From Farms to Factories and Firms—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 both the static and dynamic efficiency gains from labor reallocation, this study documents that Malaysia has undergone structural transformation from an agriculture-driven to a services-driven economy. In contrast to common perceptions, however, the country's impressive growth in output per capita over the last 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 output per capita growth has been relatively low.