divergence in productivity growth rates between the two sectors. Indeed, the average annual growth in labor productivity in services during 2000-07 is less than half that of manufacturing. Finally, despite the low rates of capital accumulation in the total economy, the contributions of capital to labor productivity growth in manufacturing increased in the later sub-period. And because TFP growth fell in the 2000s in both services and manufacturing, this relatively strong capital formation in manufacturing amounts to much of the divergent productivity growth between the two sectors. Thus, the decreased rate of capital accumulation in the total economy identified above may be largely concentrated in the services sector.

An alternative perspective on this point is provided in Figure 4, which plots the level of output per worker by these three sectors during 1987-2007, in terms of Ringgit per worker. What is strikingly apparent in the figure is that the period of catch-up between services and manufacturing evident throughout the late 1980s and early 1990s has subsequently reversed as services output per worker slowed while that of manufacturing continued to increase. Output per worker in agriculture has remained relatively constant during the period, with a slight improvement beginning in 1999.

Improvements in labor productivity for the total economy can result from increases in sectoral labor productivity as well as labor reallocations from sectors of low productivity to higher productivity areas. Thus, the importance of this “residual” reallocation effect depends in part on the degree of inter-sectoral differences in productivity and in part on changes in the distribution of employment. Figure 5 separates out labor productivity growth for the total economy by period into sectoral contributions and the reallocation effect. (Notice here that we use the full industry sector rather than manufacturing alone for completeness of allocation.) First of all, the second column pertaining to the 1990s period demonstrates the relative importance of the services sector to total productivity growth, along with a minor contribution from reallocation. Keep in mind that the contribution of each sector to the total is a function of the growth in sectoral productivity weighted by that sector’s share in output. Perhaps most importantly, the third column of Figure 5 clearly shows the stronger role of manufacturing in the 2000s, with a reallocation effect that actually turns negative. The negative reallocation effect can be explained by a reduced labor productivity growth in services during that period, combined with a services employment share that increased from 49 percent of the total in 2000 to nearly 54 percent in 2007. Thus, in this case, labor was moving out of the relatively more productive industry sector into a less productive services sector during the more recent period.

# **International Comparisons**

We now place the experience of Malaysia in a broader international context through comparing the sector-level output and productivity growth of similar countries. In addition to examining the relative performance of the industry/manufacturing and service sectors in these countries, we can also assess the _levels_ of productivity among countries and sectors. We take country-level data from a variety of sources, including Bosworth and Collins (2003), World Bank (2009), and various national accounts published by country statistical offices.

We compare the level of output per worker in 2005 by major sector for several countries in Table 3, using international purchasing power parity dollars to adjust for differences in price levels among the countries. The total-economy productivity levels broadly align with 14