As Budget 2021 focuses on B40, history shows market failures are fixed by taxpayers

At RM322.5 billion, the proposed Budget 2021 is by far Malaysia’s biggest fiscal expenditure.

Designed to cushion the impact of Covid-19, the budget has allotted a substantive sum from the public purse to improve the welfare of the people and to kickstart the floundering economy, battered and brought to its knees by the pandemic.

With the number of jobless in the country nearing a million, Malaysians, particularly those in the M40 and B40 categories, were hoping that the budget would bring some respite.

Even those in the T20 category were keeping their fingers crossed, praying for some miracle in the budget that would somehow alleviate their financial burden.

The truth of the matter is that the novel coronavirus is setting the stage for a global economic meltdown that is unmatched by any other save for the great depression of the 1930s.

All is surely not well.

With the government of the day hanging on by a thread, the approval of the budget is in itself not a sure thing. Only a bipartisan approval will see the proposed 2021 budget through.

The enormity of the triple crisis at home and globally – economic, health and political – is an existential threat with over 54 million Covid-19 cases and 1.3 million deaths globally. The fallout from the pandemic will surely reverberate the political and economic arena for quite some time, and this has prompted mankind to contemplate on whether or not our current economic and political values are sustainable in the long run.

If one were to scrutinise the proposed 2021 budget, it is self-evident that those in the B40 category are given much more attention in the form of cash transfers, insurance coverage, and subsidised Internet connectivity.

Special attention is also given to those who are laid off, especially those in the aviation industry, as they will be given relocation assistance and training.

From providing assistance to first-time home buyers to running training programmes for entrepreneurs, the proposed budget aims not to leave anyone out in the cold.

There is no doubt that the pandemic is wreaking havoc in the economy but the constant need to address the plight of those in the B40 category raises significant questions on how resources are allocated in our society.

The view among most economists is that the pre-tax distribution of income is the result of market forces. As the proposed Budget 2021 illustrates, the government amends the market outcome through taxes, transfers, and expenditures.

Among economists, the three most cited causes of rising income inequality are globalisation, skill-biased technological change, and job polarisation.

By globalisation, they mean a number of factors that have become more important over the decades in the global economy, including reduced trade barriers, increased immigration, lower international transport
costs, off-shoring of production, foreign competition and increased capital flows.

Put differently, labour, Malaysian labour included, is faced with more competition from foreign labour today compared to the past because tariff barriers and transport cost barriers have diminished, making labour costs
relatively more important.

The increase in the off-shoring of production reflects the rise in importance of relative labour costs. Transport technology (container ships, super tankers, jet freight) and political agreements (the World Trade Organisation, multi-nation trading blocs) have reduced transport costs and tariff barriers, making relative labour costs loom larger.

It is not only goods production that has been off-shoring to nations with lower cost. Services such as call centres, routine legal and medical services and software production have shifted abroad, usually to countries that can offer cheap labour.

The shift of services would not have been possible without the massive decline in cost and time of telecommunication services in the past 50 years.

The constant need to assist those in the B40 category is partly due to the changing distribution of income in the country. Available data shows that the share of national income going to labour has been declining.

Splitting labour income between the share going to the top one per cent of wage, salary, and bonus earners and the bottom 99 per cent shows that the top share is rising. Trends in productivity, hourly
earnings, male and female, as well as household income show shifts favouring highest income groups.

It is important to explain what income inequality means, what it is and what it is not. If the proportion (share) of aggregate income received by the lower end of the income distribution is falling over time, that is rising income inequality.

An easier rule of thumb is that if the Gini coefficient of the Theil index is rising over time, that is rising income inequality. The decline in labour’s share of the national income is not limited to Malaysia but is seen globally as well.

Some economists attribute the drop in labour share of the national income to technological change and globalisation. Be that as it may, the exact cause is not easy to pin down.

But one thing is for sure, market forces alone will not lead to the efficient allocation of resources. In times of crisis, history has shown that market failure had to be fixed by the taxpayers.

Profit is privatised while losses are nationalised.

This is the personal opinion of the writer and does not necessarily represent the views of Twentytwo13.

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