Academic journal article International Journal of Business and Society

On Engine of Growth in Malaysia: Export-Led, Financial-Led or Investment-Led?

Academic journal article International Journal of Business and Society

On Engine of Growth in Malaysia: Export-Led, Financial-Led or Investment-Led?

Article excerpt


The purpose of this study is to investigate the interrelations of three key macroeconomics variables on economic growth in Malaysia using the Johansen multivariate cointegration framework and Granger causality tests in the vector error-correction (VECM) model. Annual data used in the analysis covering the period from 1959-2005. Our results suggest that the three macro-variables: financial, export and investment contribute to the cointegrating vector. However, the results further suggest that financial variable is exogenous which implies that financial-led hypothesis dominates and enhances economic growth in Malaysia.

Keywords: Finance-led' Export-led; Investment-led; Economic growth.


Malaysia, as one of the countries in the Asian region, had experienced rapid economic growth and had accomplished expansion in trade and capital flows in the past two decades. Despite the high economic growth, the inflation rate has been extremely low in Malaysia. The combination of high growth and low inflation in Malaysia clearly suggests that this nation had benefited tremendously from a framework of sound macroeconomic policymix.

Since the 1980s, Malaysia has adopted a gradual and progressive approach to liberalisation of financial markets. During the past two decades, the interest rates have been liberalised to a more market-oriented interest rate determination process in order to increase competition and improve the cost efficiency of the financial sector. In addition to liberalising credit flows and removing interest rate controls, reforms have focused on strengthening prudential regulations. Subsequently, access to foreign capital has substantially increased.

Apart from financial liberalisation, the robust growth in Malaysia was supported mainly by the strong performance of the export-oriented manufacturing and services sectors. Over the past decade, the Malaysian economy has undergone significant structural transformation. During the 1980s, the manufacturing sector expanded more rapidly than the agricultural sector, and in 1987 overtook agriculture as the largest contributor to GDP. In the 1997 World Report, the World Bank reported that Malaysia accounted for a rising share of 1.5 percent of the total world's exports at the end of 1996 compared with 0.6 percent at the end of 1970 (World Bank, 1997). The relative openness of the Malaysia could be seen and understood as a vital determinant of the superior trade and general performance of Malaysia.

The other contributing factor for the steady economic growth was the reliance on government incentives in promoting capital formation/investment. Capital accumulation has been widely accepted as a prerequisite for economic growth (Lewis, 1955; Nurkse, 1962). Ceteris paribus, a higher rate of productive capital accumulation leads to higher economic growth. In general, there are three principle sources of investment funds: foreign aid, FDI and domestic savings. In developing countries like Malaysia, the need of capital accumulation is vital. Capital accumulation, though not by itself, can be regarded as the core process by which economic development is made possible. Savings and investment rates are high in Malaysia compared with countries at similar levels of development. The investment rate peaked at above 38 percent of GDP in 1983, then declined steadily to about 23 percent in 1987, but increased again to nearly 36 percent of GDP in 1991. The expansion in fixed capital formation resulted in an increase in the investment rate to 43 percent of GDP in 1996, the highest level ever achieved by Malaysia.

However, in the mid-1997, the economic turmoil that erupted in East Asia had not only reduced the value of Ringgit but also slowed down the Malaysian economic growth. The severity, scale and depth of the Asian financial turmoil were enormous and unanticipated. The detrimental effects of the turmoil put Malaysia in economic recession, as growth rate was negative following the turmoil. …

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