Social services, particularly health care and basic education, have been an important part of Malaysia's strategy for reducing poverty and economic disparities among ethnic groups. This chapter examines changes in the distributional impact of public outlays between 1974 and 1989, using household-level data on the use of public services, and discusses related improvements in health status and educational attainment. In both health and education sectors, the targeting performance of government expenditures improved over the period of the "new economic policy" (1970-90). Except for higher education, social service expenditures were progressive and became more so after 1974, as the poor captured the largest share of benefits from social expenditures. For education, primary-level enrollment is now virtually universal, and expansion of the educational system came as a result of an ethnically based targeting policy that reached lower and lower income groups. In contrast, improved targeting of health care came about as richer income groups opted out of the public system to use private practitioners. While provision of elementary and secondary schooling is pro-poor, higher education is regressively subsidized, and a false equilibrium is maintained through public monopoly on the granting of higher education degrees. As a result, the net distributional effect of overall education spending is flat with respect to income, and higher education enrollment rates are lower than those of other similar countries. Policy dilemmas and possible solutions are discussed. Includes 22 figures and data tables. (SV)