Malaysian Income Distribution in a Global Context A Khazanah Nasional Berhad and Khazanah Research Institute Seminar Session I - Global Poverty and Inequality: A View from the Global Consumption and Income Project 18 January 2018

1. 1

2. The elephant curve of global inequality and growth, 1980–2016
Branko Elephant Curve: 1% Gaining 27% of
Growth – World Inequality Report 2018
Source: WID.world. 2017. "World Inequality Report 2018." 2

3. Branko Milanovic: ABC of Globalisation
– Le Monde, December 14, 2017
• “Winners and losers of globalization: the winners are the global rich and
Asia, the losers the middle classes of the West. They are squeezed between
competition and indifference: competition of people who are able and
willing to do the same jobs for a smaller wage, and indifference of their own
rich compatriots towards their plight
• By 2050, “The Western societies will then come to resemble what we
currently see in Latin America: there would be rich people with incomes and
pattern of consumption of the global top 1%, sizable middle class, but also
significant number of people who are, in worldwide terms, relatively poor,
with incomes below the world median
• “Can societies where coexist people with income and consumption patterns
that are quite different be democratic and stable? Wouldn’t such societies
exacerbate the features of what used to be considered a Third World
disease, social disarticulation, with the top prospering and perfectly well
integrated into the global economy and the lower parts languishing and
being overtaken by the middle classes of the emerging economies?
This is, I think, the key question that the politicians in today’s rich societies
ought to ask themselves 3

4. US Political Divide Since 1994 is Symptomatic of Global
Divide
4Source: Mauldin. 2017, October 29. “Thoughts from the Frontline: The Fragmentation of Society.” Mauldin Economics.

5. Four Horsemen of
Leveling:
1. Mass mobilisation
warfare
2. Transformative
Revolution
3. State Failure
4. Lethal Pandemics
5

6. Inequality and National Development
• Branko is optimistic about Asia, because there is rapid Growth
in China, India and ASEAN in next decade, with China possibly
moving first out of Middle Income Trap into advanced income
levels
• Within ASEAN, larger economies (Indonesia, Vietnam,
Philippines) all pushing ahead with cheaper labour, larger
internal market and using technology to upgrade productivity
• But how does Industry4.0 impact on Malaysia and our ability to
formulate National Social Compact to implement national
competitiveness going forward?
• Malaysia is geographically well positioned, but need to re-think
growth model to compete in the next decade
6

7. Moving up to Industry 4.0
We are here
Ohno’s stages of catch-up industrialization
Data source: Ohno 2009.
Source: WTO, World Bank Gropu, IDE-Jetro, OECD & UIBE. 2017. "Global Value Chain Development Report 2017.” 7

8. Waves of Digital Disruption –
All Businesses/Governments will Need Digital Strategy
8
Source: Jo Caudron &Dado Van Peteghem. 2015. “Digital Transformation: Digital Disruption in Finance.” DearMedia.

9. Four Impacts of Technology on Business Models
1. Competition intensified. Technology disintermediates
conventional business – cheaper, faster, global
2. Demographics shifted. Customer older, more women and
millennials to control large share of buying power
3. Clients have new expectations: want more trustworthy, better
transparency, lower fees. Social Media spread can improve or
damage Brand reputation (e.g United Airlines Dr. Dao
reputation issue)
4. Regulation: Complex regulations – cyber-security, anti-money
laundering, tax evasion, corruption laws, cyber-security all
impose huge burden on corporate compliance and reputation
Digital Dividend: Consumer Surplus – Labour Deficit
= Job Disruption/Inequality + Populism
9Source: Accenture. 2016. "Future of Wealth Management."

10. Automation potential based on demonstrated technology of occupation titles in the
United States (cumulative)1
Job Deficit – Low Skilled Jobs will be Automated
1 We define automation potential according to the work activities that can be automated by adapting currently demonstrated technology. Data sources: US Bureau of
Labor Statistics; A future that works: Automation, employment and productivity, McKinsey Global Institute, January 2017; McKinsey Global Institute analysis.
Source: MGI. 2017. "Artificial Intelligence: The Next Digital Frontier?" Discussion Paper June 2017. 10

11. Inclusive Development Level and Trend for Developing Economies
Per WEF, Malaysia Inclusive Development Level Stands Out in Top
Quartile
Source: WEF. 2017. "The Inclusive Growth and Development Report 2017." 11

12. Virtuous Circle of Inclusive Growth and Development
Malaysia, through NEP, has Used All 7 Tools to Generate More
Social Inclusivity
12
Source: WEF. 2017. "The Inclusive Growth and Development Report 2017."

13. Key Policies: Skills, Capital & Process Upgrading
How do we adapt?
We learn to learn!
From Fintech to EdTech
Source: WTO, World Bank & OECD. 2017. "Global Value Chain Development Report 2017." 13

14. Action Recommendations of WIR2018
1. Progressive income taxation is a proven tool to combat rising
income and wealth inequality at the top
2. Tax systems face obstacles such as tax evasion. Wealth held
in tax havens is currently equivalent to more than global GDP.
Need global financial register to improve wealth transparency
3. Importance of achieving more equal access to education and
good paying jobs
4. Need for governments to invest more in the future, both to
address current income and wealth inequality levels and to
prevent further increases. Much can be done to improve
efficiency of government wealth management and reduce
wastage and inefficiencies in service delivery
Source: WID.world. 2017. "World Inequality Report 2018." 14

15. No Policies to Address Inequality can be
Achieved Without a National Social
Compact
• In global polarised environment, very difficult to get
social consensus
• Re-distribution will definitely result in winners and
losers, which means getting social collective action is
critical
• Winners will always argue for allowing rich to get rich
first, redistribute later
• But once rich, prefer status quo, so redistribution
does not occur or become difficult to attain
15

16. Islamic Financing: Can Conventional
Finance Cope with Huge Uncertainties?

17. Advantages of Islamic Finance in
Boosting Entrepreneurship
• Islamic Finance, founded on high risk caravan trading across long-
distances, is based on equity, risk-sharing and bound by trust (sharia)
• There are now two alternative models of funding – mainstream is
debt-leveraging, which has created massive systemic fragility due to
interest rates at historically low levels. Banks are constrained by
regulation to be risk-adverse and cannot groom entrepreneurs
• Silicon Valley style VC, with spread of investments in start-ups, high
failure, but strike of Unicorns (valuation over $1 billion) and
disciplined Series A, B etc investing means that high return covers rest
of losses from failures
• This is Eco-System grooming of entrepreneurs, but requires high
discipline and value investment judgement
17

18. Social Compact Involves ABC Partnership to
Tackle Key Issues of Social Inclusivity and
Development
18
• Academia (including private education platforms) – adopt MOOC,
hybrid training (coding + creative skills) with employer-designed
curriculum (constant feedback)
• Business – Chambers of Commerce/Unions to work on skills
identification, training and mentoring programmes. Retired baby-
boomers have great skills to teach/mentor start-ups and young
• Civil Service – Singapore Skills-Future Initiative – employer-designed
industry and job transformation maps; S$500 voucher scheme for
training courses by universities and MOOCs
• Evolve New Social Compact by working together for success in New
Economy

19. Concluding Observations
• Easier to identify Inequality, but harder to do something about it
• Even if we identify the right tools, difficult to achieve social consensus
with political will take tough action, such as progressive taxation
• Framing Conversation on how to move forward is critical
• Example - Carrot and Stick for 1% - increase tax rates, but encourage
tax-deductible Social Impact Investing e.g. Gates Foundation
• Government can help in cultivating eco-system that encourages
innovation and risk-taking, but true success comes from community
self-help – we need to do this by helping all communities’ young,
irrespective of race or creed
• Working together means that there must be a SHARED view on how
to be stewards for Sustainable Living – Inclusive, Green and
Progressive
• Lifelong learning to adapt, innovate and create
• Conditions are good for a breakthrough
19

20. Thank you
Q&A to
altsheng8@gmail.com
and
www.andrewsheng.net