This article proposes an extended three-stage DEA methodology similar to Fried et al. to improve the measurement of productivity growth when the assumption of free disposability of undesirable output does not apply. A directional distance function is used to construct adjusted Malmquist–Luenberger productivity indexes which simultaneously account for the impacts of undesirable outputs, environmental variables, and statistical noise. Panel data for 263 farmers' credit unions (FCUs) in Taiwan covering the 1998–2000 periods are employed to illustrate the advantages of this method. On average, the productivity of Taiwan's FCUs is found to have deteriorated over the 1998–2000 period. Although an improvement in efficiency has been observed, the major reason for the deterioration is found to be due to the regression of technology.
