THE INDIAN ECONOMIC POSITION IN MALAYSIA

THE INDIAN ECONOMIC POSITION IN MALAYSIA: A REVIEW OF PERFORMANCE & PRIORITIES FOR ACTION

by: R Thillainathan

(Paper prepared for delivery at the Conference on "The Malaysian Indian in the New Millennium - Rebuilding Community" in Kuala Lumpur on June 1-2, 2002.)

I Introduction

The original aim of my paper on the economic position of the Indian Community had intended to look at the following matters:-

1. Inter and intra racial trends in education, health, employment by sector and occupation, wealth and income;

2. Key determinants of under or over-performance and of factor or occupational mobility from traditional to non-traditional activities;

3. Pitfalls of past policies and programmes and in particular of government policies for equalizing outcomes vs opportunities;

4. Critical success factors for economic well-being and advancement in an industrial and knowledge economy and the road ahead;

5. Role of individual vs collective action as well as the merits of participating in national life and market economy versus opting out and

6. What are the economic policies we should advocate and support at the national level?

It is more than twenty years since I read any serious materials on the economics of inequality or wrote on the subject. Therefore, when I started on this paper, I had a lot of catching up to do. This I have been able to do only in a cursory manner because of the limited time at my disposal. Furthermore, the limited availability of data and studies on the subject in Malaysia has forced me to be much less ambitious in the scope and coverage of my paper. The breadth and depth of work on the economics of inequality including the economics of race in the US is amazing. In Malaysia where the affirmative action programme on behalf of the bumiputra community is a key prong of Government policy much less studies or analysis have been undertaken on the subject. The lack of transparency in disclosure of data is very glaring and has been justified on grounds of sensitivity of the subject.

My paper is divided into five parts. Part I is an introduction. Part II deals with a quick overview of the factors which makes for economic success of an individual, group or country. Part III examines the trend in the economic position of the Indian community over a thirty year period from 1970 to 2000 and the key determinants of its under or over-performance. Part IV deals with certain key issues and challenges facing the Indian community and the nation. Part V attempts to conclude - but in a selective manner and highlights some further areas or issues which have to be considered but which have been left uncovered in the paper.

II Key Determinants of Economic Success of an Individual, Group or Country

1. The importance of human capital and its components

In a developed economy, the stock of human capital accounts for 75% of the total capital stock. The share of physical capital (including housing stock) is only about 25% of the total. A significant proportion of the stock of physical capital is owned by employees through their retirement fund or as homes.

In Malaysia, I expect the share of human capital is between 50 - 67%. The stock of physical capital owned by employees is on the rise.

Human capital embodies investments in education and training. But health and longevity are also significant components of human capital. This is especially so where the stock of human capital is measured by reference to earnings and not by the accumulated cost of investment. This distinction is of some importance for minorities if their health status and life expectancies are inferior versus the rest.

Gary Becker, a top economist of the 20th century, states that investments in on-the-job training is likely to be as important as that on education. The amount of on-the-job training can range from an hour or so at simple jobs like dishwashing to several years at complicated tasks like engineering. Even college graduates are not well-prepared for the labour market when they leave school. They have to be fitted into their jobs through formal or informal training programmes.

2. Components of income, economic well-being and sources of income growth

About three-quarters of national income accrues to labour in a developed economy. The balance represents the income of property owners. In Malaysia, the share of labour income is about two-thirds of the total (but it is more if the income of own-account workers is deemed as largely a return to labour).

Edward Denison's findings for the US economy show that the increase in schooling of the average worker between 1929 and 1982 explained about one-fourth of the rise in per capita income during this period. Gary Becker contends that the effect on earnings of improvements over time in health, on-the-job training and other kinds of human capital may explain the remaining growth. (He would include as human capital lessons acquired on the virtues of punctuality and honesty.)

Professor Nordhaus of Yale University has calculated in a new paper (as quoted in a recent Businessweek article) that the value to the US economy of improvements in life expectancy is about as large as the value of all other consumption goods and services. He estimates that, in the first half of the 20th century, when life expectancy at birth rose from 49 to 68 years, the value of improvements on health outstripped the value of increased consumption of goods and services. Life expectancy gains have slowed in recent years, so the contribution is not quite so large. Nevertheless, from 1975 to 1995, life expectancy rose from 72.6 years to 75.8 years. By his calculations, the annual average increase in life expectancy was equivalent to increasing consumption by an extra 1.6% to 2.0% per year. That is not too far from the 2% annual increase in ordinary consumption over the same period.

3. Determinants of earnings & the roles of education, IQ, other personal characteristics & family background

There has been, in the US, a gradual increase in the ratio of the earnings of the typical college graduate to the earnings of the typical high school graduate from 55% in 1976 to 84% in 1994. Increasing international trade and technological change, according to Professor Gregory Mankiv, may account for this increasing inequality. The difference tends to be larger in less developed countries, where educated workers are in scarce supply.

A worker's wage depends on his years of schooling, years of experience, age and job characteristics. These are measurable variables. The wage also depends on his ability, effort and chance which are more hard to measure. The measured variables account for less than half of the variation in wages in the US economy.

Thus more than half of the variation in wages is accounted for by ability, effort and chance. By ability, we mean not an individual's IQ score but his personal characteristics namely his physical or mental attributes. To quote Mankiv, some people are strong, others weak. Some people are smart, others less so. Some people are outgoing, others awkward in social situations. Those differences in personal characteristics combined with effort as well as chance account for more than half of the variation in wages.

To quote Becker, personal characteristics required for success in working life are very different from those required in a University. In working life one has to accept the discipline imposed by factories, please customers and get along with fellow employees. The ingredients for success are very different in the flexible, individualistic and rather undisciplined university atmosphere. Eccentrics and nuts can last much longer as students or professors than as workers. The moral of this observation is that one's IQ score or academic performance is not a good indicator of one's economic success.

Orley Ashenfelter and Cecilia Rouse find strong evidence that education raises earnings, and that the economic benefits of additional schooling are as strong among those with lower IQ scores as among those with higher scores. Children from less well off families also benefit from schooling at least as much as those from more advantaged homes. Schooling thus appears to be a powerful intervention to raise earnings of the least well off.

This is confirmed by the econometric findings surveyed by Becker. In the US, high school and college education raise a person's income, even after netting out direct and indirect costs of schooling, and after adjusting for the better family backgrounds and greater abilities of more educated people.

Many of the variables which determines one's economic success and income can be influenced by the individual, his family or the government. The role of cognitive ability as measured by IQ, which is outside one's control, is not an important determinant of economic success. Scholars have also challenged some popular notions about IQ. James Flynn documents substantial trends in IQ test scores over time and cautions against the view that the cognitive abilities measured by the tests are immutable (or unchangeable). Marcus Feldman et al find that heritability has been considerably over-estimated in studies restricted to twins.

4. Democratization of education is a necessary condition for the development of a modern developed economy

Education is a key determinant of economic growth and makes for a more equitable distribution in income provided education is easily accessible and finance is readily available. The role for government in education is obvious. It should establish or promote the setting up of educational institutions and extend loans (but without any subsidies) to ensure that all students with the required qualifications are able to educate themselves. Automatic promotions should be disallowed and attention should also be given to remedial education to ensure that all, including the slow learners, through appropriate streaming and special attention, are equipped with the basic skills to work in a modern economy.

The development and modernization of an economy entails the systematic application of scientific knowledge to the production of goods. This has greatly increased the value of education, technical schooling and on-the-job training.

This is evident from an examination even of trends in agriculture. Education is of little use in traditional agriculture because farming methods and knowledge are readily passed on from parents to children. By contrast, in modern farming, education is more important because farmers must deal with hybrids, breeding methods, fertilizers, complicated equipment and intricate futures markets for commodities.

High school and college education has spread extensively in modern economies. This is because the additional knowledge and information acquired in school is so important in technologically advanced economies. Young people without a high-school or college education are not being adequately prepared for work in modern economies. And schooling raises productivity and earnings mainly by providing knowledge, skills and a way of analyzing problems.

All countries which have managed persistent growth in income have also had large increases in the education and training of their labour forces. First, elementary school education becomes universal. Then high school education spreads rapidly and also becomes universal. And finally children from middle income and poorer families begin going to college.

In Malaysia, primary and secondary education have become universal but is not compulsory. The proportion of individuals of the relevant age group in tertiary education is still very low - 15% or below. Permitting and increasing the enrolment of students in institutions of tertiary education is a necessity so long as the students have the requisite qualifications. To ensure that the output of graduates are in line with the requirements of a modern economy, incentives should not be distorted by making tertiary education free or through a guarantee of jobs. At the level of primary and secondary education, more attention should be paid to the quality of education (and not just to quantity) by improving the qualification of teachers (through appropriate hiring and retraining), reducing disparity in spending between different types of schools, streaming and by paying adequate attention to remedial education. Otherwise the country's workers may not have the required expertise, knowledge and skills to power a modern economy.

III Trends in Indian Economic Performance

1. Extend of structural transformation of the Malaysian economy

There has been a dramatic transformation of the Malaysian economy in the post-NEP period. There has been a move away from agriculture to manufacturing and services. The GDP share of agriculture declined from 29% in 1970 to 9% in 2000. Over the corresponding period the share of manufacturing increased from 14% to 33% and services from 33% to 52%. (See Table 1.)

The changes in the structure of the economy are reflected in the occupational structure. In 1970, 45% of the workforce comprised agricultural workers, 17% sales and service workers, 27% production workers, 5% clerical workers and 6% professional technical and managerial workers. There was a substantial increase in sales and service workers to 23%, in production workers to 33%, clerical workers to 11% and professional, technical and managerial employees to 15%. (See Table 2.)

The changes in occupational structure has also been accompanied by significant improvements in the educational attainment of the labour force. The percentage with no formal education has dropped from 41% in 1967 to 6% in 2000 and that for primary education from 45% to 26%. The figures for secondary education has increased from 8% to 54% while that for tertiary education has increased from 1% to 14%. (See Table 5.)

2. An analysis of trends.

a) An overview of the problem & solution

Over the 30-year period from 1970 to 2000, the relative performance of the Indian community has deteriorated across a number of key performance indicators (KPIs). But the decline appears to have been arrested and partially reversed in the 90s with respect to some of those KPIs but not with respect to the all important human capital variable. The re-prioritization of pro-growth policies from the late 80s may account for the turnaround. But the turnaround is not sustainable so long as the community's under-investment in human capital persist and so long as the increasing problem of alienation among Indian youths is not addressed.

b) Occupational differences & educational attainment

The deterioration in the relative economic position of Indians is readily evident from an examination of several KPIs. The mean monthly income of an Indian household has declined relative to that of a Malaysian household. (See Table 9.) Our share of jobs in the broad professional and managerial categories have also declined and are below our employment share. (See Table 11.) The decline is more marked among registered professionals including amongst doctors, lawyers and engineers. (See Table 12.) Our share of doctors and lawyers is still well above our employment share. But given the rate at which our share has been declining, our share of doctors may drop below our employment share in the not too distant future. Our share of engineers, accountants and architects are well below our employment share.

In terms of educational attainment, there is no significant difference between the Indians and the other communities with respect to the proportion of the labour force that is equipped with primary and secondary education. (See Table 6.) However, with respect to tertiary education (which has been defined to cover all academic education after Form 5), the Indian proportion was only 12.2% in 2000 compared to 16.6% for the Chinese and 14.8% for the bumiputras (and 16.7% for the Malays). No data is available on the educational attainment of the various races in 1970. But the preponderant view was that it was then higher among Indians than among Malays. The position has been reversed by 2000. This is further confirmed by the data on the 2002/03 intake into Malaysian public universities. The Indian intake was only 4.7% - a 36% shortfall with respect to its population share and a 43% shortfall with respect to our employment share.

One positive development is that our share of agricultural workers has declined and that of production workers has increased relative to our employment share. The opportunities for on-the-job training, upward mobility, skill upgrade, and earnings increase is greater among production workers than among agricultural workers. And to that extent this shift in our workforce from the ranks of agricultural to production workers is a desirable shift. But laborers are also included within the category of production workers. Laborers are unskilled. Unless they work in an environment such as that of a factory they will have little or no opportunities for an upgrade of their skills. More generally, the agricultural and production workers are likely to have little formal education and this may constraint their scope or capacity for on-the-job training.

The clerical line was one line of job in which the Indians were over-represented in 1970. There has been a substantial deterioration since then with some minor recovery in the 90s to levels just above their employment share by 2000. In some clerical lines e.g. legal, accounting and audit, there is considerable scope for on-the-job training and skill upgrade. There is also scope for the pursuit of part-time study. Therefore, the under-representation of Indians in the accounting and audit area is a big drawback - especially for those who cannot afford the cost of formal education and who could have benefited if they had entered the accounting or audit line which offers ample scope for a wide variety of formal and informal training and upward mobility.

The under-representation of both the Indians and bumiputras in sales jobs is readily evident and this tendency has persisted overtime. The Chinese are over-represented in this area for obvious reasons. They are prepared to take more risk and hence accept remuneration which has a low fixed component and a high variable component (with rewards based on performance). Moreover consumer preferences are such that selling across racial lines may be difficult. And given the higher disposable income of the Chinese one can appreciate why the Chinese are more successful in sales jobs. With the growth in the disposable income of bumiputras and the huge market, opportunities are more plentiful for the bumiputras to enter into sales than they are for the Indians.

By temperament the Indians may be well-suited to the teaching and nursing profession but they are substantially under-represented because the public sector is still the biggest provider of these services and the policy of favored hiring of bumiputras is more pronounced in the public sector. So long as there is no change in the hiring policy Indian under-representation in this category will continue to persist.

c) Indian household income changes

The average Indian household income was 13% above the Malaysian average in 1973. But by 1984 Indian income had fallen to the level of the Malaysian average. But since then there has been a significant recovery and by 2000 the Indian average was about 9% above that of the mean Malaysian household income.

The re-prioritization of pro-growth policies from the late 80s may have contributed to this improvement. During the 70s the pro-distribution bias in policy was at its height. Increase in bumiputra employment in the modern sector may have come at the expense of the other groups and in particular of minorities. The unemployment rate was rising or high and it was worst amongst the Indians and others. From the late 80s the unemployment rate has come down dramatically (in spite of the big import of foreign labour in the 90s with foreign workers accounting for about 10% of the labour force) and that amongst the Indians and others have in fact been below that amongst the bumiputras. (See Table 4.)

The rise in relative terms in Indian income during the 90s is indeed puzzling. During this period the Indian community is likely to have continued to under-invest in human capital as a result of its lower enrolment in institutions of higher learning. Indian share ownership increased from 1 to 1.5% over the 90s but this will have made little difference to the income outcome, especially given the depressed state of the equity market during the late 90s.

The Indians are much less of a risk-taker than the Chinese. Therefore, the outbreak of the Asian financial crisis during the late 90s will have exerted a more negative impact on Chinese incomes and this is evident in the data. However, there has been a steady rise in the relative income position of the Indians from the late 80s. For the reasons outlined above, this rise could have only come about from the increased growth opportunities of the 90s which the Indians may have seized by working much harder.

d) Performance of low income households

It is of interest to find out how the lower income Indian households have been faring vis-à-vis the higher income households. The popular expectation is that the lower income households are more worse off. Some data are given by income groups in the 8MP for the second half of the 90s. From these data we make certain inferences which are a little unexpected. In relation to their equivalent groups amongst the other races, the lower income Indian households appear to be better off than the higher income Indians households. (See Table 10.) And between 1995 and 2000 the position of the lower income Indian households appear to have improved a little further compared to the equivalent Malaysian households.

We have noted that the educational attainment at the tertiary level is lower amongst the Indians than amongst the other races. On the other hand, the educational attainment at the primary and secondary level is marginally higher amongst the Indians than amongst the other races. This is then one reason why the lower and middle income Indian households are likely to do better than the high income Indian households compared to their equivalent groups amongst the households of the other races. We have also noted that Indians are now engaged less as agricultural workers and more as production workers. As a result of this shift, the lower income Indian households may enjoy better opportunities for on-the-job training and skill upgrade compared to some of the other low income households and compared to now than before. This is also a reason which could have made for the better relative performance of the lower income Indian households.

It is also highly likely that the lower income Indian households may have worked much harder than their higher income households (e.g. by holding more than one job). There is no difference in the overall female participation rate of the various races in the labour force. However, Indian women with primary education have a higher participation rate (47% versus 39% for bumiputras and 37% for Chinese) than Indian women with tertiary education (58% versus 64% for bumiputras and 58% for Chinese). Therefore, the number of workers per household in relative terms for the lower income Indian household is likely to be somewhat higher than that for the higher income Indian household as compared to the non-Indian households. This may also have made for the better relative performance of the lower income Indian household with respect to income.

IV Key Issues & Challenges Facing The Community & The Nation

1) Impact of Government policy on import of labour on intra & inter-racial income inequality

From the late 80s the Government has substantially relaxed its policy on the import of labour into the country. This is readily evident from an examination of the data on the employment of the group "others". The employment share of others was between 0.7 to 0.9% of the total until 1985. In 1990, the figure jumped to 6.1% and peaked at 11.1% in 1995 before declining marginally to 10.5% in 2000. (See Table 16.) From these numbers it is therefore clear that during the second half of the 90s about 10% of the labour force represented imported foreign workers. The work permits issued (usually for a three-year period at any one time), were largely for the import of unskilled labour. Thus in 2000, the employment share of others was 6.1% of sale workers, 12.0% of service workers, 21.6% of agricultural workers and 11.5% of production workers. In 1985, the corresponding share of others only ranged between 0.4% and 0.8%. On the other hand, others made up only 2.7% of professionals and 5.2% of managers in 2000 compared to 1.6% and 2.6% in 1985. (See Table 17.) From these numbers it is very clear that work permits were issued extremely liberally for the import of unskilled labour but this was not the case for the import of labour for the professional and managerial (or even clerical) categories.

From the late 80s the economy registered a very rapid growth of about 8% p.a. But there was little or no improvement in the inequality of income distribution, (as measured by the Gini crefficient). The very liberal import of unskilled labour, at or below the going wage rate for unskilled workers of Malaysian origin, would have had an adverse impact on income distribution. On the other hand, as there were restrictions imposed on the import of labour with professional or academic qualifications, there was no check on the upward pressure on the salary levels of the higher level manpower. As there was in relative terms more Indians in unskilled and semi-skilled jobs, the Government's policy on the import of unskilled labour will have exerted a more adverse outcome on Indian incomes relative to the incomes of the other races.

2) Impact of freer import of unskilled labour on occupational mobility

The unrestricted import of unskilled and semi-skilled labour has had other unintended and adverse consequences on the fortunes of the Indian community.

Historically, Indians predominated in wage employment, preferring jobs which had security of tenure. The type of jobs in which the Indians were primarily engaged, such as rubber tapping and road construction, offered little of no scope for upward mobility through the acquisition and upgrading of skills via on-the-job training. These jobs also provided little or no opportunity for the Indians to branch into self-employment or set themselves up in their own businesses even if these were no more than small-scale ventures. On the other hand, the Chinese were more than willing to go for self-employment and where they accepted wage employment, they were prepared or even preferred to work on a piece rate basis to share in the risk and to be rewarded based on a share of profits. The activities they entered, such as mining, construction, sales and services, offered ample opportunities for risk-taking, for on-the-job skill acquisition, and for venturing into their own businesses. For instance, the Chinese bricklayer in a building construction gang could aspire to become not only a plasterer but also set himself up as a sub-contractor engaging in masonary work. If he had the entreprenurial talents (and he was in a position to discover for himself whether he had these talents if he was prepared to take the necessary risks), he had the opportunity to graduate into the rank of a contractor or a developer. This gives a partial explanation of the several case histories of individuals who had risen from "rags to riches" within the Chinese community, whereas there were almost no such cases in the Indian community.

In the face of the rapid growth of the Malaysian economy in the late 1970s and early 80s and the then emerging labour shortages, many Chinese sub-contractors and businessmen were willing to hire Indians as their assistants, in several areas of activities, thus opening up opportunities for on-the-job skill acquisition, for acquiring the Chinese work ethic and for increasing their appetite for risk-taking.

With the unrestricted import of unskilled and semi-skilled labour from the late 80s, many of these Chinese contractors and businessmen found it more profitable to hire Indonesian workers, as the Indonesians were prepared to work at a more competitive wage rate as well as live in kongsis at construction sites. The upgrading in the skill level of the Indonesian construction worker is now readily evident and many Chinese contractors and sub-contractors in the construction industry have greatly reduced their dependence on Chinese workers even for highly skilled jobs. The decision of the Government to import foreign labour and the failure of the Indians to compete with the Indonesians led to the Indians to miss a great opportunity to move into a sector which offered ample scope for upward job mobility.

Unlike the construction sector where foreign workers comprised as much as 19% of the workforce in 2000, foreign workers in the manufacturing sector only numbered around 9%. This encouraged more locals including Indians to enter manufacturing as conditions of employment were more favourable in manufacturing. And manufacturers had a preference for a more stable labour force. Manufacturers therefore had a greater incentive to hire locals since work permits for foreign workers were issued for periods of only three years with an extension for a further period usually of two to three years. These sets of considerations have enabled locals including Indians to enter in greater numbers into manufacturing and thereby enjoy the opportunities the sector offered for upward job mobility.

If the Government had pursued more restrictive policies with respect to the import of unskilled labour, then local labour would have gone into construction and manufacturing in bigger numbers and reaped the entire benefits of on-the-job training and skills upgrade the move provided. Now the benefits have been captured by foreign workers which will disappear from the country as and when those workers leave the country.

3) Factors making for under-investment in human capital by Indians

Total investments in on-the-job training may be almost as large as the investment in education, according to Gary Becker. The amount of on-the-job training can range from an hour or so at simple jobs like dishwashing to several years at complicated tasks like engineering. Even university graduates are not well prepared for the job market on graduation. They are fitted into their jobs through formal or informal training programmes.

Entry into universities requires certain minimum academic qualifications. Similarly to be able to undertake on-the-job training and advance in one's career, an employee requires certain basic linguistic and quantitative skills. Education is now universally available in Malaysia with automatic promotion up to form five. This may mean that those who make it up to form five may have acquired a level of linguistic or quantitative skills as well as a knowledge of Science which may be well below the level required for passing the form five examinations. The question is whether one should continue with this state of affairs or invest more time and resources in ensuring that a student acquires the requisite skill through appropriate streaming and an extended learning period before he is allowed to proceed to the next level of schooling. The additional resources required for this more intensive approach can be met partly from the resources saved from discontinuing the programme of automatic promotion. Even if additional resources are required the authorities must provide them by cutting back on spending elsewhere. There is less risk of over-investment or resource misallocation in education than in other areas of spending.

A case in point are the Tamil schools. The children have been registering a low pass rate in their standard six examinations because of their poor pass rate in their Bahasa Malaysia subject. These same students have been registering a much higher pass rate in two common subjects, namely Maths and Science which pass rate is only a little below the pass rate achieved by children from the Chinese and Malay-medium schools. Although this low pass rate has been registered for many, many years, the Government has not addressed the problem by hiring better teachers or extending the hours of teaching in Bahasa Malaysia. As the medium of instruction for all subjects at the secondary school level is Bahasa Malaysia, the failure to address and reverse the problem means that the Tamil school children who move on to the secondary schools will end up under-performing even in Science and Maths. This will severely disadvantage their capacity for human capital acquisition as well as their potential for employment in the modern sector and for undergoing further on-the-job training thereafter.

4) Priorities for community action for acquiring physical & human capital

In devising any community action programmes to address the problems of the Indian community, the priorities have to be drawn up on the clear understanding that wants are unlimited and that resources (at the disposal of the community) are limited. Painful choices have to be made between competing wants if the limited resources are to be put to best use. I believe that we should not succumb to the temptation of undertaking mega projects - whether it is in the corporate sector or in the education field. Community-based business ventures have seldom succeeded because of their distorted incentive structure. The economic viability or political desirability of capital-intensive educational projects can also be called into question if members of the community cannot afford to pay the required fees of these educational institutions or if they end up benefiting only a handful of people.

Where a community feels a strong need to save and invest to increase its stake in equity ownership, then the best way to do this is by investing on a portfolio basis and (as far as possible) passively. And to ensure that one does not get the market timing wrong, it is best to save and invest in the equity market on a regular basis. These decision rules are based on the time-tested research findings of the best minds in finance.

One of the best and most viable ways of increasing Indian participation in business is through its greater involvement in small-scale ventures. The Government can assist in this process by a more liberal licensing regime. Some interesting and pertinent issues are taken up in Box I.

Box I: Opportunities for entry of Indian youths into small businesses

The scope for getting Indian youths started on small businesses, such as hawking, vending and stall-keeping, has been readily recognized but very little has been done in this direction. In certain lines of hawking and vending Indians have dominated, as in the case of the teh-tarik man, the chendul vendor, the kacang putih seller, the mee goring and rojak seller, the milkman, the newspaper vendor and the breadman. When one examines these activities more closely, it will be noticed that most of the foodstuffs hawked are indigenous to the Indian community whereas in the case of the vending activities the goods dealt with are those which entail little or no risk in relation to their price, durability or demand. In the case of the Chinese although many of the foodstuffs hawked are indigenous to the community, they have not hesitated to move into non-traditional areas such as the selling of satay. Moreover, their other food products, such as fruits, vegetables, fish, poultry and livestock, are highly risky in terms of both their prices as well as durability. The Chinese have also been prepared to move into non-traditional lines such as the vending of milk but in a form and on a scale which tend to swamp those of the Indians. It may be necessary to organize the Indian hawkers, vendors and stallholders as well as the other small businessmen into guilds or associations in order to improve their competitiveness and bargaining power vis-à-vis the other communities. At the same time, they should be introduced to the rudiments of modern business practices such as book-keeping and inventory control. Regular courses could be organized by advisory units on small businesses set up by organizations, including the guilds, which could persuade the small businessmen to move into new lines of activities and also update them as to the various types of credit facilities offered by the financial institutions.

As the number of Indians engaged in self-employment and small-scale business ventures are few in relation to their population, many more Indians must be encouraged to enter into such activities. The Government is inducing, rather successfully, the Malay community to move into these lines by providing it with training, capital and licences. Similar efforts must be made for the Indian community, either with the assistance of the Government or through community actions. Apart from the need to obtain licensing permits, the establishment of small businesses is a fairly easy undertaking, given the small capital outlay required and the absence of any formidable barriers to entry into these lines of activities. Appropriate informal training programmes can also be started for youths who have the interest and aptitude for business. By requiring them to raise at least part of the outlay, it is possible to ensure that those who wish to go into business view their undertaking as a serious commitment and are subject to the normal disciplines of the market.

(Extracted from A Sivalingam (1993), pp393-4.)

As regards the type of community action that can be undertaken on the educational front, we examine the cost and benefits of dealing with the high failure rate in Bahasa Malaysia amongst children of Tamil schools. The high failure rate has severely handicapped the capacity of a vast majority of these children to successfully pursue and complete secondary education given that the instruction at this level is in Bahasa Malaysia. The attention and resources required to remedy this problem will not be that great but the returns can be enormous given the tens of thousands of children it can benefit. If the problem is not addressed, these children will be condemned to under-performance, relegation to the worst classes, stereo-typing, alienation, delinquency, their premature dropping out from schools and to the high risk of their involvement in crime. The labour market cannot do much for school dropouts who can hardly read and never developed good work habits. The cost to society in fighting the resulting crime can also be high.

Gary Becker has stated that on-the-job training is an important source of the very large increase in earnings as workers gain greater experience at work. The Indian community may face limited opportunities for on-the-job training. But I believe that this can be offset partly by community action and by persuading the Indian youths, given their bias towards the academic stream, to enroll in institutions which provide formal training in technical as well as accounting skills. The first course of action is to ensure that Indian enrolment in Government-run vocational and technical institutions, which is still well below its population share, is increased through political action and a mental revolution, to at least its population share. The second course of action is to provide financial assistance for youths from disadvantaged families to enroll in existing private technical institutions such as the FIT and WIT. The third course of action is for the community to set up more such technical institutions.

Earnings of parents and children are more strongly related when parents are poorer, according to Becker and other economists. Poorer families are unable to pay for the training of their children, including the earnings forgone when children spend time in training rather than at work. One solution is for the Government to lend money to students when their parents are unable or unwilling to finance the training. Where such finance is provided, then Indian children of poorer families can seek educational training not only from community-based institutions but also from any privately-run institutions thereby increasing their choice and minimizing supply and demand mismatches.

5) Health component of human capital

As we noted in Section II longevity gains are worth a lot. There was a considerable slowdown in life expectancy gains during the last quarter as compared to the first half of the 20th century. Nonetheless, Professor Nordhaus has calculated that over the period 1975 to 1998, the average annual increase in life expectancy in the US was still equivalent to increasing consumption by an extra 1.6% to 2.0% per year as compared to the 2.0% annual increase in ordinary consumption over the same period.

The various communities in Malaysia registered life expectancy gains over the period 1970 and 1999. However, the life expectancies of Indian men in 1999 were still about 4 years below that of Malays and 6.5 years below that of Chinese men. Further, the life expectancy gains over the 1970 to 1999 period were a little slower for Indian men. All women also made about the same life expectancy gains during the period as the men but the gains were most pronounced for Indian women. Thus, at the turn of the century, the number of years by which women would have outlived men was 3.5 years amongst Malays, 5.5 years among the Chinese and 8.5 years amongst Indians. (See Table 8.)

It is unlikely that Indian men are consuming less medical care. Their lower life expectancy may be attributed either to environmental factors (which will be the case if their occupation are more stressful) or to their lifestyle (which will be the case if they smoke or drink too much, have an improper diet or lead a sedentary lifestyle). Their lower life expectancy is in all likelihood due to their less satisfactory lifestyle.

As the annual earnings of an average Indian male for his investment in human capital is not likely to be very different from that of an average Malaysian male, the lower life expectancy of an Indian male implies that the return to his investment in human capital is likely to be lower and that he is equally likely to have less incentive to invest in such human capital. Further, the Indian household is likely to be more disadvantaged as compared to a Malay or Chinese household as the number of earners in the former will be less than in the latter (from the earlier demise of one of the breadwinners). On account of these considerations, Indian men have to reconsider and lead a more sober lifestyle if their incentives are not to be distorted and if their families are not to be disadvantaged.

Box II: An Interesting Aside on The Economics of Healthcare & Life Expectancy

The production of health is influenced by a variety of factors, including the amount of medical care consumed. Some of the other factors determining health are the individual's initial endowment of health, socioeconomic status, lifestyle and environmental factors.

The empirical evidence for both infants and adults indicate that good health depends only moderately on the consumption of medical care. Socioeconomic status and lifestyle appear to play a much greater role in the production of good health.

Medical expenditures in the US have grown rapidly in recent decades. In 1960, nominal per capita health expenditures equaled approximately USD140 and overall health expenditures accounted for 5.1% of GDP. By 1996, per capita expenditures equaled almost USD3,759, while total health expenditures accounted for 13.6% of GDP.

In an attempt to obtain a more precise measure of the impact of medical care on overall health in the US, Bunker et al (1995) estimate increases in life expectancy that can be attributed to a select group of preventive and curative medical services.

The authors estimate that the 13 preventive medical services examined (represented largely by a programme of screening and immunization for an array of diseases such as cancer and diphtheria) increased the life expectancy in the US by approximately 1.5 years.

The authors also estimate that the 13 medical interventions (for such medical conditions as hypertension, cancer, kidney failure and diabetes) improved life expectancy by a total of between 3.5 and 4 years for the entire country.

Bunker et al conclude that the preventive and curative medical services reviewed have improved the average life expectancy by a total of approximately 5 years as of 1990. These results represent a sizeable contribution to longevity given that the average life span in the US increased by a little more than 12 years from 1940 to 1990 (62.9 years to 75.4 years). These results somewhat contradict those of other studies by suggesting that medical services have had a significant impact on health as measured by length of life.

Only after the cost of medical services has been factored into the analysis can one conclude whether more emphasis should be placed on curative at the expense of preventive medical interventions.

Poor health habits as well as weak lifestyle traits affect health. Breslow and Enstrom (1980) discovered that men and women who follow seven beneficial health habits have, respectively, mortality rates 28% and 43% lower than men and women who follow three or fewer of these health habits. The seven habits include never smoking cigarettes, regular physical activity, moderate or no use of alcohol, seven to eight hours of sleep per day, maintaining proper weight, eating breakfast and not eating between meals.

In the US, approximately 81% of individuals succumbed to the 10 most common causes of death in 1996. By far the number one cause of death was diseases of the heart. It accounted for almost one-third of all deaths in 1996. Researchers are certain that the blood level of cholesterol, smoking, level of physical activity and obesity play a major role in determining the risk of heart disease. Each one of these factors is influenced by lifestyle to a large degree.

The second leading cause of death with a share of 23.4% is cancer. Lifestyle choices often have an impact on this type of illness as well. For e.g. Edlin and Golanty (1988, p296) point out that approximately 80% of all lung cancer deaths, the most common form of cancer, can be attributed to smoking. The remaining 20% in part result from environmental factors, such as air pollution.

Two of the ten categories, accidents and adverse effects and suicide, deal with deaths related to individual behavior rather than natural causes. Together, these causes (with a share of 5.3%) represent the number four reason for deaths in the US.

(Extracted from Rexford E Santree & Stephen P Neun, Health Economics - Theories, Insights & Industry Studies, Dryden, Revised Edition 2000.)

V Conclusions

Over the 30-year period from 1970 to 2000, the relative performance of the Indian community has deteriorated across a number of key performance indicators (KPIs). But the decline appears to have been arrested and partially reversed in the 90s with respect to some of those KPIs but not with respect to the all important human capital variable. The reprioritization of pro-growth policies from the late 80s may account for the turnaround. But the turnaround is not sustainable so long as the community's under-investment in human capital persist and so long as the increasing problem of alienation among Indian youths is not addressed. Addressing the community's under-investment in the equity market is less of a priority.

The government's massive affirmative action programme on behalf of bumiputras in education (through such measures as the setting up of specialized institutions, enrolment in overseas universities, granting of scholarships and preferential allocation of seats) was a key factor in the economic upliftment of the Malay community in the post-independence period. Now the Malays are able to compete on merit and secure places in the Malaysian public universities in excess of their population share. Therefore, there is now a compelling case for a review and reorientation of the affirmative action programme. The programme should now be aimed primarily at favoring and equalizing opportunities for poor Malaysians including the disadvantaged Indians.

A country cannot become economically developed if there are disparities in education and if the workforce is not well-developed and trained. This is because the development and modernization of an economy entails the systematic application of scientific knowledge to the production of goods (which has in turn greatly increased the value of education, technical schooling and on-the-job training).

In Malaysia, primary and secondary education have become universal but is not compulsory. The proportion of individuals of the relevant age group in tertiary education is still very low - 15% or below. Permitting and increasing the enrolment of students in institutions of tertiary education is a necessity so long as the students have the requisite qualifications. To ensure that the output of graduates are in line with the requirements of a modern economy, incentives should not be distorted by making education free or through a guarantee of jobs. At the level of primary and secondary education, more attention should be paid to the quality of education (and not just to quantity) by improving the qualification of teachers (through appropriate hiring and retraining), reducing disparity in spending between different types of schools, streaming and by paying adequate attention to remedial education. Otherwise, the country's workers may not have the required expertise, knowledge and skills to power a modern economy.

Poorer families are unable to pay for the education and training of their children. One solution is for the Government to lend money to students when their parents are unable or unwilling to provide the finance. Unless this is done to equalize opportunities and with little or no restrictions, the poor will have less access to education and the distribution of income will be more inequitable.

A disproportionate number of Indian youths, including secondary school pupils, are becoming increasingly alienated from the mainstream of society in recent years. Some of these youths are joining secret societies or are taking to violence and crime. It is a national problem which the government must tackle by the right mixture of sympathy and firmness. The problem of alienation of school children has to be handled sympathetically by the front-line teachers. In the case of about half of these children and who are from Tamil schools their alienation may have something to do with their dismal performance in Bahasa Malaysia (BM). In spite of their creditable performance in Maths and Science (which are common subjects for all streams) their weak foundation in BM makes it doubly difficult for them to pursue their education at the secondary level where the medium of instruction is BM. This may lead to their poor performance in all subjects and make for their alienation. The front-line teachers or their superiors should be showing sympathy. Instead they are likely to be treating these unfortunate children as a problem lot and are likely to be relegating them into the backward classes and compounding the problem further by neglect. Further, the Government should address the problem by hiring better teachers or extending the hours of teaching in Bahasa Malaysia. Violence and crime among youths have to be handled firmly by the police but not through a indiscriminate use of force. The authorities must also provide adequate opportunities for the rehabilitation of those youths who are first time offenders and who have not committed any serious crimes.

To undertake on-the-job training and to be able to advance in one's career, an employee requires certain basic linguistic and quantitative skills. Education is now universally available in Malaysia with automatic promotion up to form five. This may mean that those who make it up to form five may have acquired a level of linguistic or quantitative skills as well as a knowledge of Science which may be well below the level required for passing the form five examinations. The question is whether one should continue with this state of affairs or invest more time and resources in ensuring that a student acquires the requisite skill through appropriate streaming and an extended learning period before he is allowed to proceed to the next level of schooling. The additional resources required for this more intensive approach can be met partly from the resources saved from discontinuing the programme of automatic promotion. Even if additional resources are required the authorities must provide them by cutting back on spending elsewhere. There is less risk of over-investment or resource misallocation in education than in other areas of spending.

Historically Indians were more involved in agriculture which provided little opportunity for upward occupational mobility. The construction sector offers such opportunities. But the free import of Indonesian workers and their preparedness to work under less favourable employment terms deprived Indians of an opportunity of moving into the sector. Manufacturing also provides such opportunities. Better employment terms and need for a more stable labour force provided an opportunity for unskilled Indians to enter this sector in greater numbers.

Training foreign workers may be counter-productive because the country will loose the benefits of such training when these workers return home. There is therefore a need for a policy rethink. To encourage geographical mobility from the rural to the urban sector, the authorities or community action groups must also provide affordable accommodation to migrant workers, some financial assistance as well as certain rudimentary training programmes including lecturs on work ethic. The need for more formal training will be much greater if there are inhibitions or prejudices in the labour market. Such training may then encourage entry or hiring more readily. But more effort will have to be applied the greater are the inhibitions or prejudices and the greater is the sophistication of industries with growth opportunities.

Economic well-being and advancement in an industrial and knowledge economy depends on such factors as capital accumulation, investment in health care, work effort, skills and knowledge acquisition, as well as risk taking. The hard choices for the community are as follows: we have to consume less and save more; work harder and consume less leisure; work longer and retire later; take more risk and do not just play it safe; venture into business and do not just be an employee; invest less in physical and more in human capital; and invest less in physical and more in financial assets.

We have the choice of individual action versus collective action as well as the choice of participating in national life and in a market economy versus the option of opting out and going it alone. The choices are obvious.

Some of the relevant issues and measures are as follows:-

- we should consider contributing a minimum percentage of one's income to a fund for community development and investment hopefully with a matching government contribution but the fund should be used strictly for community development projects,
- we should consider contributing time or money (in lieu thereof) for community projects,
- the basis of contribution should be voluntary,
- any effort at promoting saving and investment through community efforts should be based on the principle of risk diversification or portfolio management and hiring of the best managers;
- and community-owned and operated business ventures should be avoided.

Our accumulated savings and investments for retirement with the Employees Provident Fund (EPF) will come to constitute a significant part of our wealth. There are some basic questions we should address in this regard. They are as follows:-

- Should individuals rely on the EPF to take care of their retirement or should they participate in other old age savings/investment schemes or should they rely on an extended family or the state; we must address questions of the specialized risk of a business, market risk & longevity risk in providing for one's old age care; issues related to the utilization & management of one's accumulated EPF balances over one's working life and at retirement (given the liberal withdrawal provisions and low interest rate environment).

R THILLAINATHAN
May 27, 2002

REFERENCES

1. Kenneth Arrow, Samual Bowles & Steven Durlauf (Ed), Meritocracy and Economic Inequality, Princeton University Press, 2000.

2. Gary S Becker, Human Capital, The University of Chicago Press, Third Edition, 1993.

3. N Gregory Mankiv, Principles of Economics, The Dryden Press, 1998.

4. Shyamal Nagaraj & Lee Kiong Hock, "Human Resource Development and Social Reengineering: Which Part of the Field are We Levelling?" (mimeo), 2002.

5. A Sivalingam, "Economic Problems and Challenges Facing the Indian Community in Malaysia" in K S Sandhu & A Mani (Ed) Indian Communities in Southeast Asia, ISEAS, 1993.

6. R Thillainathan, "The NEP - What is in Store for the Indians?" paper delivered at the University of Malaya Tamil Language Society Forum on the same subject on September 22, 1977 and included in the Catholic Research Centre, "Information & Formation", Kuala Lumpur.