Tuesday, June 3, 2014

How our Winner Take-All Market Deepen Income Inequality while Decaying Our Education System?

Are we better off than we were 10 years ago? I am sure the majority of us will answer with a resounding ‘NO’. Why is this so? There are many reasons that contributed to this, among them are the following.

  • Increased in income inequality
  • Rising costs of living
  • Income not catching up with inflation
  • Longer working hours and less recreation
  • More indebted than before
  • Less opportunity for self-improvement due to time constraint
  • Society is getting more competitive
  • Crime on the rise

Wonder what caused the above? Listed above are the consequences or the price of economic development that are caused by forces that shaped our social economic fabric. We are living in a world where resources such as land, labor and natural resources are in limited supply or scarce. To maximize the usage we not only have to limit wastages but also need to efficiently allocate these scarce resources to the most important part of the economy.

In a free market economy as we have today, the distribution of resources will be led by the forces of supply and demand created by the ‘invisible hand as known to Adam Smith’.  However, no matter how efficiently resources are allocated there are bound to be situations where inequality exists. Thus, we are confronted with a trade-off between inequality in the distribution of resources and economic development.

Unequal Economic and Wages Growth

When an economy grows there will always be inequality in resource distribution because some people are better equipped to capture a larger share of the economic pie. These qualities include education level, talent, creativity, hard work and the willingness to take risk and will affect the wages and profits accrue to different actors in the economy. Thus some people will be left out by the progress of the economy and below I present to you an analysis on the extent of the inequality.

The following chart on GDP growth shows that our economy prospered throughout the years.

. Malaysia GDP

As can be seen from above our GDP grew from $124.75 in 2004 to $303.53 in 2012. This represents a 145% growth during that period. But has our income/wages kept up with the economic growth? To find out I present to you below the chart on the growth of wages in the manufacturing sector. The manufacturing sector was selected as it employs the most people and thus provides a better representation.

Historical Data Chart

The average manufacturing salary in 2004 was around RM17,000 per annum and went up to RM28,000 in 2012. Thus our wages only grew 65% (28000 – 17000 / 17000) during this period. Hence, we can conclude that our wages has not been rising proportionately to economic growth during the period of study (2004-2012). This inequality can best be described in one chart as follows.

GDP as a metric not only used to measure economic growth but also reflects the standard of living of a country. In this case it shows that the rise in our standard of living has not been accompanied by the rise in wages. Obviously this is not good news because the longer this goes on the wider will be the disparity. Since the distribution of income is a zero sum game consequently there will be gainers and losers. So who are the gainers and losers?

The losers will be the workers and the gainers will be the top 10% of the population that controls 35% of our nation’s wealth. The top 10% of the population are folks that make up of shareholders, stakeholders, directors, high level management and so on. Hence, they are the ones that are benefiting from the GDP growth because they are residing at the very top of the food chain. Trickle-down economics indicates that any benefits derived from economic growth such as profits and dividends will have to flow from the top layer of the pyramid. Thus it is not surprising to note that the majority of the gains from GDP growth stop right at the top level of the pyramid while the spillover went to 90% of the population. The extent of the income inequality in Malaysia has grown from bad to worse as we now ranked third in Asia Pacific Region. A summary with no comments can be seen from the graph below.  

Source : World Bank

Income inequality can be measured by a statistical approach called Gini coefficient or index. The Gini index is used to measure the gap between the poor and the rich. The higher the reading the higher is the inequality. High income inequality means higher proportion of the nation’s wealth held by a smaller group of individuals. This also implied that any benefits that derived from economic growth will flow to the higher income group instead of the lower income. Our next question is how much wealth held by the ‘elite’ top 10% and bottom 10% of the population? It can best be describe with the following two charts.

Source: Compiled from World Bank Data

As can be seen, the wealth held by the top 10% of the population increased from 28.77% in 2003 to 34.65% in 2009. At the other end of the spectrum, the wealth held by the bottom 10% of the population decreased from 2.67% in 2003 to 1.78% in 2009. This shows that the wealth held by the bottom 10% dropped by one third or 33.33% (2.67-1.78/2.67) whereas the top 10% increased their wealth by 20.4% (34.65-28.77/28.77) from 2003-2009. So what caused such a great disparity in our income distribution?

What causes the inequality?

Some factors put forward include education level, intelligence, hard work, higher productivity, experience and talent. It may be true because collectively they formed the forces that helped create a ‘Winner Take-All’ market. What is a Winner Take-All market?

In sports, what do Rafael Nadal, Lee Chong Wei and Nicol David have in common? They are the world champions in Tennis, Badminton and Squash respectively and operate in a very niche market called Winner Take-All. As its name implies Winner Take-All gets most of the reward and leaves little to the rest. They operate in an extremely competitive environment where thousands of players all eying for the top position. Top players are rewarded with endorsement fees and advertisement contracts which are very lucrative. Those lower ranked will be lesser known and earn much lower fees. To prove it, does anyone know the current second ranked men badminton or women squash player in the world?  Other than sports, Winner Take-All market also exists in other sectors of the economy.

In the corporate world where competition is fierce any slight advantage may cause a big improvement in the bottom line. Due to the pressure to perform, bidding for talented executives has gotten more intense. This led to an explosion in the salaries of top executives in the corporate world. Companies are increasingly dependent on outsiders rather than executives within their company to run their operations. The surged in income among the top managers further heightened the disparity in income between those at the top and bottom within a company’s hierarchy.  

In politics, various political parties also engage in Winner Take-All market. Whenever the federal announces a project, various State Governments will compete and try to outdo each other in order to convince the authority to relocate the project to their state. Thus there will be demand for political strategist, lobbyist, fund raisers and a whole host of other workers that involve in the political machinery. When they successfully persuade the authority to relocate a project to a particular state then there will be trickle down economic benefits such as more job and business opportunities for the local population.

Around the world, countries also engaged in Winner Take-All market competition. In today’s competitive world human resource plays an important role in the development of a country’s economy. We need the right people to do the right job such as people with background in economics and finance to run our finance ministry or people who are good in management skills to run our Government Linked Companies. What happens when we lacked the talented people to fill those positions?  We have to source it elsewhere. We will attract talents from other countries by offering higher wages and better benefits or in other words we encourage ‘Brain Gain’. If we are not doing it then someone else will and this will lead to ‘Brain Drain’.

Another flip-flop policy implementation is the reversion the use of English from our school syllabus to Bahasa Malaysia. After 5 years of implementation only we found out that we are producing non-marketable graduates due to the lack of skills in English.  English can be considered the de facto language for business in both the private and public sector in more than 50 countries. More than 15% of the world population speaks English and 80% of the information stored in computers is in English. The growing importance of English also helped give rise to winner take-all market by reducing the costs of information (no need to translate) and also increasing the networking of people around the world. Thus with the efficient flow of information on prices and cost of transportation plus an enlarge audience of suppliers and customers it helped intensify the competition.

However, according to a report by The Straits Times’s Asia Report in Oct 2013, almost a quarter of the 470,000 Form Five students failed English in 2012. And according to the education ministry 70% of the 70,000 English teachers failed a competency test to teach English. In the 2009, Malaysians students ranked third from the bottom out of 74 countries in the PISA assessment. The results show that our ‘flip flop public policies’ are taking its toll on student performances.  

In education, universities also engaged in the Winner take-all market. For the past decade or so, the quality of our education system has gone anywhere but up. Evidence can be seen from the absence of our Public Universities from Times Higher Education ranking. Times Higher Education can be considered the authority in University Ranking where they are judged according to 13 performance indicators from five areas – teaching, research, knowledge transfer and international outlook.  

According to Times Higher Education World University Ranking 2012-2013, Malaysian Universities failed consecutively for two years to enter into the top 400 spot. To add salt to injury there are 81 universities from the Asia Pacific region made it to the top 400. So what cause the decadence in our Education System? One major factor overlooked by our authority is the existence of winner take-all market in our education system. How will the Winner Take-All market in our education system lead to erosion of quality in our public universities?

Winner Take-All Market

Why the standards of our Public universities are dropping drastically in recent years? Due to increasing competition in the labour market, academic credentials have become more crucial in determining the marketability of a student in the job market. Good academic credential is also important for students seeking acceptance into post graduate courses in reputable universities.

Top jobs and Top schools

World class Management Consulting companies like McKinsey & Company and the Boston Consulting Group are known to be a magnet for most talented professionals. A survey was done by Fortune magazine in 1990 to determine the relationship between top jobs in the business world and elite schools. What they found is that out of the 1500 respondents almost 93% of them graduated from Ivy League universities such as Harvard, Yale, Princeton, Stanford and so on. In addition, the number of CEOs graduated from the Ivy League universities also increased from 15% to 19%.

Thus, it is no surprise that students are now more selective in choosing which universities to attend when they graduate from high schools and colleges. Hence, there will be competition among universities to upgrade their facilities and faculties or they will risk losing top students. To upgrade their faculties, universities are forced to compete for able and famous professors. Thus this helped gave rise to a winner take-all market in education. As a result, salaries for well-known professors and administrative staffs have risen substantially. Public universities that are not keeping up will risk losing many of their top academicians to private universities. In fact many of our public universities are already suffering from this ‘Brain Drain’ syndrome in recent years.

A good example is the recent fiasco in University Sains Malaysia’s medical faculty. Due to low pay and lack of meritocracy that prohibited promotions, many of its teaching staffs have left for greener pastures in local and foreign universities. The once well-known and vibrant medical faculty is a shadow of its past and now it is at the verge of closing down.

Increase in Top 20% Household Wealth

Another factor that causes our public universities to lose students is the rise of the income of the top 20% household. As seen below the top 20% household in Malaysia now controls 51.45% of our country’s wealth.

 malaysia income share held by highest 20percent wb data
Source : World Bank

Tuition fees in private universities have risen in tandem with increased demand in recent years. Fortunately, due to the increase in income for the top 20%, more parents are able to send their children to study in private universities. To capture the growth in student intake, private universities are also expanding their faculties. Thus this also helped to cater to the increasing number of students seeking education in elite private universities.  

Success begets Success

Academic excellence feedback loop also plays an important part in attracting top students. In simple terms, academic excellence feedback loop refers to a situation where better students attract better students. As mentioned earlier having an excellent faculty is important in attracting students. But on the other end having good students also tend to attract a better faculty in terms of teaching staff. This is because faculty members are more incentivized to teach in a prestigious institution with good passing grades than a less prestigious one.

The quality of a faculty is measured by the amount of research being done and articles publish in their respective journals. Being associated with better known universities, professors are assured of research funds, increase demand for books written by them and better opportunities for landing a consulting job. The reputation of a university will further enhance when it has an excellent team of academia. Thus, to be on the top universities will need an eco-system of good students and faculty because they reinforce each other. This also helped explain why certain universities go to the length of providing financial aid such as scholarships and loans so as to attract the best students.    

Employers and Students feedback loop

Another pull factor that makes student more attracted to private universities is the increased number of top companies having their on-campus recruitments there. The reason for top companies doing their on-campus recruitment in private universities is due to their concentration of top students. Hence, there exist another feedback loop between top students and top employers. In the end, private universities tend to gain from the concentration of top students because employers will also concentrate their recruitment drive there. We will be seeing more of this ‘jobs go to the people’ phenomenon in the future as our economy gets more creative.  Another benefit students can derive from concentration of top students is the networking of students within the alumni. When they start work later in life it will be a boon for them to know who’s who in the market.  

Changing Demographics

Demographics also played an important part in giving rise to winner take-all market in education. Unknown to many, although our population is growing our country is also heading into a demographic crisis. Why is this so? Let me present you the following two charts. The first one depicts the percentage of our population aged between 0-14 years old. The second shows the percentage of our population aged above 65 years old.

Source: Department of Statistics Malaysia

I hope you are able to notice the diverging trend in our population composition. The percentage of Malaysians aged above 65 years old has increased from 4.54% to 5.12%. What this means is that our population is fast aging. This is not good sign for the economy because our government will have to increase its spending on healthcare to support this group of people in the future. Since our government has been running budget deficits then increase spending on other social programs like education and disability will be a challenge.  

Further, as you noticed the percentage of Malaysians aged between 0-14 years old has decreased from 31.2% to 29.5%. What does this tells us? It tells us that in future there will be a decline in students going to schools which also resulted in lesser students entering universities. Thus, colleges and universities will have to buck up and spend more on attracting and recruiting students in future. This inadvertently led to a winner take-all market because universities will have to outdo each other in attracting students. Again the loser will be the public universities if they are unable stand up to the challenge. The search for top educators and faculty staffs again will lead to an explosion in salaries.     

Wrapping Up

Thus, it can be seen that the battle of education supremacy has led to many negative developments such as rising salaries of lecturers and professors, growing faculty members, more expensive laboratories and libraries. In sum all these have led to increasing pressure on university budgets. The only way out is by increasing the tuition fees.

As evident from above, improvements in the private universities will only benefit the top 20% of the population. Students who cannot afford the high fees in private universities will have to contend with public universities whose standards are affected by the ‘Brain Drain’ of their academic staffs.

Another implication is that whichever university reacted first on the information above will be in an advantageous position in the future. When we know the following,

  • Increased household income of the top 20%
  • Fewer students enrolment in high schools in coming years
  • Less funding on education by the authorities   
  • Student and Faculty feedback loop
  • Student and Employer feedback loop

Then according to Game Theory, whichever party acted first on the information will always be in forefront of the game. The Game Theory that I am referring to here has nothing to do with the Safari in Africa but a study on strategies on how to out-manoeuvre your opponents. Understanding Game Theory will equip us with tools to not only predict the future outcome but also see through our opponent’s strategy. Game Theory is also being used extensively in politics especially in Western countries not only to strategize but also to see through the opponent'strategy.

In this case the strategic advisor to a university already knew the future problems of the government and other universities. It also knew what type of quality education students are looking for in their pursuit of further studies. When he utilizes a theoretical game strategy called ‘look ahead and reason back’ he already knows what his competitor going to when the time comes. Thus all the strategic advisor needs to do at the mean time is tailor-made a marketing plan emphasizing on its strong point to lure students away from their competitors.     

The author is the Economic Advisor to the National Union of Bank Employees.


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