KUALA LUMPUR (Jan 18): Global income and wealth inequality between different nations has narrowed , but has widened within almost every country in the last 30 years, Khazanah Research Institute (KRI) chairman Tan Sri Andrew Sheng Len Tao said.

At a joint seminar by Khazanah Nasional Bhd and KRI today, Sheng said the narrowing wealth inequality between nations were due to the rise of emerging markets led by China, India and ASEAN.

"We live in an unfortunate situation whereby despite widespread concerns, “within nation" inequality is still growing in almost every country. This is a conundrum because with the spread of global knowledge, the world has learned how to create income and wealth. Countries with favourable locations, such as the cross-roads of trade, or with rich natural resource endowment, can generate wealth from efficiency gains from concentration and proximity in trade and investments that come with low transaction costs," Sheng explained.

"Furthermore, the greater the knowledge and skills embodied in clusters of industrial innovation, it will bring greater growth opportunities. Those who grasp the coming opportunities will gain. Those who do not, and cannot have access to these opportunities, will become more and more less-privileged," he added.

Nevertheless, Sheng said knowing what causes inequality does not mean that the prognosis will be easy.

"Indeed, it is easier to study inequality than to execute effective solutions. Malaysia is a leading example of a developing country that is truly serious about addressing inequality. The results have been remarkable, because Malaysia has created a Bumiputera middle class that is fairer than under the colonial period. We have by and large succeeded, but we can have better," he said.

Sheng opins lslamic finance through ethical investing in equity and risk sharing is a "logical and important" tool to address long-term sustainable and stable social equality.

"As we all know, the prophet Mohamed was a trader and the true basis of Islamic finance is equity finance, not debt with interest. In other words, if you are to succeed in business and life, you have to take high risk and the appropriate funding is equity or risk-sharing and not exclusively debt," he said.

"Anyone with experience in the stock market would tell you that if you made some bad losses, you cannot easily recover without taking even higher risks. If you follow the index, you will earn safe, but average returns, but with the shock loss, you don't recover. Risk taking or entrepreneurship is the only way to move higher or up the income or wealth ladder," he said.

Sheng said the conventional thinking of naturally free markets actually maintains at best, status quo, and has little lessons for how to address inequality.

"The natural state of free markets means that no one has to do anything about inequality. That cannot be right. This is why a sovereign wealth fund is catalytic in changing the mindset that free market ideology cannot solve some of the issues of social inequality," he said.