Public Expenditure Impact and Income Distribution Analysis in Malaysia Using a Social Accounting Matrix Framework

Income distribution issues continue to grasp attention in Malaysia as income inequality between ethnic, urban and rural still remains wide and persistent. Distribution trend shows that income inequality has reduced since 1970, but has been rising again since 1999. The objective of this thesis is to analyze the impact of public expenditure on income distribution in Malaysia. Specifically the objectives of the thesis are threefold.First, to examine the initial functional and institutional distribution of income across different institutional agents and sectors. Second, to evaluate the impact of the public expenditure policies in reducing the inter-ethnic and rural-urban disparity. Third, to assess the impact of public expenditure policies in different Malaysia Plan on income distribution among household sector. The analysis on income inequality requires a complete and comprehensive data system,thus Social Accounting Matrix (SAM) is employed in this study. A detailed framework of Malaysian SAM is constructed for year 2000 which constitutes 50 accounts. The framework includes detailed structure of the different component of public expenditure, production activities and different group of household sector. A SAM based ‘fixed price’multiplier model grounded an analysis of public expenditure impact on income distribution. The empirical results highlight; first, the existence of unequal distribution of income for institutional and sectoral in the initial year 2000. Chinese and urban households are the dominant income earner, the higher relative position in income distribution among the household sector vis-a-vis the Malay and rural household. Second, public expenditure expansion has an impact on reducing income inequality in Malaysia. The effects of alternative public expenditure components show that the increase in investment for agriculture and rural development reduce both inter-ethnic and rural-urban income disparity, the increase of current expenditure for education reduce inter-ethnic income disparity and widen rural-urban income disparity, while the increase in investment on wholesale and retail trade, industry and transportation increase inter-ethnic and ruralurban income disparity. Third, public expenditure policies in different Malaysian Plans reflected by the different components of public expenditure in different Malaysia Plans influence the outcomes of income distributions; it contributes to the changes in income inequality through out the years. The policy lesson that can be derived from the study is that the implementation of strategy to achieve equality goals will require a change in the composition of public expenditure. Public expenditure for education requires reorganization to streamline with income equality goals. Public investment need to be increasingly directed on agricultural and rural area development. Investment in wholesale and retail trade, industry as well as transportation and communication need to be reviewed. As a way of reducing overall income inequality, presently, addressing the rural-urban disparity is seen more crucial than inter-ethnic disparity