modern goods exports in Malaysia, which nearly rivals that of Singapore. Although the magnitude of trade is not as high as that of China or Korea, the high level of technological intensity appears as an impressive feature of Malaysia’s goods trade.

For an additional perspective on Malaysian goods trade, we develop a cross-country sample of the EXPY measure of sophistication of exports advanced by Hausmann, Hwang, and Rodrik (2007) explained above. Using publicly available data assembled by Nicita and Olarreaga (2007) we plot individual year scatter plots of the export sophistication index (in logs) with the log level of GDP per-capita for a sample of around 90 countries.<sup>15</sup> We display three such scatter plots in Figure 8, highlighting the relative position of Malaysia, for years 1980, 1990, and 2003 to illustrate the evolution of Malaysia’s export sophistication over time. The scatter plots show striking evidence of the positive correlation between growth and sophistication, a relationship which Hausmann, Hwang, and Rodrik argue runs from export sophistication to growth rather than the other way around. The series of charts also shows Malaysia’s rapid climb up the sophistication ladder: while significantly below the predicted level in 1980, Malaysia has advanced its manufacturing exports to attain one of the highest index values in the world. Of course, the position of Malaysia in 2003 well above the trend line would imply a higher level of development (it is notable that Singapore lies at a similar level of sophistication) than Malaysia currently enjoys. The final figure in the series plots all countries for all years (1976-2004) in our sample. This figure nicely summarizes the movement of Malaysia over time from a low level of sophistication to one of the world’s highest.

# **Service Trade Pattern**

Both modern and traditional service exports have been growing rapidly at the global level. In fact, since the 1980s, the global trade in services has grown faster than the global trade in merchandises goods, though services trade remains at a far smaller magnitude. Figure 9 compares the trend in share of service trade in service value added for developing and developed countries for the period 1985 to 2005. What stands out is that the ratio of service trade in service output for developing countries has increased much _faster_ than for developed countries. This suggests that developing countries are more focused on production of services that can be traded, rather than for domestic consumption. In addition, modern service exports are growing much _faster_ than traditional service exports. However, within developing countries, some regions have benefitted more than the others in modern services trade.

According to our distinction of modern and traditional identified above, modern services exports peaked in Malaysia in 1998 with a share of 59 percent, but have fallen dramatically in more recent years to levels around 20-25 percent. This rapid decline is largely a combination of reduced exports of ‘other business services’ combined with an expansion of traditional ‘travel’ exports. Both modern and traditional services recorded healthy growth of 10-12% annually during the early 1990s; however more recently the expansion of services trade has been more skewed. As shown in Figure 10, Malaysia has witnessed negative growth in modern service exports during the period 2000-2006, whereas most developing countries have seen growth in

> 15 The sample of countries varies from year to year. Please see Nicita and Olarreaga for a more complete description of the data.

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