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

  • Ghani, Ejaz
  • Suri, Vivek

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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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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  1. 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.
  2. Robert J. Barro, 1998. "Notes on Growth Accounting," NBER Working Papers 6654, National Bureau of Economic Research, Inc.
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