Though gains from drivers of growth other than within-sector labor productivity growth may be more limited, productivity-enhancing policies should nevertheless be combined with policies to positively affect the employment rate and to facilitate the productive reallocation of labor across sectors. Regarding the employment rate, renewed efforts are needed to further increase labor force participation especially among women, and to better use the productive potential of older persons in the face of a rapidly accelerating aging process.

Finally, significant productivity gaps between sectors show that there is still potential for growth-enhancing structural change and the reallocation of labor toward the most productive sectors, such as the business services and transport services sectors. In fact, McMillan et al. (2017) suggest that rapid and sustained economic growth requires a high level of investment in fundamentals that contribute to both within-sector productivity growth and structural change. In this context, human and physical capital will play a particularly important role. Martins (2019) finds that the pace of structural change is significantly shaped by human and physical capital, suggesting that investments in education and physical infrastructure can accelerate structural change and economic growth. While Malaysia has made great strides in improving physical infrastructure and providing near-universal access to primary and secondary school, there are concerns regarding learning outcomes. Better-quality basic education could help Malaysia catch up with high-income countries and standout regional peers, and a more dynamic and demand-driven higher education and workforce development system could help the country adjust to the changing nature of work (see World Bank 2018a and World Bank 2018b).

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