devastating. Walter W. McMahon (economist at University of Illinois) outlined the "private non-market benefits" for degree-holders. These include better personal health and improved cognitive development in their children. Alongside is the "social non-market benefits", such as lower spending on prisons and greater political stability.

Reality #2: “Neither here nor there”

Malaysia is neither here nor there, and education opportunity is a major contributing factor. Robert Reich, former U.S. secretary of labour and professor at UC Berkeley, made a compelling argument that is very applicable to Malaysia. To attract jobs and capital, nations and states face two choices; one is to build a low-tax but low-wage “warehouse economy” competing on price, another is to compete on quality, by increasing taxes and regulation to invest in human capital for a highly productive workforce.In Malaysia, wage growth caught up with productivity growth only up until the late 1990’s. Since 1996, we have been living in the “middle income trap”, stunted at the World Bank’s definition of upper middle income; neither high nor low income. In fact, for the past 10 years real wage growth has been negative. Having 77% of the Malaysian workforce with only SPM and below qualification is a structural barrier to us crossing over to the higher income group. The labour force is largely unskilled and unable to move their labour services up the value chain where higher salaries are paid.

Reality #3: Education is fundamental to a competitive value proposition

Another case for education is competitiveness for both FDI and outputs. On the FDI side, our factors of production, in this case labour, needs to be attractive enough. With a labour force that is neither highly skilled nor cheap, our value propositions dwarf next to the likes of Vietnam and Singapore. As a result, technology and automation service the lower-value processes replacing need for labour, while R&D and origination have not caught up due to lack of expertise. Malaysia has been the only country in the region facing net outflow in FDI since 2007.

On the output side, our goal to move away from producing lower-value manufacturing and primary goods, into the higher-value services sector too have been held back by limited talent and capabilities. Lack of advanced education is one major factor causing this lack of competitiveness.

Reality #4: Efficiency driven economy versus Innovation driven economy

A study released by the Global Entrepreneurship Monitor (GEM) categorizes Malaysia as an efficiency-driven economy, behind innovation-driven economies. We focus on improving existing processes, but we are not out there inventing new things where the big money is. Focusing on the latter is extremely important now more than ever for Malaysia, because we can no longer offer very cheap labour, land and factories to produce mass generic products competitively. The number of researchers in Malaysia for each 1 million population is only 365 behind Japan’s 5,416 and South Korea’s 4,231. We are in dire need for more trained professionals and innovators, and we could have harvested them from talents that did not pursue tertiary education due to the lack of opportunities.

Reality #5: Education is an investment…

Like parents investing in their children’s future, the state must invest in the population for the future of the nation. An educated society is able to position themselves into higher standards of living characterized by higher income, production of high value goods and services, longer life expectancy, subscription to civic and moral values, political stability, existence of civil liberties and openness to change and development. While highly developed nations like Denmark and the Netherlands invest 11.2% and 10.8% (respectively) of GDP in education, we invested only 4.8% last year (majority on infrastructure and emoluments!). To make matters worse, the education budget education is slashed from RM50 billion to RM37 billion this year! To get an idea of how counter-intuitive this is for a developing Malaysia, even Afghanistan (7.4%), Vietnam (7.2%) and Timor Leste (12.3%) spent more.

Currently, about 80% of the bottom 40% income households are only-SPM qualified and below, while only 5% received higher education. The rest never made it to school at all. The reason is crystal clear; it is education that can lift households into higher income thus significantly reducing poverty and its consequences. If this group were to receive higher education, it is the state that ultimately benefits as social capital is returned from the household to the state in increased production and tax income. Social justice is served; while nobody is left discriminated or neglected from being given an opportunity to develop his or her own merits.

Reality #6: … with a Positive Net Return-on-Investment (ROI)

Entertain this simple simulation: Consider a fresh graduate entering the workforce with a salary of RM2,500, working for 30 years with a modest increment of 5% a year. Upon retiring at the age of 55 years, he would have paid back at least RM290,000 to the government only in income taxes. Even after discounting, payback in taxes is significantly beyond the investment cost providing education.

Reality #7: Education correlates with wealth and income

Tertiary-educated individuals have an average of RM182,000 in wealth to their name, while SPM holders have only an average RM82,000 in net worth. Degree holders have at least 2.2 times the wealth of SPM leavers. But the tertiary education penetration rate for Malaysia stands at only 36.5%. This is only measured at point of enrolment (not completion)! Not only we are significantly behind “very high human development” nations’ average of 75%, we are also behind “high human development” nations’ average of 50%. In contrast, 86% of Americans, 84% of Kiwis, 100% of Koreans, 99% of the British, 45% of Thais, and 38.4% of Turks are university-trained. As a result, the bulk of our workforce is unable to position themselves in higher-earning jobs. The bulk of our jobs involve the lower portions of the industry value chains. How are we then to move our economy into higher GNI territory, and inclusively move the majority of our population into higher income brackets? Current practice of relying on one-off mega construction projects will not ensure Malaysia move into high-income status, and stay there for the long run!

Reality #8: Education will reduce income inequality

Malaysia ranks as the third most unequal nation in Asia, based on a GINI coefficient of 0.4621 (World Bank). Using only GINI, a simple measure of dispersion between the richest and poorest in an economy, we can already see that there are structural problems with the kind of growth that we have been enjoying. A household that earns RM10,000 monthly and above is already considered the top 4% Malaysian households! 60% of the highest earning income households have at least one member that received tertiary-level education. But 60% of the lowest-earning households have only SPM-holders as their most qualified household member. Not coincidentally, only the top 20% income households in Malaysia have experienced substantial income growth. For the remaining 80% it has been moderate. The gap between the rich and poor has been consistently growing from year 1970 until today. Only non-discriminatory access to education for the bottom 40% will arrest the growth of this gap.

America perceives that the benefits of tertiary-level education are enjoyed most by the individual himself, thus the individual funds his higher education. The Scandinavians believe that the government should pay for higher education. On one hand, we see a privately funded education system in America, and growing inequality between the relatively richer and poorer households. There is at least $902 billion (NY Federal Reserve) in total outstanding student loan debt in the United States today. In contrast, government-funded higher education Scandinavia ranks as most equal nations in the world. The apparent causal-effect relationship here is hard to dispel.

We expect free access to education to allow inter-generational mobility and narrow this inequality gap. If we let economic disability become a prohibitive factor for education, relatively poorer households will never be lifted out of the low-income bracket.

One graduate for every Malaysian family

We need an education system that is inclusive, does not neglect academically-struggling yet vocationally-advantaged pupils, matches industry requirements, yet streams students into disciplines where they will excel most. Most importantly, the system must not allow students to find themselves at the point of entering the industry, handicapped with a student loan on their shoulders, only to realize that they are not employable.

Malaysia has progressed in many aspects by making primary and secondary education free. 100% of Malaysians finish at least primary 6 and 68% finish form 5. The current socio and economic condition in Malaysia now calls to make finishing form 5 legally compulsory and providing free and accessible tertiary education for all.

I humbly urge the government, non-governmental bodies, policy-makers, and lobby groups to move towards providing free tuition fees for higher education at all our public universities. Where public universities are unable to cater for surplus of qualified students, it is suggested that the same equivalent amount of tuition fee funding is to be provided for private universities in a staggered manner, so as to ensure education accessibility by all.

I also propose the target of one graduate in each of the 6.4 million Malaysian households to ensure inter-generational mobility; that is for at least one child of a self-subsistent fisherman or low-salaried factory worker to uplift the entire family into a higher income bracket. A graduate in each family will be the change-agent that ensures his generation improves the family; via a chain reaction multiplying effect, ultimately affecting the graduate’s surroundings.

Education is way too important for us to risk any mismanagement, oversight and underfunding. The generations that go through a robustly managed quality education system, or lack of them, will ultimately decide Malaysia’s direction and the society that we will live in. Only then we can fundamentally assure that our true north for a high income Malaysia is sustainable, inclusive and is enjoyed by all layers of society - not just for the Top 1%.  Let us reflect what Nelson Mandela said for a better Malaysia! “Education is the most powerful weapon you can use to change the world.”

*Anas Alam Faizli is an oil and gas professional. He is pursuing a post-graduate doctorate and is the executive director of Teach For The Needs (TFTN).

** Datas and figures are derived from EPU, DOSM, HIS 2009, HDR 2011, World databank and BNM. For details, please refer BLINDSPOT (http://www.facebook.com/blindspot.msia)