income inequality in the country as the government undertake liberalization measures in trade and finance. No doubt the exact impact of trade and financial liberalization on income distribution in Malaysia and other countries in the region are quite complicated and also quite contingent. Furthermore, available information does not allow a carefully considered assessment of the welfare consequences of recent liberalization measures on different socio-economic groups, including those in poverty. Nevertheless, several tentative explanations could be forwarded at this stage to explain the unfavourable trend in income distribution in Malaysia during the 1990-1995 period.
There is no doubt that industrial development in Malaysia, especially after the shift away from the import-substitution to export-oriented industrialization in late 1960s, together with the rapid expansion of public sector employment in the early 1980s, has led to the expansion of employment opportunities in the secondary and tertiary sectors. At the same time, as a result of both differential factor rewards and the deliberate efforts of the government, large number of rural population, especially the young and the educated, migrated out of the low-productivity traditional agricultural sector to higher productivity sectors in the urban areas. This has resulted in the growing percentage of the employed labour force in the non-primary sector as well as reduction in unemployment rates.
It is also important to note that not only did more people become employed, but significantly more people were employed full-time. The increase in the labour force participation include a substantial number of Malay women who were employed in the free trade zones and various industrial estates set up around the country. With these developments, the wage levels in various sectors in Peninsular Malaysia also rose. This gain in real wages is found to be fastest in the lower income brackets, which explain the improvement in urban income distributions of all ethnic groups and hence declining urban inequality as well as the overall inequality. In other words, it is the decline in urban income inequalities that cause the overall income distribution to improve over time, since
