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

Abstract

comments. Uma Ramakrishnan and Chor Ching Goh provided inputs for an earlier version of this paper; Koji Miyamoto provided data on human capital stock. An earlier version of the paper was discussed in a workshop in Kuala Lumpur. The authors are responsible for any remaining errors. The views expressed in How did the East Asian miracle turn into one of the worst financial crisis of this century? This paper examines the above 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 large short-run external debt relative to foreign exchange reserves. These indicators of vulnerability are themselves endogenous outcomes of deeper institutional features. We argue that some long-term features of the development strategy, that helped sustain high growth in the first instance, also contributed to increasing vulnerability of the economy. High output growth was driven by rapid growth in capital stock. The banking sector played a critical role in transforming and accelerating large savings into capital accumulation. But the banking sector was perhaps not allocating capital efficiently. We find that the rapid growth in bank lending in Malaysia is negatively associated with total factor productivity growth. However, we should not overlook the other structural strengths of the economy, such as openness to foreign direct investments and technology, that helped improve productivity growth.