Structural Transformation and Economic Resilience: The Case of Malaysia

ERIA-DP-2024-02 ERIADiscussionPaperSeries No.509 StructuralTransformationandEconomicResilience:TheCaseofMalaysia CasseyLEE* ISEAS–YusofIshakInstitute,Singapore May2024 Abstract:ExportshavebeenacriticalsourcefortheresilienceoftheMalaysianeconomyduringtheCOVID-19pandemicandpost-pandemicperiod.Long-termstructuralchangeinintersectoralproductionnetworkscouldhavereducedthisresilience.Strongerdomesticintersectorallinkagesanddecliningparticipationinbackwardglobalvaluechainparticipationarelikelytoreducetheimpactofpositiveexportshocksonthecountry’seconomy.Theservicessectorhasbecomeincreasingimportantovertime.Consumptionintheservicessectorisclearlyanimportantdriverofgrowth.Apositiveexportshockisenhancedbyhigherdomesticintersectorallinkagesintheservicessectorbutnotinmanufacturing. Keywords:structuralchange,exports,macroeconomicfluctuations JELClassification:F14,E32,L16 *Email:cassey_lee@iseas.edu.sg 1.Introduction TheMalaysianeconomyexperiencedasharpcontractionduringthenovelcoronavirusdisease(COVID-19)pandemic.Thecountry’srealgrossdomesticproduct(GDP)growthdeclinedby6.2%in2020.ThecontractionwasprimarilybroughtaboutbytheseverelockdownimposedbytheMalaysiangovernmentaswellascross-bordertravelrestrictions.Malaysiawentthroughseveralphasesofmobilityrestrictionsstartinginmid-March2020.ThecountryonlybegantoentertheendemicrecoveryphaseinearlyAugust2021.TheMalaysianeconomysubsequentlyexperiencedarobustrecoveryin2021,achievingan8.9%growthinrealGDP(Figure1). Exportsplayedapositiveroleintermsofshieldingtheeconomyfromexperiencingadeepercontractionin2020andinsupportingeconomicrecoveryin2021and2022.Inotherwords,thecountry’sexportsectorwasresilientduringthepandemicandrecoveryperiods.ItispossiblethattheresilienceofMalaysia’sexportsectorcouldbeunderstoodfromtheperspectiveoflong-termstructuralchangesintheeconomyandtheglobaldemandformanufacturedgoods.Therehasbeenalackofresearchonthistopic. ThegoalofthispaperistoanalysehowstructuralchangesintheMalaysianeconomyhaveaffectedtheresilienceofthecountry’seconomy.Todothis,thispaperwillexaminehowtheMalaysianeconomyhaschangedstructurallyfrom2000to2020intermsofsectoralGDP,tradestructure,andglobalvaluechain(GVC)participation.ItishopedthatthefindingsofthispaperwillshedsomelightonhowstructuralchangeshaveaffectedtheresilienceoftheMalaysianeconomyintermsofdomesticandexternalshocks. Theresearchliteraturethatinformsthisstudyisdrawnfromresearchonintersectoraldomesticlinkages,GVC,andmacroeconomicstability.Thisdiversebodyofliteratureisconvergingtowardsaresearchframeworkthatlinkseconomicfluctuationstofirmsizedistributionandproductionnetworks.Suchaframeworklinkslong-termstructuralchangeinproductionnetworkstomacroeconomicfluctuationsandstability. Theoutlineoftherestofthepaperisasfollows.Section2willdiscusstherelevantliteratureandtheirkeyfindings.Section3analysesthetrendsinstructuraltrendsinMalaysiafromvariousperspectives.Thestateofinter-industryproductionnetworkisexaminedinSection4.AneconometricanalysisiscarriedoutinSection5.Section6concludes. 1 15 10 5 0 -5 -10 (%) Figure1:Malaysia–RealGDPGrowth 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 GDP=grossdomesticproduct. Source:WorldBankData.https://data.worldbank.org(accessed10May2022). 2.LiteratureReview Theresearchliteraturerelevanttothisstudyisbasedonstructuralchangeandeconomyvolatility.Keycharacteristicsofstructuralchangeincludesectoralcompositionoftheeconomyandinter-sectorallinkages(asmeasuredthroughinput–outputtables). Carvalho(2008)providesananalysisofhowintersectoralproductionlinkagescanamplifymacroeconomicfluctuations.Inthestudy,productivityfluctuationsinhub-likeconnectedsectorspropagatethroughtheeconomy.Aneconomy’sresponsetoexogenousshocksdependsontheproductionnetworkstructureoftheeconomy. Acemogluetal.(2012)studiedhowthepropagationofidiosyncraticshocksandaggregatefluctuationsdependonthestructureofinteractionsbetweendifferentsectors.Inparticular,productivityshocksinagivensectorcanbecascadetotheentireeconomyifthesectorhashigher-orderinterconnectionswithothersectors. Moro(2015)provideevidencethatanincreaseinshareofservicesinGDPreducestotalfactorproductivitygrowthandvolatility.Thisisexplainedbythefactthattheservicessectorhaslessshareofintermediategoodsingrossoutput,whichleadstoithavingasmallermultiplier. ConstantinescuandBarauskaite(2018)usedtheinterconnectednetworkapproachtoexaminehowshockspropagateinopeneconomy.Theauthorsfindthatthesectorallinkagesresultinadecayinaggregateeconomicvolatilitybutataratelowerthantheoreticalprediction.Suchlinkagesappeartobeimportantinclosedaswellasopeneconomies. Klimek,Poledna,andThurner(2019)estimatedresilienceasanonequilibriumpropertyofnetworkedproductionsystems(sectorallinkages)usinginput–outputdata.Theauthorsshowthatsusceptibility-basedgrowthpredictionsthatconsidersector-andcountry-specificrecoveryperformbetterthanconventionaleconometric-basedpredictions. ADB(2022,Chapter4)usesinput–outputtablestoestimatetheimpactof