# **IV. A GLOBAL COMPARISON OF MALAYSIA’S PATTERNS OF GROWTH, PRODUCTIVITY, AND TRADE**

In this section we document the nature of Malaysia’s progression to achieve middleincome status over the past several decades. In particular, we focus our analysis on the sectoral patterns of growth in productivity and the growth and sophistication of Malaysia’s exports to the rest of the world. The first section presents a series of growth accounting calculations that separates Malaysia’s recent economic growth into the contributions from increased employment, capital, labor productivity, and a residual total factor productivity measure. We also compare these estimates to several other comparable countries to place the Malaysian experience in an international context. The second section reviews the performance of Malaysian exports in recent years, and presents our calculations on the sophistication of exports separately for goods and services. Again, we place Malaysia in an international context through a series of cross-country regressions on the interaction of trade and economic growth. An accurate exposition of what propelled Malaysia into a middle-income status will be indispensable for charting the future path to high-income status.

## **Growth Accounting Calculations**

We present a series of growth accounting calculations for Malaysia for the period 19902007. The growth accounting framework originates from the concept of an aggregate production function that relates output to the contributions of factor inputs (namely, capital and labor) and a shift component normally associated with an adjustment of the inputs for quality. Assuming competitive markets where the factors are paid their marginal products, we can derive a simple index number formulation that relates changes in output to changes in the factor inputs plus a residual term typically referred to as total factor productivity (TFP).<sup>13</sup> For the case of Malaysia, we use measures of output (value added) from the national accounts as published by the Department of Statistics (DOS), and employment estimates are obtained from the labor force surveys published by DOS. The labor input is adjusted for quality using a measure of the average educational attainment of the labor force (also taken from the annual labor force surveys), assuming a seven percent return per year of schooling.

We obtain a measure of the capital input from the DOS, although at the level of individual industries we must rely on estimates prepared by the Malaysian Productivity Corporation. While there is some concern about data quality because these industry-level estimates are based on limited data, we largely restrict our analysis to the level of major sector and broad industry-groupings. Finally, there is some difficulty obtaining reliable time-series estimates of total wage compensation by sector and industry. Because the growth accounts use factor income shares as weights in measuring factor contributions to output, we use the wage measure to capture the share of income attributed to labor. Currently, we have estimates of labor income only for the benchmark year of 2000, and thus we use constant factor income shares (also known as a Cobb-Douglas production function) for our analysis.

> 13 A more detailed explanation of the growth accounting framework, is provided in Bosworth and Collins (2003).

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