Macroeconomic Crisis and Productivity Changes in Banking Sector: Evidence from an Emerging Economy

This study estimated the Malmquist Total Factor Productivity Index and its components. It attempted to examine patterns of change in these indices in periods leading up to and immediately following, the macroeconomic crisis in Pakistan in the year 2008. Bootstrapping procedure proposed by Simar and Wilsonwas employed to construct confidence intervals for efficiency estimates. For many banks, total factor productivity and its components were found significantly different from unity, implying change in TFP or its respective component. The results also showed that TFP and most of its components exhibited negative growth in the year before the crisis. In the year immediately following the crisis, however, low base effect caused the average TFP as well as its components to register positive growth, the only exception being scale efficiency change. The scale efficiency actually declined in the post-crisis year, indicating scaling down of banking operations because of the crisis that had adversely affected banks’ balance sheets.