The Divergent Paths of Malaysia and Senegal

Needed: Boosting the Contribution of Total Factor Productivity 2

The Divergent Paths of Malaysia and Senegal

In 1960, the productivity stories of Malaysia and Senegal were roughly similar. Despite their geographical distance—one in East Asia, the other in West Africa—the two countries were quite close in terms of labor productivity and its corresponding deep fundamentals: factor endowments and total factor productivity (TFP).

For instance, the 1960 output per worker in Malaysia and Senegal was US$7,261 and US$7,899, respectively (in 2011 dollars at current purchasing power parity [PPP] prices).1 That is, labor productivity in Malaysia was about 92 percent that of Senegal. The capital per worker and capital-output ratios in Malaysia were also close to those in Senegal.2 Physical capital per worker in Malaysia and Senegal in 1960 was US$22,874 and US$23,175, respectively (in 2011 dollars at current PPP prices), while their corresponding capital-output ratios were 3.15 and 2.94. In addition, Malaysia’s human capital index was 29 percent higher than Senegal’s in 1960.3 Finally, workers in the East Asian country were about 70 percent as productive as those in the West African country. Arguably, these two countries had similar initial conditions in terms of labor productivity and similar factor endowments (figure 2.1).

By 2017, labor productivity in Malaysia had already navigated a different path from that of Senegal. Output per worker in Malaysia was 6.6 times larger than in Senegal (US$49,630 and US$7,532, respectively, in 2011 dollars at current PPP prices). Although the capital-output ratios of Malaysia and Senegal have remained almost invariant over the past six decades, the amount of physical capital per worker in the East Asian country is now more than six times that of the West African country—specifically, 6.4 times as large in 2017. Human capital continues to be higher in Malaysia than in Senegal, although the gap has increased, from about 29 percent in 1960 to 92 percent in 2017. In addition, Malaysian workers became more productive than Senegalese workers—by 2017, 3.5 times as productive (figure 2.1).

In sum, the greater gap in labor productivity between Malaysia and Senegal over the past six decades could be attributed not only to greater differences in factor endowments but also to differences in TFP. In other words, Senegal lost ground to Malaysia not only because of lower investment (in physical