Country Economic Work for Malaysia - Islamic Development Bank

(2006-2010) but its annual average growth rate remained 4.2%. Compared to 11 high growth
performing Asian countries (China, India, Singapore, Korea Republic, Vietnam, Hong Kong,
Taiwan, Indonesia, Thailand, and Philippines), Malaysia was at the 3 rd position (after China and
Singapore) in terms of high growth during 1990s but over the last decade its momentum of
growth noticeably slowed and its ranking moved to 7 th position, while the growth rates of several
other countries in the region have improved during 2000s.
22. Keeping in view the deceleration in growth during 2000s, it is important to find out what
are the major causes and binding constraints to Malaysian’s sustainable growth, using an
appropriate growth diagnostic framework, which is described as follows.
i. Growth Diagnostic Framework
23. The widely used Growth Diagnostic Framework developed by Hausmann, Rodrik,
and Velasco (2005), which considers low level of private investment as the only binding
constraint, to economic growth, while ignoring the role of public investment and software of
growth in achieving sustainable economic development. In this study, Hausmann, Rodrik, and
Velasco framework is extended by including all the possible sources of economic growth (i.e.
public investment, private investment and software of growth). The IDB Group MCPS Team for
Malaysia has developed the problem tree, which provides a complete framework for diagnosing
critical constraints to sustainable economic growth in Malaysia (Figure 1.12).
24. The Growth Diagnostic Framework starts with private investment: First, it starts by
asking what keeps the level of private investment low. Is private investment low due to low return
on investment or high cost of financing? If it is low because of low social returns, is that due to
poor geography (natural disasters) or poor human capital or physical infrastructure? If the
problem is poor appropriately, is it due to government failures, market failures or both? If it is
government failure, is that due to micro risks (i.e. high cost of doing business), macro risks (i.e.
financial, monetary and fiscal instability) or restriction on foreign ownership for the foreign
investors? If the impediment on private investment is due to high cost of financing, is that due to
bad international finance (i.e. high interest rate and stringent conditionalities) or shortage of local
finance. If the problem is of bad local finance, is that due to low private saving or poor
intermediation of the banking system. 8
25. Starting from the second part of the problem tree with regard to low level of public
investment, it starts by asking what keeps the level of public investment low. Is public
investment low because of budgetary constraints, leakages, or limited implementation capacity?
If it is due to budgetary constraint, is it because of tight fiscal position, high borrowing cost or
other development priorities? Are the leakages due to corruption or poor governance? Is limited
implementation capacity due to weak institutions or poor human capital?
8 For further detail on the Growth Diagnostic Framework, see Iqbal Z. and A. Suleman (July 2010), “Indonesia: Critical
Constraints to Infrastructure Development”, and ADB-IDB-ILO (2010), Joint Country Diagnostic Study on “Indonesia:
Critical Development Constraint”.
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