Reliable measures of x, the capital share in total income, are hard to come by. Bosworth and Collins (1996) after reviewing the existing literature find that a plausible range for capital share is 0.3 to 0.4. In their computations of TFP they use a fixed value of 0.35 for developing countries, including the East Asian countries. While this is valid only for a limited set of production functions, they report that existing studies find little evidence of major changes in factor shares over time. Sarel (1997) who analyzed TFP growth in East Asian countries found no major change in the value of ax for Malaysia which hovered around 0.32 over most of the 197896 period. We adopt here a one-third share of capital, as some others have done (for instance Klenow and Rodriguez-Claire 1997). However, we also estimated TFP using the end-range values of 0.3 and 0.4 and find that it did not have any significant impact on the analysis.

A series of capital stock was constructed using the perpetual inventory method, as is common in the literature. The initial capital stock was obtained from Nehru and Dhareshwar (1993)3. Investment data are taken from World Bank's World Development Indicators cd-rom. We were unable to obtain disaggregated data on capital stocks in order to conduct quality adjustments. The capital stock was computed with depreciation rates ranging from 0.05 to 0.12. The impact on TFP estimates was however not appreciable.

We obtained data on employment of the labor force over the 1970-97 period from official Malaysian publications and World Bank country reports. Labor force was adjusted for what has been found to be it's most important quality adjustment, namely, educational attainment<sup>4</sup> . A series on the educational attainment of the labor force was constructed<sup>5</sup> by employing the methodology described in Nehru, Swanson, and Dubey (NSD, 1995).

Figure 1 plots the trend of TFP _level,_ capital per worker, and output per worker during the period 1974 to 1997, employing an cc value of 1/3, d = 0.075, and quality unadjusted factor inputs. The level of output per worker has consistently increased during the last two and a half decades. Most of this came through the increases in the level of capital per worker, especially in the 1990s. The TFP level has been relatively flat and has contributed less to output relative to capital.

Malaysia faced two major economic crisis during the last two decades. During both crises, a downturn in the TFP growth is evident prior to the crisis. TFP growth fell in the early 1980s prior to the first crisis in 1984-85 (Figure 2). This was followed by a sharp recovery and impressive performance during the period 1987-90, as the Government liberalized the manufacturing sector, resulting in increased inflow of foreign direct investments, import of capital goods, and technical change. TFP growth slowed down in the latter part of the 1990s.

3 Available on the Economic Growth Research web site of the World Bank. http://www.worldbank.org/html/prdmg/grthweb/growth_t.htm 4 One could also include human capital as a separate factor of production in order to capture the impacts of education. Adjusting the labor input assumes that the benefits of education are embodied in workers.

'Constructed by Koji Miyamoto (June, 1999).

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