Inequality and Financial Crisis

Quoting philosopher George Santayana, “Those who cannot remember the past are condemned to repeat it”, Dr Lim Mah Hui cautioned that the next financial crisis is in the making. His opinion was shared at the Perak Academy Lecture “Inequality and Financial Crisis: Cause and Consequences” recently.

Dr Lim is a former international banker and academician currently a board member of Penang Institute. He is also a councillor with Penang Municipal Council and a consultant to South Centre, Geneva, the think tank for G-77.

He previously worked in major banks such as the Chemical Bank in New York, Credit Suisse First Boston in Singapore, Deutsche Bank and Standard Chartered Bank in Jakarta and the Asian Development Bank in Manila.

At the Perak Academy-sponsored lecture held at Symphony Suites Hotel, Ipoh, Dr Lim explained how inequality contributed to the current global financial crisis and how current monetary policy, especially quantitative easing, is causing greater asset inflation and bubble, exacerbating even greater inequality and distribution of wealth.

Inequality is both a cause and consequence of the recent Great Financial Crisis that was just experienced. These are mega trends faced in the 21st century, amongst all societies. Although the talk was general and global in perspective, many of the issues touched were relevant to the Malaysian economy.

One of the Structural Macroeconomic Imbalances is the imbalance between the rich and the poor. Functional Income Distribution, another measure of inequality, is how GDP is distributed between Labour (in terms of wage and benefits) and Capital.

Over the past 30 to 40 years, wage share has been declining in most countries. In Malaysia, it has gone down from about low 40% to low 30% of GDP from 1990 to 2008. As a comparison, in advanced countries, the wage share is about 50% of GDP.

The fundamental reason that wage share is declining is because productivity per hour has been increasing but compensation per hour has been increasing at a slower rate. As productivity increases, more of the increase in growth has been skimmed off by capital. As this is happening, there will be an impact on growth and demand.

Policy implications would include the need to fix inequality issues, regulate the financial sector and come up with policies that reduce inequality.


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