Determinants of Income Inequality in Malaysia: an ARDL Approach

Leong, Wei Keat (2022) Determinants of Income Inequality in Malaysia: an ARDL Approach. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

Income inequality is a serious problem in a country's economy. This is due to the reason that the imbalance of income distribution will bring several negative impacts on the economy. For example, it will create conflict between rich and poor, increase the poverty rate of a country, and so on. This can be seen in Covid-19 pandemic. When the Malaysian government first implemented Movement Control Order (MCO), we can see that the income inequality problem in Malaysia worsened the quality of life for the poors and it forced them to request help from others. In order to avoid such things happening again, this issue becomes more crucial to be investigated for improving the income inequality problem in Malaysia. Our research is aimed to investigate whether Malaysia’s economy is affected by economic growth, inflation rate, unemployment rate, and foreign direct investment over the period of 1982 to 2016. Subsequently, Autoregressive Distributed Lag (ARDL) test as well as an error correction model based on ARDL approach is employed to verify whether there is relationship between variables. Our finding indicates that the economic growth is insignificant to impact Malaysia’s income inequality in both the short run and long run. In addition, our results implies that the inflation rate is negatively correlated with Malaysia's income inequality in both the short run and long run. Furthermore, the findings discovered that the unemployment rate has a negative relationship with Malaysia’s income inequality in the long run. Moreover, our results revealed that the foreign direct investment (FDI) is negatively correlated with Malaysia's income inequality in the long run. As a result, our government should offer tax incentives to foreign investors, maintain the inflation rate via expansionary monetary policy and fiscal policy, and provide unemployment benefits to improve the problem of income inequality.