5 - Productivity Led Growth

Summary

“Productivity isn't everything, but in the long run it is almost everything.”

—Paul Krugman

Introduction

Sustained economic growth is commonly associated with higher living standards. It is for this reason that the preoccupation with economic growth is an ancient one which continues until today. Within the economics literature proper, theories of economic growth dates back to as far as Adam Smith's Wealth of Nations, published in 1776. More than two centuries later, growth theories continue to interest scholars and policy-makers albeit such theories have undergone significant changes, due partly to economic structure and development. The classical theories of Smith, Malthus and Ricardo, forged during the nascent stage of industrial revolution, were premised upon specialization, rapid population growth and diminishing returns. The post-World War II saw the formulation of growth theories by Harrod, Domar, Swan and Solow, which were primarily driven by capital accumulation within the Keynesian mode. The most recent vintages by Lucas and Romer in the 1980s broaden the scope of such theories to include human capital and technological innovation, factors that would imply increasing returns and the promise of sustained growth.

Today, the cumulative theoretical and empirical literature is vast and substantial. Its influence on academics, officials from aid agencies and policy-makers has been substantial. Malaysia is no exception in this regard. For example, in the Sixth Malaysia Plan (1986–90), there is explicit mention of achieving higher growth through improvements in total factor productivity (p. 19). Malaysia's growth record since the country's independence in 1957 is quite enviable. However, the country's growth rate in recent years, especially since the Asian Financial Crisis, has been relatively sluggish. This has led to concerns on whether Malaysia is currently facing the problem of the middle-income trap.

The objective of this chapter is to critically examine Malaysia's economic growth for the past two decades as well as discuss some of the policy options that might be useful for sustainable growth in the future. Section 2 of the chapter provides a brief summary of Malaysia's economic growth and economic structure during the period 1990–2010. Section 3 analyses the sources of growth of the Malaysian economy. Section 4 discusses some of the challenges and policy options for sustainable growth in the future. Section 5 concludes.