IS RESOURCE MISALLOCATION LEADING TO PRODUCTIVITY GAPS IN MALAYSIA’S MANUFACTURING SECTOR?

The reallocation of resources from low- to high-productivity firms can generate large aggregate productivity gains. The paper uses data from the Malaysian manufacturing censuses of 2005 and 2010 to measure the country’s hypothetical productivity gains if all misallocation within industries are removed. Comparing the results across the two census waves, we conclude that efficiency gaps (that is, the degree of misallocation) in Malaysia have narrowed by one-fifth. The efficiency gaps, however, appear to be over 40%, indicating a substantial room for improvement. This is important, particularly if total factor productivity growth is expected to support future economic growth. The analysis in this paper accounts only for resource misallocation within sectors. There may be other, possibly large, resource misallocation across sectors. Closing those gaps could boost total factor productivity and gross domestic product growth even further.