Resource Misallocation and Productivity Gaps in Malaysia

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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

“…In addition, World Bank (2020) contends that beyond implementing strategies that are largely about the quality of factors of production such as capital, land and labor, raising productivity growth will necessitate a fresh look at the way these factors are put together and organized, and thus at management practices. In addition, Chuah et al (2018) find that in the period between 2000 and 2010, allocative efficiency within relatively narrowly defined sectors in Malaysia worsened. Conversely, reallocating resources to more productive firms within sectors can potentially lead to a significant increase in economic growth but will require a conducive policy environment -for instance with regard to competition and financial market policies -that ensures that product markets remain contestable with low barriers to entry.…”

“…Nevertheless, there are promising policy areas to at least moderate the decline in economic growth. These include overcoming skills gaps, maintaining the high quality of infrastructure, building innovation capacity, addressing distortions in output markets, improving management quality, and fostering the reallocation of production factors within sectors (World Bank 2016;Chuah et al 2018;World Bank 2020). Though gains from sources of growth other than within-sector productivity are likely to be more limited, productivity-enhancing policies should nevertheless be combined with efforts to spur the more productive reallocation of labor across sectors.…”

Productivity and Resource Misallocation: Evidence From Firms in Middle East and North Africa (MENA) Region Countries

“…We should notice that in this framework we consider firms in the same defined sector expressed by the 4-digit International Standard Industrial Classification (ISIC). Following Hsieh and Klenow (2009) and other studies (León-Ledesma, 2016;Cirera et al, 2017;Chuah et al, 2018) the firm maximizes the profit as:…”

“…Earlier studies that examined the implications of the misallocation on productivity can be split in two categories; those studies that adopt the direct approach and others that follow the indirect approach (Chuah et al, 2018). Studies following the direct approach obtain a direct measure of factors or explore specific regulations that cause input misallocation.…”

“…First, the wedges do not always necessary reflect distortion, but may be a result of production function misspecification. Second, given that wedges are estimated using actual data, may also reflect measurement errors in the data (Chuah et al, 2018).…”