Openness and Efficiency of Malaysia, India and China Relative to the World Economy: A Comparative Study

This paper adopts a dynamic approach to investigate the impact of openness on efficiency improvement of the world economy and compares the linkages between openness and performance in Malaysia, India and China. Based on a panel of data covering 126 countries over the period 1970-98, a world production frontier was established using stochastic frontier techniques. The economic efficiency of an economy relative to the world production frontier was identified and its determinants examined. The results indicate that openness, as measured by international trade, foreign direct investment (FDI) and its interaction with human capital plays a positive role in improving efficiency, although the impact of trade is not as robust as that of FDI. Given its highest degree of openness, Malaysia enjoyed the highest relative economic performance among the three economies. Contrary to the conventional perception, India performed better than China in raising efficiency until the mid-1990s. However, China has experienced a higher degree of openness and therefore a faster rate of catching-up with the world s best efficiency practices than India