Academic journal article International Journal of Business and Society

Openness, Financial Development and Economic Growth in Malaysia

Academic journal article International Journal of Business and Society

Openness, Financial Development and Economic Growth in Malaysia

Article excerpt

(ProQuest Information and Learning: ... denotes text missing in the original.)

I. INTRODUCTION

Malaysia is a small open economy. The openness of the Malaysian economy to international trade in terms of total trade to gross domestic product (GDP) has increased over time. The average of the ratio, i.e. total trade to GDP over the period 1970-1979 was 88.6 percent. The average of the ratio increased to 113.1 percent over the period 1980-1989 and 178.2 over the period 1990-1999. In 2000, the ratio was 230.8 percent. The openness of the Malaysian economy is expected to increase with liberalisation and globalisation of the world economy. Malaysia has achieved high economic growth rates since the 1970s, one of the success stories in Southeast Asia. The average economic growth rate per annum in Malaysia over the periods 1970-1979, 1980-1989 and 1990-1999 were 8.4 percent, 5.8 percent and 7.2 percent, respectively. The economic growth in Malaysia remained impressive after the Asian financial crisis, 1997-1998, which is a relatively short period. In 2000, the economic growth rate of Malaysia was 8.5 percent (Table 1).1

Monetary aggregates in Malaysia increased significantly over the period 1970-2000. The average of the ratio, i.e. M1 to GDP over the period 1970-1979 was 18.2 percent and increased to 19.3 percent over the period 1980-1989 and 25.5 percent over the period 1990-1999. In 2000, the ratio was 23.7 percent. The ratio of M2 to GDP also increased significantly. In the period of 1970-1979, the average of the ratio was 41.9 percent and increased to 64.7 percent over the period 1980-1989 and 88.5 percent over the period 1990-1999. In 2000, the ratio was 104.1 percent. In the same periods, M3 to GDP and domestic credit to private sector (DC) to GDP also increased significantly (see Table 1). A steady and stable growth in monetary aggregates is considered important for economic growth. Moreover, the growth of monetary aggregate over GDP is usually viewed as financial deepening, which entails growth of financial instruments. Generally, financial development includes financial deepening, financial broadening and financial liberalisation. Financial broadening means an increase in the number of financial institutions and financial instruments. Financial liberalisation means deregulation of interest rates,-free movement of foreign capital and removal of other restrictive practices (Ansari, 2002).

The relationship between openness to international trade and economic growth, and financial development and economic growth are focus of economists (Roubini and Sala-i-Martin, 1991). Generally, it is argued that openness to international trade and financial development has a positive impact on economic growth. The reason for the argument is partly based on the conclusions of many empirical studies, which claim that outward-oriented economies consistently have higher economic growth rates than inward-oriented economies. It is also partly due to the failures of import-substitution strategies, particularly in the 1980s and overstated expectations from trade liberalisation (Yanikkaya, 2003: 57). Lloyd and MacLaren (2000) argue that the fast-growing East Asian economies were partly a result of their early openness to international trade; less openness of economies to international trade will slow down their economic growth rates. Although there is a near consensus about the positive impact of trade flow on economic growth, the theoretical economic growth literature, which studies the economic growth impact of trade restrictions, reports that the impact is very complicated in the most general case and the results are mixed as to how trade policies play a role in economic growth. The fact that empirical studies describe openness to international trade very differently makes the classification of countries according to their level of openness to international trade a formidable task (Yanikkaya, 2003). King and Levine (1993), amongst others, show the positive link between financial development and economic growth, and financial development has predictive power for future economic growth. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.