Reducing Disparities

In deciding to continue with affirmative action, the National Economic Advisory Council in its concluding report on the New Economic Model argued that it was consistent with Article 153 of the Constitution, which safeguards the special position of the Malays and natives of Sabah and Sarawak and the legitimate interests of the other communities. In any event, any pro-poor, inclusive growth strategy like the one under the NEM, invariably entails some form of social engineering to narrow economic disparities. As the bottom 40 per cent of households are not specific to one ethnic group or one region, it is only right that the NEM measures shall be racially blind. Now that the market distorting elements such as quotas and preferences that gave affirmative action a bad name have been removed to make it market friendly, and reforms instituted to eliminate rent-seeking behaviour, it should become more palatable politically. Given that almost three of the four of the most disadvantaged segments of the population are Bumiputera and there are targeted programmes to strengthen Bumiputera businesses, there should be a positive effect on the political sustainability of the economic reforms as well. It goes without saying that policy-making has to be sensitive to the domestic political context and investor sentiment.

While the NEAC rightly favours policies that both stimulate growth and reduce inequality, clearly there are no easy win-win situations that deliver both growth and equity. For this reason, the NEM focuses on building up the capacities of the bottom 40 per cent, improving their access to resources and opportunities, and compensating them with appropriate social security measures to reduce their vulnerability. But the outcome of the subsidised social services such as education, housing and public transport and social safety nets obviously depends on the targeting mechanisms used. This is why the overarching policy on social assistance programmes and the setting up of a single database on poor households is a step in the right direction as spending on social services should be well targeted to ensure they are more efficiently distributed to the poor.

But as poverty and inequality will persist without growth in per capita income, the main thrust of the NEM has still to be on accelerating growth. It was rapid economic growth that helped to reduce the absolute number of households living below the poverty line. But as we have not been able to sustain the levels of growth, there is no choice but to make bold breaks with outdated policies and create conditions that make us more competitive and innovative.