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Economics

[2411] Malaysia’s long-run growth, 1955-2010

There is a famous graph depicting how real growth of the economy of the United States of America has been remarkably constant over time. It is remarkable in a sense that history deviates little from such constant growth rate. I was reminded of this after reading a post by Karl Smith at Modeled Behavior.

I had not seen the Malaysian version before and so, I decided to draw it myself.

It does not exactly replicate what the famed US graph replicates. Rather, this is the natural log of the Malaysian nominal GDP instead.

As you can see, the long-run growth rate is pretty much constant. The straight line that cuts through the series is the approximated long-run nominal growth rate (specifically, from 1955 to 2010. Why did I choose that particular period? The data at the IFS of the IMF goes only as far back as 1955. I could draw the real GDP but since real GDP growth will not deviate much from nominal GDP in terms of natural logarithm, I thought nominal values are good enough).

Smith suggests that government policy does not matter in the long-run. I do not share that view but certainly, the tendency for growth to revert to a certain long-run growth rate is remarkable. Perhaps, what is more interesting are the deviations from the long-run growth.

More relevantly, growth from 2008 to 2010 were lower than the long-run trend. That was caused by the global financial crisis.

It is worth noting that the economy might be still operating below its potential, if the black line is a potential output growth to start with. In other words, there is an output gap. Yes, this is despite the great PEMANDU says and whatever their plans are.

For those who claim the growth post-recession is all thanks to the Najib administration — let us pretend a little that their narrative is the right one right now — this is something they can chew on. Even with the base effect producing what seemed to be spectacular growth, the Malaysian economy is possibly still operating below potential.

With the possibility of a double dip coming, we could see a lot of excuses from Putrajaya soon. Claim the credit but cut the blame.

Another interesting point is that the economic condition in the 1960s might have been Malaysia’s worst within the 55 years period when compared to the long-run trend. It also reaffirms that the 1990s were among the best years.

What is mind boggling is that the Asian Financial Crisis does not register. I tend to believe that the crisis of the late 1990s was more severe than the recession of the late 2000s. I may need to check my premise.

By Hafiz Noor Shams

For more about me, please read this.

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