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Macroeconomic Tail Risks: Malaysia

In a recent post on the World Economic Forum website (See here), Daron Acemoglu summarizes findings from his recent work on what really causes economic downturns. His focus is on the US economy and starts by showing that the distribution of post war growth in America has generally not followed the normal distribution. I was curious what this would look like for Malaysia (where I am currently working) so I ran the Normal Q-Q Plot in R and this is what I found.

Data from the World Bank's WDI database

Malaysian real per capita income growth between 1960 and 2013 has largely followed a normal distribution but there are significant tail risks. The plot above shows that large negative downturns are more common than the standard normal distribution would suggest. The downturns correspond,  in descending order of severity, to 1998 (Asian Financial Crisis), 1985 (Commodity Shock), 2009 (Great Recession), 1986 (Commodity Shock continued), 2001 (Dot Com Bust), and 1975 (1st oil shock).

Acemoglu et al (2015) conclude that "the frequency and depth of such downturns [in the US & advanced countries] may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms. This is due to the fact that the propagation of shocks over input-output linkages can lead to the concentration of tail risks in the economy."

I will not venture to speculate too much as to the causes of the deep deviations from normality at the negative tail end observed in Malaysia. This may be covered in a more involved growth diagnosis for the country. Suffice it to say that the downturns largely emanate from the global economic environment and exacerbate domestic micro economic weaknesses. What is interesting about the above finding for Malaysia is that only large negative downturns appear to be common with no corresponding outliers on the positive side. Contrast that with the untruncated graph for post-war US in Acemoglu's post.

A bit more on the origins of Malaysia's downturns:

1974/5: US and global recession was triggered by a tripling of the price of oil following the Yom Kippur war, and by the oil embargo that followed.

1984/6: The high-interest rate policy in the US resulted in a collapse of world commodity trade: Malaysia’s export price index fell by 30% due to sharp declines in tin and palm oil prices.

1997/8: When the Thai baht came under speculative attack in mid May, the ringgit also experienced heavy selling pressure.

2001: The bursting of the dot com bubble led to low external demand for Malaysia’s electronics and other exports.

2008/9: Resulted in trade shock for Malaysia; sharp fall in share prices; and an exodus of short term capital flows. Manufacturing output contracted by about 15% in 2009.


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