From the latest round of IMF working papers (abstract):
Potential Growth in Emerging Asia
Rahul Anand ; Kevin C. Cheng ; Sidra Rehman ; Longmei Zhang
Summary: Using three distinct approaches—statistical filtering, production function, and multivariate model— this paper estimates potential growth for China, India, and five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) during 1993–2013. The main findings include: (i) both China and India have recently exhibited a slowdown in potential growth, largely reflecting a decline of total factor productivity (TFP) growth; (ii) by contrast, trend growth for the five ASEAN countries has been rather stable and might even have increased marginally, with the notable exception of Vietnam;(iii) over the longer term, demographic factors will be much more supportive in India and some ASEAN economies than in China, where working-age population should start shrinking, with the overall dependency ratio climbing by the end of this decade. Improving or sustaining potential growth calls for broad structural reforms.
As the abstract says, the general consensus around the various approaches used suggests that potential growth has slowed from declining TFP growth in China and India, while being mostly stable in ASEAN.
For Malaysia, potential growth has dropped slightly from the pre-2008 period, also largely due to declining TFP growth, though this decline is fairly slight – eyeballing the chart, it looks like somewhere between 0.5% to 1%. Right now, potential (non-inflationary) growth is in the region of 5.0% or a little below, which agrees with my own primitive and rudimentary estimate.
While the estimation of potential growth is methodologically sound – at least, I have nothing to criticise – the analysis is somewhat less so. Take the graphs on Pg. 12, from which the authors derive some conclusions about the evolution in potential growth. The first three charts show purported relationships between R&D expenditure, infrastructure development and economic complexity against TFP growth, but:
- China is such an obvious outlier in all three charts, it should have been taken out before estimating any relationship; and
- But after taking out China, the correlations become really weak, and you’re deriving conclusions from a sample of only 6.
The fourth chart doesn’t try to show a correlation, but leads to a real howler of a mistake in the text (Pg. 9, emphasis added):
Nevertheless, trend TFP growth remains typically low in these five economies, particularly compared to China, and also, to a lesser extent, India. This could reflect a host of factors, ranging from: low Research and Development (R&D) expenditure (particularly Indonesia, the Philippines, Vietnam, and Thailand), poor infrastructure (particularly Indonesia and Thailand), low levels of economic complexity (particularly Vietnam, Indonesia, and the Philippines), and difficulty in doing business and stringent regulations in product markets (particularly Malaysia and Thailand) (Figures 7–10).
In the World Bank’s Ease of Doing Business Indicator, a low number indicates a high ranking. Far from being hard to do business in, Malaysia and Thailand are the highest ranked countries in the sample, and the easiest to do business in. Both countries are in fact ranked among the top 10% of the countries in the world (12th and 18th easiest respectively).
So take the numbers with some confidence, but you might want to take the conclusions and policy advice with some healthy scepticism.
Rahul Anand & Kevin C. Cheng, Sidra Rehman, and Longmei Zhang, "Potential Growth in Emerging Asia", International Monetary Fund Working Paper No. 14/2, January 2014