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Income distribution across ethnic groups in MalaysiaSaari, Mohd

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Income Distribution across Ethnic Groups in Malaysia

Applying Social Accounting Matrices

M. Yusof Saari

Publisher: University of Groningen, Groningen, The Netherlands

Printed by: Ipskamp Drukkers, B.V.

ISBN: 978-90-367-7673-8

978-90-367-7672-1 (e-book) © 2015 M. Yusof Saari All rights reserved. No part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, now known or hereafter invented, including photocopying or recording, without prior written permission of the publisher.

Income Distribution across Ethnic Groups in

Malaysia

Applying Social Accounting Matrices

PhD thesis

to obtain the degree of PhD at the University of Groningen on the authority of the

Rector Magnificus Prof. E. Sterken and in accordance with

the decision by the College of Deans

This thesis will be defended in public on

Thursday 19 March 2015 at 12.45 hours

by

Mohd Yusof Saari

born on 21 August 1979 in Perak, Malaysia

Supervisor Prof. H.W.A. Dietzenbacher

Co-supervisor Dr. B. Los

Assessment committee Prof. M. Llop Llop Prof. J. Oosterhaven Prof. D. Roland-Holst

To my parents

Hidup memerlukan pengorbananan. Pengorbanan memerlukan perjuangan.

Perjuangan menentukan kejayaan. Kejayaan pula akan menentukan kebahagiaan.

Jangan impikan kejayaan tanpa berusaha mencapainya.

To Az Zahrawaani, Daniel, Danish and Durrah

Kejayaan ini dipenuhi dengan seribu macam kemanisan tetapi untuk mencapainya perlu seribu macam kepahitan.

Kalau tidak kerana semalam kita telah berusaha, bersabar dan berdoa, belum tentu hari ini kita akan berada di sini.

Acknowledgments

This dissertation is the end of my long and solitary journey to obtain a Ph.D. degree

from the University of Groningen, the Netherlands. At the beginning, many colleagues

and friends from my home university (Department of Economics, Universiti Putra

Malaysia) asked me why I had chosen the University of Groningen for my Ph.D. study.

This may seem a somewhat uncommon destination indeed, because most of the staff

members pursue their Ph.D. in economics in the United States, the United Kingdom,

or Australia. My answer was simple: “I am looking for a “guru” in input-output

analysis.” In addition, the University of Groningen offers a research-based Ph.D.

program which would certainly benefit my home university in its attempt to increase

the quality of research and the number of publications. In that respect, I expected to

learn a lot in Groningen that could be beneficial for my home university. Another

question that I received was: “How is Groningen city?” I had no idea. The only

information I had then was about Fandi Ahmad, a Singaporean football player, who

played for FC Groningen in the 1990s. After living in Groningen for four years (2006-

2010), I can say that it is a great city to study and live in. Ik hou van Groningen.

This dissertation is a collection of self-contained papers, the drafts of which

were written between December 2006 and December 2010 at the Faculty of Economics

and Business of the University of Groningen. This dissertation would not have

appeared in its present form without the kind assistance and support from many

people. It is a true honor and pleasure to acknowledge them here.

It has been a great experience to work under the supervision of two well-known

input-output experts, Erik Dietzenbacher and Bart Los. With his enthusiasm,

inspiration, and great efforts in explaining things clearly and simply, Erik made input-

output analyses fun for me. He has provided excellent guidance from the beginning

until the completion of this dissertation. Bart is an enduring source of innovative and

critical thinking. He gave me the inspiration to create the novel aspects of my

research, which certainly has improved its quality. Both of them have provided

extensive efforts in reading and editing drafts of the papers. Apart from the scientific

writing experiences that I learned from them, I believe that Erik and Bart have

succeeded in transforming me in three aspects: (i) from an unfocused to a focused

worker; (ii) from a standard Malaysian researcher to an international researcher; and

(iii) from publishing in “local” journals to publishing in social science citation indexed

journals. Apart from research guidance, Erik also taught me “how to make life easy”

while Bart trained me “to become a good badminton player”. This additional knowledge

sharing has certainly made my life colorful and enjoyable.

I would like to express my gratitude to the members of the assessment

committee (beoordelingscommissie), Jan Oosterhaven, Maria Llop and David Roland-

Holst for their willingness to read this dissertation. Their valuable comments and

suggestions have certainly further improved the quality of this dissertation.

This study would not have been possible without the support and assistance

from various government agencies in Malaysia. The financial means provided jointly by

Universiti Putra Malaysia and the Ministry of Higher Education Malaysia were crucial

for the completion of this study. The strong support from the Economic Planning Unit

Malaysia has made this study feasible. Data supply and guidance provided by the

Department of Statistics Malaysia have in many ways facilitated my research.

I owe my deepest gratitude to the members of Research School SOM, Martin

Land, Rina Koning, Ellen Nienhuis, Arthur de Boer and Astrid Beerta for their legal

and administrative support. The assistance of Rina and Ellen in organizing the

translation of the dissertation summary in Dutch is highly appreciated.

I am indebted to many colleagues who have read my papers or commented on

my presentations in Groningen. Among them are Jan Oosterhaven, Bert Steenge, Dirk

Stelder, Marcel Timmer, Dirk Bezemer and Robert Inklaar. Also several colleagues

outside Groningen (who I met personally at conferences or virtually via e-mail

communication) have provided their valuable comments and suggestions. I have

benefited in particular from Jeffery Round, Graham Pyatt, Geoffrey J.D. Hewings,

Michael L. Lahr, Gülay Günlük-Şenesen, Kurt Kratena, David L. Ryan, Manuel

Frondel and Henry Thompson. Furthermore, it has always been a pleasure to have

communications beyond academic discourse with other Ph.D. colleagues: Umed

Temurshoev, Xuemei Jiang, Maaike Bouwmeester, Jiansuo Pei, Quanrun Chen,

Janneke Pieters, Abdul Azeez Erumban, Gaaitzen de Vries, Lewis Lishemoi, Kadek

Dian Sutrisma Artha, Peter van Santen, and Anna Samaryna.

Finally, my heartfelt thanks to my wife, Az Zahrawaani, who has tolerated my

inordinate demand for time over the past few years. I think the best way of expressing

my gratitude is by dedicating this book to her.

Contents

Chapter 1: Introduction 1

1.1 Ethnic Plurality and Economic Duality in Malaysia 1

1.2 Income Inequality and Ethnic Riots in Malaysia 4

1.3 Research on the Links between Economic Growth and (Ethnic) Inequality 7

1.4 Outline 10

References 13

Chapter 2: Construction of a New Social Accounting Matrix and Analysis of

Income Distribution 15

2.1 Introduction 15

2.2 Structure of the SAM for Malaysia, 2000 18

2.2.1 General structure 18

2.2.2 Disaggregation for Income Distribution Analysis 22

2.3 The Top-Down Approach 24

2.4 Data Requirements and Problems 27

2.4.1 Data requirements 27

2.4.2 Problems related to data 29

2.5 Results and Discussion 31

2.5.1 Distribution of household income 32

2.5.2 Inequality in the labor market 37

2.5.3 Summary of most important findings 43

2.6 A Comparison of the Income Distributions in 1970 and 2000 44

2.6.1 The situation in 1970 45

2.6.2 The changes between 1970 and 2000 47

2.7 Concluding Remarks 49

References 51

Appendix 54

Chapter 3: Sources of Income Growth and Inequality, 1970-2000 57

3.1 Introduction 57

3.2 Economic Policies, Growth and Income Inequality, 1970-2000 59

3.3 Social Accounting Matrices and Deflation Procedures 67

3.3.1 The 1970 and 2000 SAMs 67

3.3.2 Deflation procedures 71

3.4 Structural Decomposition Analyses 74

3.4.1 Decomposition of the changes in income 74

3.4.2 Decomposition of the changes in employment 80

3.4.3 Decomposition of the change in Theil’s inequality index 81

3.5 Results and Discussion 82

3.5.1 Decomposing changes in income per capita 82

3.5.2 Decomposing changes in household incomes and labor incomes 85

3.5.3 Decomposing changes in labor income inequality 92

3.5.4 Decomposing changes in production and employment 96

3.6 Concluding Remarks 99

References 103

Appendices 106

Chapter 4: Production interdependencies and poverty reduction 109

4.1 Introduction 109

4.2 Growth and Poverty across Ethnic Groups 112

4.3 Methodology 115

4.3.1 Decomposition of output growth 115

4.3.2 Linking the multiplier decomposition analysis to poverty 122

4.4 Data Sources 125

4.5 Results and Discussions 127

4.5.1 Impacts on aggregate poverty 127

4.5.2 Decomposition of poverty impacts 135

4.6 Concluding Remarks 140

References 142

Appendices 146

Chapter 5: Impacts of Higher Petroleum Prices on Income Distribution 159

5.1 Introduction 159

5.2 The Standard Quantity and Price SAM Models 163

5.3 A SAM Model with Price-induced Substitution Effects 168

5.4 Imposing a Price Shock 175

5.5 Results and Discussion 178

5.5.1 Price effects 178

5.5.2 Income effects 179

5.6 Concluding remarks 183

References 185

Appendices 188

Chapter 6: Summary and Conclusions 193

6.1 Introduction 193

6.2 Sources of Income Inequality 194

6.3 Growth Interdependencies 195

6.4 Energy Price Deregulation 196

6.5 Reflection 197

References 203

Samenvatting (Summary in Dutch) 205

List of Tables

Table 2.1 Schematic SAM for Malaysia, 2000 21

Table 2.2 Aggregate SAM (control values) for Malaysia, 2000 (MR billion) 26

Table 2.3 Distribution of household income, population and labor (%), 2000 35

Table 2.4 Distribution of compensation of employees per skill-type, 2000 39

Table 2.5 Percentages of income and employment, and wage rates, by industry

(2000) 41

Table 2.6 Distribution of household income, population and labor in 1970, and

the comparison with 2000 46

Table 3.1 Value added growth and percentage share by sector, 1970-2000 61

Table 3.2 Income inequalities measured by Theil index, 1970-2000 (in 2000

constant prices) 64

Table 3.3 Schematic representation of the Malaysian SAMs for 1970 and 2000 70

Table 3.4 Decomposition of changes in per capita household incomes, 1970-2000

(in 2000 constant prices) 84

Table 3.5 Decomposition of changes in household incomes, 1970-2000 86

Table 3.6 Decomposition of changes in labor and capital incomes 1970-2000 89

Table 3.7 Decomposition of changes in Theil’s inequality index for labor income,

1970-2000 95

Table 3.8 Decomposition of changes in production (gross outputs, in billion MR) 97

Table 3.9 Decomposition of changes in employment, 1970-2000 100

Table 4.1 Head count poverty rates and gross domestic products (GDP) in current

prices 114

Table 4.2 Schematic representation of the endogenous and exogenous accounts

in the social accounting matrix 116

Table 4.3 Estimates for poverty profiles across ethnic groups, 2000 130

Table 4.4 Percentage change in numbers of poor arising from a 1 billion MR

increase in final demand, 2000. 132

Table 4.5 Decomposition of the change in the number of poor due to a 1 billion

MR increase in final demand, 2000. 137

Table 5.1 Movement of petroleum prices, 2004-2008 161

Table 5.2 Budget share for consumer items and per capita income in 2000 162

Table 5.3 Schematic representation of endogenous and exogenous accounts in

the SAM 164

Table 5.4 Income and per capita income effects of rising petroleum price 180

List of Figures

Figure 1.1 Map of Malaysia 2

Figure 1.2 Poverty rates and per capita income gaps, 1957-2005 6

Figure 4.1a Contribution of the initial effect on poverty reduction across rural

groups (%) 137

Figure 4.1b Contribution of the initial effect on poverty reduction across urban

groups (%) 138

Figure 5.1 The nested structure of the production functions 171

Figure 5.2 Correlation between changes in price and energy intensity 179