The latest 2019 Household Income and Basic Amenities Survey Report published by the Department of Statistics Malaysia (DOSM) highlighted that Malaysia’s Gini coefficient had increased from 0.398 in 2016 to 0.407 in 2019.

The Gini coefficient serves as a gauge of economic inequality, measuring income distribution among a population.

The Gini coefficient expresses 0 as perfect equality, whereas 1 expresses perfect inequality. Thus, the DOSM’s data shows that Malaysia’s income inequality has worsened since 2016.

What has contributed to this escalating income inequality level?

For years, existing research has focused on factors such as equal opportunities in education attainment, low minimum wages, high unemployment rates and institutional quality to explain the income inequality levels. However, one outstanding factor in recent years has been uncertainty.

Theoretically speaking, increasing uncertainty causes delays in investment and hiring, and under its influence, households may reduce their spending as a precaution.

Therefore, high uncertainty will threaten investors’ and consumers’ confidence, deteriorate a country’s gross domestic product (GDP) and cause a global recession.

If such a situation prolongs, it will harm economic circulation where consumers may cut their spending and producers will be forced to reduce their production capacity.

Empirical evidence has suggested that high uncertainty has a detrimental effect on economic growth (world GDP contracted by 3.6% in 2020). It slows down foreign direct investment (FDI) (global foreign direct investment fell by 42% in 2020) and increases unemployment (global unemployment rate increased to 6.5% in 2020, as compared to 5.36% in 2019).

Thus, the greater uncertainty is likely to increase income inequality.

A report published by the World Bank in 2022 also indicated that uncertainty caused by the COVID-19 pandemic is estimated to increase the income inequality levels of all emerging markets and developing economies (EMDE) by 0.03 and all low-income countries (LIC) by 0.04.

During the recent period of uncertainty, due to the COVID-19 pandemic starting in early 2020, the world’s ten richest billionaires have doubled their wealth (from US$700 billion to $1.5 trillion). In contrast, the lower income groups suffered an income loss due to layoffs or reduced working hours.

Thus, uncertainty has further widened the income gap between the rich and the poor.

A similar trend has also been reported in Malaysia.

In 2020, an additional 12.5% of households had monthly incomes less than RM2,500. Besides, 20.0% of households from the M40 group have moved to the B40 group, but the incomes of the T20 group were found to have increased by 0.4%.

One of the main focuses of the 12th Malaysia Plan (RMK-12) tabled on September 27, 2021 was to reduce the income gap.

What is the best remedy to increase the incomes and welfare of the bottom 40 per cent of society and reduce the income gap between the rich and the poor?

Given that uncertainty has a detrimental impact on income inequality, perhaps policymakers could consider the following policies to mitigate the impact of uncertainty.

First, all countries should form and maintain a functional incident response team to immediately respond to incidents that cause uncertainty.

As Sherlock (1998) highlighted, the Asian financial crisis worsened mainly due to the lack of effective and immediate government policy responses.

Second, policymakers should examine promoting sustainable growth.

The journey to recover from the shocks caused by uncertainty could be lengthy and challenging. Thus, building more robust and cleaner economic foundations may help better withstand the pressures from future shocks through uncertainty.

Third, policymakers should promote the empowerment and inclusion of vulnerable groups regardless of their age, sex, disability, race, ethnicity, religion or political belief.

New empirical research conducted by the World Bank revealed that the empowerment and inclusion of vulnerable groups could significantly accelerate many of the United Nation’s Sustainable Development Goals and targets.

Lastly, the COVID-19 pandemic has also shown us that innovation and digitalisation are crucial for the survival of any corporation. Thus, policymakers should foster innovation and digitalisation as conventional business methods can no longer withstand shocks caused by uncertainty.

(Goh Lim Thye, Department of Economics and Applied Statistics, Universiti Malaya.)