From Farms to Factories and Firms: Structural Transformation and Labor Productivity Growth in Malaysia

Amanina Abdur Rahman,Achim Schmillen

doi:10.1596/1813-9450-9463

Abstract

This study aims to provide a quantitative and integrated analysis of long-term structural transformation and labor productivity growth in Malaysia. Using data from the Department of Statistics Malaysia from 1987 to 2018 and decompositions that take account of the static and dynamic efficiency gains from labor reallocation, it documents that Malaysia has undergone structural transformation from an agriculture-driven to a services-driven economy. However, in contrast to common perceptions, the country's impressive growth in output per capita over the past three decades can largely be attributed not to its structural transformation but instead to sustained growth in within-sector labor productivity. At 3 percent, the contribution of between-sector reallocation of labor to growth in output per capita in Malaysia has been relatively low. Accordingly, together with efforts to spur the more productive reallocation of labor across sectors and positively affect the employment rate, the main policy challenge for Malaysia going forward will be to achieve sustainable labor productivity growth within various sectors.

Highlights

Since independence in 1957, Malaysia has undergone a profound development process that has radically improved nutrition, health care, and social service provision
Among the 88 countries for which comparable data on GDP per capita in both 1960 and 2019 are available in the World Bank’s World Development Indicators, Malaysia recorded the seventh highest growth rate in the intervening years. These relatively high levels of economic growth have propelled it to becoming the uppermiddle income country at the cusp of high-income status that it is today (World Bank forthcoming)
Since independence in 1957, Malaysia has been transformed from an agriculture-driven economy to one dominated by services

Summary

Introduction

Since independence in 1957, Malaysia has undergone a profound development process that has radically improved nutrition, health care, and social service provision. Among the 88 countries for which comparable data on GDP per capita in both 1960 and 2019 are available in the World Bank’s World Development Indicators, Malaysia recorded the seventh highest growth rate in the intervening years (in local currency units). These relatively high levels of economic growth have propelled it to becoming the uppermiddle income country at the cusp of high-income status that it is today (World Bank forthcoming). Its share of employment has declined to 10.6 percent in 2018, releasing labor first to the manufacturing sector and increasingly to the services sector. As Malaysia pursues further development toward becoming a high-income and developed nation but faces a slowdown in both structural change and productivity growth, questions have been raised whether the reallocation of production factors can be a driver of the country’s future economic growth.

Objectives

Methods

Findings

Conclusion