Ethnic inequality and poverty in Malaysia since May 1969. Part 2: Poverty

Abstract

Abstract Over the last 50 years, Malaysia has seen one of the fastest rates of income-poverty reduction in the world. This came alongside falling overall income inequality, due in large part to a national policy effort to address ethnic inequalities, in the wake of tragic race riots in 1969. The first paper in the two-part series examined various measures of ethnic inequality. This second paper assesses the role that changes in between-group inequality played in Malaysia’s success against poverty. To address this question, a new decomposition method is applied to survey data spanning 50 years. The results indicate that ethnic redistribution helped reduce poverty, but it was not as important as within-group redistribution or mean-income growth. A pure ethnic redistribution effect is defined and isolated empirically. Sizable potential gains to the country’s poor from ethnic redistribution are revealed in the 1970s, suggesting that the early policy effort made sense. The absolute gains have faded over time and are now small, though the elasticity of national poverty to ethnic redistribution remains quite high.