Academic journal article The Journal of Developing Areas

Concentration of Exports and Patterns of Trade: A Time-Series Evidence of Malaysia

Academic journal article The Journal of Developing Areas

Concentration of Exports and Patterns of Trade: A Time-Series Evidence of Malaysia

Article excerpt

ABSTRACT

This paper investigates the magnitude of geographic as well as commodity concentration for Malaysia from 1970 to 2003 and how the pattern of trade and instability has changed over time. The instability index is regressed upon a set of explanatory variables including commodity concentration, geographic concentration and share of primary commodity exports. The results indicate that the commodity concentration appears as a significant variable in explaining the export earnings instability. The paper recommends Malaysia takes several measures in order to remain immune from negative effects of instability. They include the continuous effort to stay competitive by maintaining productivity higher than production cost, to diversify as well as broaden its industrial base and constantly find new markets for new products. These measures, in the presence of right macro-economic policies supplemented by increasing foreign direct investment with intra-regional trade paved the way for market-friendly approach backed by a number of liberalization measures.

JEL Classifications: C32, E00

Keywords: Export concentration, Instability, Malaysia

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The Malaysian economy has shown to be one of the most dynamic economies in the Asia Pacific region. Since its independence in 1957, dramatic transformation and changes have taken place in the structure and profile of the Malaysian economy in the last five decades. Gradually over this period, it has displayed attributes of newly industrialized country and its economy has shown an impressive track record. In the 1970s, its annual growth rate reached 7.8% and continued to grow at a rate of 8.8% in the late 1980s except during the periods of deep recession in 1985 to 1986 where real GDP growth recorded a decline of 1.1% and 1.2%, respectively (Malaysia, 1986, p.39). The Malaysian economy managed to recover few years later and starting 1988 onwards it has sustained an annual growth of over 8%. In 1995 it has registered a growth of 8.5%. However, the financial crisis that hit Malaysia and other East Asian countries resulted in a negative growth of 7.5% in 1998. With various economic policy adjustments made in 1999 onwards, Malaysia was able to pull itself through the crisis and recorded a positive growth in seven consecutive years. After a strong take-off of 5.3% in 2003, the second half of 2006 recorded a higher than expected growth of 5.9% (Malaysia Economic Report, 2006, p.27). The economic outlook for 2008 is promising and the economy is predicted to register robust growth with real GDP is expected to expand between 6.0 percent and 6.5 percent (Malaysia Economic Report, 2007, p.11). It is envisaged that Malaysia will reach the status of industrialized economy by the year 2020.

For a small and open economy as that of Malaysia, trade dependency is unavoidable. Trade dependency implying dependency on both exports and imports as a proportion of national income can be measured by the geographic as well as commodity concentration of exports and imports. While the geographic concentration measures the concentration of trade on limited trade partners i.e. countries, the commodity concentration measures the dependence on a few tradable commodities. It is often argued that lack of diversification of exports and limited trade partners contribute to export earnings instability. The objective of this paper is to investigate the extent of geographic as well as commodity concentration for Malaysia from 1970 to 2003 and how the pattern of trade and instability has changed over time.

The paper is structured as follows. The next section undertakes an evaluation on cross-sectional and time-series studies on several countries related to concentration and diversification of exports and instability of export earnings. Section 3 describes the data and model used in this study. Section 4 presents the empirical results and the last section concludes. …

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