An Analysis of Export Performance and Economic Growth of Malaysia Using Co-Integraton and Error Correction Models

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ABSTRACT

This paper aims to test the relationship between export and economic growth in the Malaysian economy from 1960 to 2005. Combining production function, and international trade and development theories, a five variable model is specified and estimated by using cointegration tests and error correction model. Multivariate cointegration results revealed that there exists a single cointegrating vector in the estimated system. This means that these variables are linked together in achieving their steady state equilibrium in the long run. From the estimation of the specified model, we reported that there is a positive relationship between export and economic growth in the long run and short run at 5 percent significance level in the Malaysian economy. Besides, our results suggest that capital has positive impacts on economic growth in the short-term and long-term but labor has an impact on economic growth only in the long run. For imports, it is proven that it has a negative relationship with economic growth.

JEL Classifications: E22, F10, F43

Keywords: Economic development, economic growth, international trade, Malaysia

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INTRODUCTION

Economic development is one of the main objectives of every society in the world and economic growth is fundamental to economic development. Neoclassical school economists suggest that exports make major contributions to economic growth. The argument concerning the role of exports as one of the main deterministic factors of economic growth is not new. It goes back to the classical economic theories by Adam Smith and David Ricardo, who argued that international trade plays an important role in economic growth, and that there are economic gains from specialization. It was also recognized that exports provide the economy with foreign exchange needed for imports that cannot be produced domestically.

In the last three decades, there has been a lot of writings and discussions in the economic growth literature triggered by the endogenous growth theory, which has led to emergence of models that stress on the importance of trade in achieving economic growth. The rationale lies in the belief of many economists, that trade is the engine of growth, in the sense that it can contribute to a more efficient allocation of resources within countries as well as transmit growth across countries and regions. Exports, and export policies in particular, are regarded as crucial growth stimulators. Exporting is an efficient means of introducing new technologies, both to the exporting firms in particular and to the rest of the economy, and exports are a channel for learning and technological advancement. Moreover, the growth of exports plays a major part in the growth process by stimulating demand and encouraging savings and capital accumulation, and, because exports increase the supply potential of the economy by raising the capacity to import.

The export promoting strategy has received renewed attention following the success of Japan in growing its economy in the 25 years after World War II and the success of East Asian economies (South Korea, Taiwan, Hong Kong and Singapore) in adopting export-led growth strategy during the 1970s and 1980s, and especially if compared to the overall failure of import substitution policies in most countries in Africa and Latin America. The success of the East Asian countries is explained by the rapid growth rates they achieved in the past three decades. By specializing in the production and export of consumer goods, these countries have, since the 1960s, achieved continuous high GDP growth rates that far exceeded those of the advanced industrialized countries and other less developed countries. The impressive performances in economic growth and expansion of total exports in East Asia provide an interesting basis for examining the relationship between export performance and economic growth in Malaysia. …