Malaysian politics has long been dominated by tensions arising out of inter-ethnic inequality. However, economic policy in the earlier years of independence took a laissez-faire approach. Following the racial riots in 1969, there was a re-think on policy and the New Economic Policy (NEP) was promulgated in 1970. The underlying objective of the policy was to achieve national unity, which entailed improving the economic and social status of the Malay (Bumiputera) community visa-vis the non-Malays (non-Bumiputeras), especially the Chinese. The policy also attempted to transfer ownership of industries to the Malay (Bumiputera) community to develop a capitalist economy under the control of the Malay (Bumiputera) ethnic group. This study argues that, whilst the policy was successful at the outset in generating economic growth and reducing poverty, especially in the rural areas, it became obsolete even for that narrow purpose. The exclusive focus of the policy on inter-ethnic inequality made it insensitive to the problem of intra-Malay inequality. Due to the very success of NEP in the earlier years, the Malay community has become less homogeneous and cross-cutting cleavages have begun to emerge. Also, Malay tolerance of intra-Malay inequality has begun to erode. Many of Malaysia's current economic and political problems can be explained by the failure of income redistribution policy to reflect these changes within the Malay community. The argument is presented here using an analysis of the trends in income distribution. The required data are obtained from the literature and also from the Malaysian Family Life Survey (MFLS).