19 The lack of visible improvements in allocative efficiencies could be potentially due to the disruptions to economic growth during the global financial crisis (GFC).<sup>18</sup> However, further investigation is needed to identify the distortions and channels through which they have operated. The other limitation is related to measurement issues.<sup>19</sup> These arise from the inaccurate measurement of the market value of physically capital stock, as well as the estimated growth rate of investments. The five-year gap between each census period could result in the underestimation of investments. Failure to account for the change in prices that reflect differences in product quality could also contribute to the mismeasurement of TFP gains.

Following Hsieh and Klenow (2009), we measure how much TFP in the manufacturing sector could increase had capital and labor been reallocated to equalize marginal products across firms within each 3-digit industry to the level experienced by the United States, in 1997.<sup>20</sup> The United States is used as the benchmark economy. More importantly, should measurement errors exist, benchmarking the results would help mitigate some of the bias arising from such errors. In other words, if results in the United States and Malaysia are exposed to the same degree of bias, the benchmarking approach will cancel out the errors. The results show that had Malaysia’s resource misallocation problem matched the relatively smaller level of the United States in 1997, Malaysia’s manufacturing TFP could hypothetically have increased by 36% in 2010.

While the size of the TFP gain gives a sense of the magnitude of distortions in the economy, observing the trends of these gains across time is equally important. The trends suggest that the productivity gaps appear to have worsened over the 10-year period, implying that Malaysia faces difficulties in “catching-up” with the more advanced countries.

**Table 2:** TFP Dispersions and Gains in 2000, 2005, and 2010

|**Year**|**No. of**<br>**obs.**||**TFPQ**|||**TFPR**||**We**|**dge**|P.H<br>Gain 1|P.H.<br>Gain 2|
|---|---|---|---|---|---|---|---|---|---|---|---|
|||SD|75–25|90–10|SD|75–25|90–10|Capital<br>SD|Output<br>SD|||
|**2000**|7,698|1.0537|1.5096|2.7399|0.7564|0.9414|1.8666|1.6637|0.5713|61.22|12.82|
|**2005**|9,511|1.0738|1.4774|2.7769|0.7813|0.9685|1.9440|1.6427|0.5681|80.81|26.53|
|**2010**|7,412|1.1385|1.5394|2.9679|0.7843|1.0017|1.9591|1.6220|0.6002|93.95|35.72|

Source: Authors’ calculations. Note: Potential Hypothetical (P.H.) Gain 1 is measured as TFP gains derived from a complete elimination of distortions in the economy. Potential Hypothetical (P.H.) Gain 2 is measured as TFP gains derived from a removal of distortions to that of the level of the United States in 1997. TFPQ, TFPR, Wedge, and Gains 1 and 2 are estimated based on census data for firms that exceed the threshold of 10employees. No. of obs. = number of observations; P. H. = potential hypothetical; TFPQ = physical productivity; TFPR = revenue productivity; SD = standard deviation.

> 18 Benkovskis (2015) observes growing misallocation of resources before and during the global financial crisis (2007–08) and improvement in the allocation of resources afterward. The improvement in allocation of resources made a positive contribution to economic growth in 2011–13.

> 19 The issue arising from mismeasurement and suggestions to address the problem are discussed in Bils, Klenow, and Ruane (2017).

> 20 We follow Hsieh and Klenow (2009) in choosing the United States as the benchmark economy because it is assumed to be an economy that had the least distortions and the year 1997 was when the United States registered the largest productivity gains.