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

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. Policy Research Working Paper 9463This study aims to provide a quantitative and integrated analysis of long-term structural transformation and labor productivity growth in Malaysia.Using data from the Department of Statistics Malaysia from 1987 to 2018 and decompositions that take account of the static and dynamic efficiency gains from labor reallocation, it documents that Malaysia has undergone structural transformation from an agriculture-driven to a services-driven economy.However, in contrast to common perceptions, the country's impressive growth in output per capita over the past three decades can largely be attributed not to its structural transformation but instead to sustained growth in within-sector labor productivity.At 3 percent, the contribution of between-sector reallocation of labor to growth in output per capita in Malaysia has been relatively low.Accordingly, together with efforts to spur the more productive reallocation of labor across sectors and positively affect the employment rate, the main policy challenge for Malaysia going forward will be to achieve sustainable labor productivity growth within various sectors.This paper is a product of the Social Protection and Jobs Global Practice.It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.