Part (A) – Case Study: The Role of Fiscal Policy in Inclusive Growth in Malaysia
One of the long-term economic challenges faced by Malaysia is to achieve a more inclusive growth. Inclusive growth is defined as an economic growth that is sustainable in the long term as well as broad based, benefitting a large share of the labour force, thus increasing employment opportunities and reducing income inequality. Malaysia has been recording a high economic growth since 1970s averaging around 6.3% from 1970 to 2018 due to the various economic policies implemented under the various Malaysian Plans which have enabled it to almost eradicate absolute poverty and reduce income inequality between races. The absolute poverty level in 1970 for Malaysia was very high with almost half of the population living under the poverty income level compared to under 1% recently. The income gap between races has also been on the declining trend due to the high-income growth experienced by all races in Malaysia.
Malaysia has achieved huge achievement in almost eradicating poverty as well as reducing income inequality measured by Gini coefficient; however, gap between income groups is increasing. Therefore, the focus of the government under the 11th Malaysian Plan is to make growth more inclusive such as by reducing the income inequality between the top earners and bottom earners, that is, the top 20% of income group (T20) and bottom 40% of the income group (B40). Another aspect of income inequality that policymakers would like to address is the income inequality between the developed states such as Kuala Lumpur and Selangor with the least developed states such as Kelantan dan Sabah.
Some of the factors that contributed to this income inequality in economies among others are development of new technology, globalisation, lack of educational opportunities, high healthcare cost and lack of social protection system. This income inequality could be detrimental in achieving macroeconomic stability and growth. Fiscal policy has been identified as one of the main policy tools that can be used to reduce income inequality, through redistributing efforts using taxation and public spending to increase capacities of lower income groups. In addition, social safety nets programmes are very important to protect the income of the poor and ensure equal access to healthcare and education services that provide increased productive capabilities.
The new challenge of fiscal policy in emerging and developing economies is to create adequate fiscal space. This was due to the large fiscal stimulus implemented to overcome the impact of fiscal crisis in 2008. The current fiscal policy in many emerging and developing economies is inadequate for effective future countercyclical measures and facing new fiscal challenges such as achieving inclusive growth. Due to rise in income and population ageing, public spending over GDP will increase from 2.4% in 2010 to 7.3% in 2050, while for social security and welfare, the increase is 2.5% and 5.6%. This would require for governments to increase their fiscal revenue to ensure fiscal sustainability.
In addition to inadequate fiscal space, other issues concerning the role of fiscal policy in the economy especially in achieving inclusive growth are how does fiscal policy reduce inequality and is it effective? Some of the approaches taken by fiscal policymakers to achieve inclusive growth include revisiting the tax and public transfer policy, increasing the public service delivery, enhancing the role of business dynamism and public spending pro-poor and better targeted. This is important because there is a widening income gap in economies, for which the most effective tool identified is fiscal policy. Fiscal policy is the most effective public tool because it promotes equal opportunities for all level of society through public spending in education and healthcare as well as through better income distribution. However, this would require increasing public spending and could affect fiscal sustainability if revenue is not increased. In addition, the increasing population ageing could result in fiscal pressure due to the rise in healthcare and social protection cost.
Inclusive growth can be measured by income growth and distributions which can be observed by looking at the GDP per capita growth and income inequality Gini coefficients. The concept of inclusive growth includes increasing the pace and size of the economy through equal access for investment and employment opportunities for all social groups in the economy. The United Nations Development Programme (UNDP) stressed that inclusive growth is growth with low and declining inequality, increasing participation of the poor in the economic and political process which will contribute higher benefits to them.
[Source: Wan Sulaiman, W.F. (2019). The Role of Fiscal Policy in Inclusive Growth in Malaysia, Issues and Challenges in the Malaysian Economy. Emerald Publishing Limited, 95-108.]
1. Referring to the above article, “Some of the factors that contributed to this income inequality in economies among others are development of new technology, globalisation, lack of educational opportunities, high healthcare cost and lack of social protection system.” What is your opinion on these factors that contribute to income inequality? Provide necessary justifications to support your arguments.
2. From the above article, it is understood that “Fiscal policy has been identified as one of the main policy tools that can be used to reduce income inequality, through redistributing efforts using taxation and public spending to increase capacities of lower income groups.” Evaluate the effectiveness of fiscal policy in reducing income inequality.
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