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Foreign Direct Investment (FDI) On Sustainable Development
by Mohd Rohaizad
The UTIP project should be highly commended for making this data accessible online at no cost. At a glance, it appears that when FDI inflows increase, inequality decreases in Malaysia.
Economists claim that FDI is both good and bad for income inequality, depending on the type of FDI that a nation attracts. FDI improves income inequality if much of the flows create employment for the masses, especially the low-skilled, thus boosting their income.
FDI tends to worsen inequality when it flows into industries that are high-tech and it does not create much employment for the masses.
Some economists attribute increasing income inequality in Thailand in the late 1980s to FDI inflows into capital-intensive and relatively skill-intensive chemical, machinery and electrical manufacturing sectors.
This suggests that FDI was unlikely to have reduced wage inequality, which would have resulted in lower income inequality since wages are a large part of income.
The neo-liberal camp argues that FDI is good for improving income inequality while the neo-Marxist camp argues that FDI has a negative impact on income distribution in the long run.
My model (using data from sources including UTIP, the International Monetary Fund, the United Nations Conference on Trade and Development and World Bank's World Development Indicators) suggests that FDI has helped to reduce income inequality in Malaysia from 1970 through 1999.
In fact, it did more to reduce inequality levels than Gross Domestic Investment.
One of the reasons for attracting FDI is to "balance" development in Malaysia. My model suggests that the FDI is having this effect.
But since my research lumps both public and private investment together, I am unable to offer reasons Gross Domestic Investment does so poorly in promoting an egalitarian Malaysia.
I can only say that where the capital comes from makes a difference in leveling incomes in Malaysia.
UNCTAD data shows that much of FDI flows have been to the secondary or industrial sector and more specifically, the electrical and electronics sector, as Malaysians have long suspected.
Although increasing FDI flows are seen to improve income inequality, concentration in the electrical and electronics sector could create skewed economic development.
You could liken this type of development to putting all of one's eggs in one basket. A softening of demand in the electrical and electronics markets has had a negative impact on our economy.
It is no secret that the electrical and electronics sectors have long depended heavily on the backs of women.
Hence, boosting the income levels of this segment of the population would do much to reduce inequality in Malaysia in the long run.
So would legislation that would protect their earnings. A provision in Malaysia's Islamic Family Law (IFL) allows a husband to freeze the assets and claim jointly acquired assets from his wife or wives each time he files for divorce or enters into a polygamous marriage.
Such gender-biased practices will eventually worsen inequality in Malaysia.
Nevertheless, the UNCTAD data do show that as of 2001, more FDI flowed into the primary sector (agriculture and commodities).
If that is accurate, it would be a first in Malaysian FDI economic history, at least from the 1990s onwards.
Regardless of sector, FDI flows into Malaysia must continue to create employment for the masses, whether the industry is low-tech or high-tech - promoting not only an egalitarian society but an economy that can be driven by domestic consumer spending.
About the Author
We would then welcome FDI even more, once we realize the apparent equalizing impact FDI has on our society.
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