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Productivity growth, capital accumulation, and the banking sector - some lessons from Malaysia

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  • Ghani, Ejaz
  • Suri, Vivek

Abstract

How did the East Asian miracle turn into one of the worst financial crisis of the century? The authors address the question using Malaysia as a case study. Many discussions of the East Asian crisis address proximate and short-run causes of the crisis, such as the current account deficit, exchange rate misalignment, and disproportionate short-run external debt relative to foreign exchange reserves. These indicators of vulnerability are themselves endogenous outcomes of deeper institutional features. The authors argue that some long-term features of the development strategy that helped sustain high growth in the first place also contributed to the economy's increasing vulnerability. High output growth was driven by rapid growth in capital stock, for example. The banking sector played a critical role in transforming (and accelerating the transformation of) large savings into capital accumulation. But the banking sector may not have been allocating capital efficiency. The authors find that the rapid growth in bank lending in Malaysia is negatively associated with total factor productivity growth. On the other hand, the economy's other structural strengths, such as openness to foreign direct investment and technology, helped improve productivity growth. Malaysia's exceptional growth record over the past quarter century was driven largely by the growth in physical capital stock. Total factor productivity growth may have slowed in the late 1990s, and sustaining high output growth will require greater emphasis on productivity improvements. Policies that encouraged the flow of foreign direct investment and better access to imported capital goods contributed to productivity growth. But rapid growth in bank lending relative to GDP may have slowed it. How policymakers can best slow the growth of credit is a question that remains unanswered.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2252.

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Date of creation: 31 Dec 1999
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Handle: RePEc:wbk:wbrwps:2252

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Related research

Keywords: Banks&Banking Reform; Capital Markets and Capital Flows; Environmental Economics&Policies; Economic Theory&Research; Labor Policies; Economic Growth; Economic Theory&Research; Banks&Banking Reform; Achieving Shared Growth; Environmental Economics&Policies;

References

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  1. Robert J. Barro, 1998. "Notes on Growth Accounting," NBER Working Papers 6654, National Bureau of Economic Research, Inc.
  2. Nehru, Vikram & Swanson, Eric & Dubey, Ashutosh, 1995. "A new database on human capital stock in developing and industrial countries: Sources, methodology, and results," Journal of Development Economics, Elsevier, vol. 46(2), pages 379-401, April.
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Cited by:
  1. Okuda, Hidenobu & Hashimoto, Hidetoshi & Murakami, Michiko, 2003. "The Estimation of Stochastic Cost Functions of Malaysian Commercial Banks and Its Policy Implications to Bank Restructuring," CEI Working Paper Series 2003-2, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  2. Marialuz Moreno Badia & Veerle Slootmaekers, 2008. "The Missing Link Between Financial Constraints and Productivity," LICOS Discussion Papers 20808, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Robalino, David A. & Voetberg, Albertus & Picazo, Oscar, 2002. "The macroeconomic impacts of AIDS in Kenya estimating optimal reduction targets for the HIV/AIDS incidence rate," Journal of Policy Modeling, Elsevier, vol. 24(2), pages 195-218, May.
  4. Okuda, Hidenobu & Hashimoto, Hidetoshi & Murakami, Michiko, 2002. "Production Technology of Malaysian Commercial Banks: The Estimation of Stochastic Cost Functions Adjusted to The Non-Performing Loans," Discussion Papers 2002-04, Graduate School of Economics, Hitotsubashi University.
  5. Jomo K.S., 2005. "Malaysia┬┤S September 1998 Controls: Background, Context, Impacts, Comparisons, Implications, Lessons," G-24 Discussion Papers 36, United Nations Conference on Trade and Development.
  6. M. A. Baqui Khalily & Abdul Khaleque, 2013. "Access to Credit and Productivity of Enterprises in Bangladesh: Is there Causality?," Working Papers 20, Institute of Microfinance (InM).
  7. Gatti, Roberta & Love, Inessa, 2006. "Does access to credit improve productivity ? Evidence from Bulgarian firms," Policy Research Working Paper Series 3921, The World Bank.
  8. Mahadevan, R., 2001. "Assessing the output and productivity growth of Malaysia's manufacturing sector," Journal of Asian Economics, Elsevier, vol. 12(4), pages 587-597.

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