Trade is vital for every single state in the world. For many countries the subject of exports is the main and most relevant factors for a well establish working industry. In fact, many countries identify their economic progress through their exports performance. Export growth is important because of its effect on internal trade and economic stability.
Obviously, the relationship between export and economic growth always had been a subject of controversy between economists. This situation endures today. Although a number of multi-country case studies employing comparable analytical frameworks, countless econometric studies using cross-country data sets, and vital hypothetical advances considering how exports and commercial development interact, there is yet substantial argument considering the relationship amid these economic variables.
Exports did not only affect the Gross Domestic Product (GDP) rate directly but perhaps affect the other variables and indicators as well. This is how they are related to each other. For instance, when net exports are increase, then it will also lead to a positive balance of payment as the value of exports are greater than value of import. A positive balance of payment is important for the country as it will attract many investors who feel confident about the potential of market of this country. Thus, it will also increase the value of investment in this country as the value of foreign direct investment (FDI) boost.
Malaysia is a country that depends most on international trade to develop its economic. The openness economic that practiced by this country has transformed our economic to a high new level beginning from 1990's.An open economic system meaning that a country performance is depend or influenced by the environment or effect of the global economic .Since our country reach its independence's on 1957, Malaysia had experience some economic crisis due to the uncertainty of international economic performance.
Over the past years, many growing state including Malaysia concentrated on transactions liberalization policy. Liberalization always made as a main constituent in growing export-oriented industry. The transactions liberalization strategy is always considered as the best resolution to enhance the development of exports in addition to the development of economic growth in the country. In Malaysia, the commitment towards trade liberalization policy begin at the mid of 1980's.
1.1 Economic background
Since Malaysia grasp its independences in august 1957, the economic progress is generally driven by a commodity established industry alongside elevated autonomy towards rubber and tin industry. Economy is vitally driven by private sector. As for the record, private investment accomplish average annual development of 7.3 percent. The economy stays too reliant on external company to account concerning 70 percent of finished exports earning, 28 percent of government revenue and 36 percent of employment produce income from external currency transactions to finance its development.
The new government since independent later finds new methods to vanquish the commercial construction alongside emphasis on increasing and updating agrarian sector and rural progress emphasized. Import substitution is the strategy utilized to empower manufacturing progress that focuses on resources based industry such as rubber and tin.
Resulting from the progress attained in farming and manufacturing sectors, including utilities, services and other sectors, Malaysia possesses appeared at the end of the 1960s with the economic base of the deeper, wider and stronger. Contribution of exports of goods and services in GDP weakened from 52.6 percent in 1960 to 45.1 percent in 1970, while the contribution of rubber and tin in overall manufacturing exports also shrink from 70 percent to 53 percent in the decade.
Thus, in 1970, the early period of Malaysia's economic transformation, the diversity of farming, possesses an encounter on the timber and palm oil that appeared as the most vital export commodity. With the discovery of oil fields in offshore Sarawak, crude petroleum production was more important. Overall growth of 6 percent per annum is not merely higher than the target but even faster than the target of 5 percent by the United States Progress Decade for growing countries.
However, despite of impressive performance of economic during the period, poverty remains as a problem that needs to be deal wisely. To eliminate lower income, these kinds of plans tend to be applied, such as the provision of products and amenities throughout farming areas, taking in the indigent in to the modern agriculture and other sectors through the provision regarding productive occupations and the provision associated with social services. Via these kinds of plans, poor people have the ability to improve their productivity as well as earnings by means of total using productive resources and also expertise to enjoy a much better standard of living.
The country's progress started slowdown during the early 1980's because of particularly from the extended economic downturn of the world economic system following a second gas jolt in 1979. The actual failure in the expense of major goods irritated the situation which generated serious resource constraints and also steered the particular economic system in a twin debts position according to the finances as well as balance of payments.
The eighties also witnessed a major structural transformation of the economy. The manufacturing sector took over as fastest growing sector with a growth rate regarding 10.4 percent per annum but for the very first-time later it surpassed the farming market to account for 22.6 per cent of GDP. Besides, the inflows of foreign capital were more vast than ever encountered ever.
In the main and mid-nineties Malaysia experienced countless years of quick commercial growth. Gross Domestic Product (GDP) produced at 8.5 each cent amid 1991 and 1997 alongside per capita income rising twofold and the incidence of property plummeting from 16.5 to 6.1 each cent. The favorable macroeconomic environment that influence huge capital flows led to economic development and the enhanced the economic prospects of the nation.
Starting the new century in 2000, Malaysia economic performance start to rebound strongly beginning 2002. The outbreak of the Severe Acute Respiratory Syndrome (SARS) and the fight in Iraq during that period did not adversely alter the development of the Malaysian economy as the government seized competent preemptive action.
For the time being, Malaysia main exports now are electrical and electronic devices, petroleum and liquefied natural gas, followed with palm oil, rubber and chemical based product. On the other hand, our country largest import commodities are also electronic devices, machinery and chemical product. Today, Malaysia shares healthy trade relations with a number of countries, specifically the US. The country is associated with trade organizations, such as APEC, ASEAN and WTO. The ASEAN Free Trade Area that was established for trade promotion among ASEAN members also has Malaysia as its founding member. Malaysia has also signed Free Trade Agreements with countries including Japan, Pakistan, China and New Zealand.
Figure 1: Gross Domestic Product (GDP) in Malaysia from 1980 till 2010
Source: Department of Statistic Malaysia.
Malaysia economic performance since 1980 is very impressive compare with other nation in this region. The Gross Domestic Product (GDP) keep increasing years by years which represent the significant of our total national income. However, the rate or percentage of increases is not consistent if observed by years since 1980.This is due to some kind of reasons which results from the effect of international economic progress. From 1980 to 1984,the value of GDP is increasing until the years of 1985 where Malaysia experience GDP deficit for two years until 1986.Starting from the years of 1987 till 2008,Malaysia experiences tremendous increases in the value of GDP with the highest value is recorded at RM 742470 million in the year 2008.International economic crisis had affect the income of Malaysia with poor GDP value in the years of 2009 with only RM679938.Despite of the world crisis, Malaysia still able to get fast economic recovery compare with other nation by the years of 2010.
Figure 2: Malaysia Trade Performance from 1980 till 2010
Source: Department of Statistic Malaysia.
Over the past few years, Malaysia trade performance had developed impressively to help boost the economic growth of this country. The value of export is increasing about 3 times in the year of 2010 compared to the year of 1980. However, the value is not consistent along the 30 years period of time. On top of that, the value of import also not very consistent with highest value is recorded in the year of 2010 with RM528828.20 million. Overall, Malaysia total trade is improving even though the percentage of increases is not consistent or in other words the value fluctuates in time.
1.2 Problem statement
Export led growth theory is said to be the most effective economic strategy to improve the economic performance of a country especially, the developing country. However, many economists still argue about this matter whether export does really give big impact on economic growth or it is cause by other indicator.
Ekanayake (1999) noted that different methodologies may be one of the reasons of inconsistent outcomes of previous studies on the ELG hypothesis. Exchange rate should be considered as variables in estimating the ELG hypothesis. Previous study on export led growth theory by (Amrinto, 2006) in Philippines clearly state that it is important to include the effect of exchange rate in analyzing the export led growth hypothesis.
Therefore, this study attempt to include all the factors that are not taken into account by previous researcher which might affected their result to be biased or not very reliable as some indicator are not used to analyze the hypothesis.
1.3 Objective of the study
The general objective of this study is to examine the relationship between export and economic growth by considering the effect of exchange rate and gross fixed capital formation. The specific objective are
To investigate the impact of exports on economic growth in Malaysia.
To examine the causality pattern between exports and economic growth.
1.4 Significance of the study
Previously, many researchers often forget to include the important of exchange rate and gross fixed capital formation as the variables or factors that might affect the result of finding. Those, it will become a miserable thing if the government of Malaysia are using that particular analysis to plan for the future economic policy.
So, if the result or finding of this study is proved whether export led growth theory is correlated or not, then it would help the government to make a right decisions to be apply in future without any doubt. Later on, a right design policy from government will result in tremendous and huge improvement in our national income or economic growth.
In general, perhaps this study will contributes for the past study and become a reference in future for those who eager to find out the truth about the export led growth theory in the case of Malaysia.
1.5 Organization of the study
This research will be organized as follows. Chapter one is mainly about the introduction of the study. This will include the background of economic, problem statement and objective of the study. The second chapter will discuss on literature review about the previous research and study that related towards export led growth theory in many kind of country. Different method will be further elaborated in explaining the empirical result. Chapter three will provide the methodology used in testing the relationship between export and economic growth. Besides, chapter four will present the empirical findings and analysis of the study. Last but not least, chapter five will provides the conclusion remark.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
The hypothesis of export led growth is very popular and the findings for some country are very important in order to plan a brilliant and effective trade plan in the future. These results possess main implications and are vital to reassess the effectiveness of transactions strategy as a strategy for commercial development because the result might differ in each nation due to several factors.
There are many studies have been conducted by previous known researcher to examine the relationship between export and economic growth worldwide using different method of estimation and model. So, for this chapter, I have tried to review relevant studies and later on finds that there are several ways on how export affect growth and the factors that might affect the finding or result of previous study.
I have divided the previous research in export led growth hypothesis into three different types that is research in
Low income country like Canada
Middle income country like Philippines
High income country like Sri Lanka
2.1 Low income country
Most researcher focused on the their research on export led growth theory in middle income country and high income country and not really interested to do research in low income country probably because lack of official data to make their finding reliable. However, there are also some of them who did research in low income country in the past.
Kenya is categorized as a low income country in Africa. Mohan and Nandwa* (2007) who did research in Kenya finds that there is a long run relationship between Gross Domestic Product (GDP) growth and exports growth and it is unidirectional, running from exports to GDP growth. Both of them suggest that export oriented policies is much recommended for the case of Kenya in promoting their economic growth.
Besides, Nepal also considered as a low income country. A study by Shirazi and Abdul Manap (2005) come up with a conclusion that the relationship between exports and economic growth is valid for the case of Nepal. They suggest that Nepal should pay full attention to boost up their exports so that their economy will be more prosper and develop in the future.
On top of that, there is also research done in a low income country in the region of Asia. Bangladesh is regarded as one of a low income country that still struggle to enhance their economy. Previous study by Al Mamun and K Nath (2005) finds that there is a positive long-run equilibrium relationship between exports and industrial production. However, they didn't find any evidence of short-run causal relationship between these two variables.
2.2 Middle income country.
There are many research been carried out about export led growth theory in middle income country worldwide.
One of the countries is Philippines. According to Amrinto(2006), there is empirical evidence to prop the argument that real exports incline to exert a unidirectional encounter on real output or export-led growth in the Philippines in the short run. Though, this fact is upheld merely by a parametric procedure that utilizes annual data, and not by the semi parametric procedure. The last endowed empirical facts to support bidirectional causality amid exports and commercial growth. Interestingly, both procedures reported development hypothesis, consequently, is sensitive to parametric and semiparametric ideal estimation.
The second one is Chile which is categorized as an upper middle income country. For the case of Chile, the previous research by Siliverstovs* and Herzer* (2005) finds that the estimation results support the export-led growth hypothesis for Chile and at the same period point out to the differentiated encounter of manufactured and main exports on the economic growth. In additional, they also provide that empirical evidence of the export-led growth hypothesis for Chile is rather robust to application of different methodological approaches as well as inclusion of different variables into the estimated model.
Researcher also has provided evidence of export led growth theory in case of Mexico which is an upper middle income country. Based on the research done by Waithe, Lorde and Francis (2011), they have come out with evidence offers support for the hypothesis in the short run. However, contrary to the hypothesis, long-run results suggest that the relationship between export and economic growth is inversely related. They state that probable explanation is the elevated import content and diminishing innate content of exports, and frail linkages alongside internal suppliers, therefore cutting probable spillover or multiplier benefits.
The next country which categorized as upper middle income country is Macedonia. Petreski (2007) in his research have come up with conclusion that export led growth theory are valid in case of Republic of Macedonia. By using cointegration and VEC analysis, he concludes that there is a strong relationship between export and economic growth both in short run or long run.
Besides that, I have also included the previous research in Egypt as a relevant review for this research. Egypt is a lower middle income country. According to Khashaba, Mahboub, Latham III and AboElsoud (2010),the result from their research strongly agree with the hypothesis of exports led growth.The research provide that exports expansion lead to economic growth by enhancing efficiency in allocation of productive resource and spillover effect.
2.3 High income country
For sure, there is also researcher who focused on testing export led growth theory in high income country such as Canada and Japan.
For the case of Canada, a research has been carried out by O.Awakuse (2003) who finds that there is a relationship between exports and economic growth in the long run. The analysis from the author focused on the dynamic causal relationship between exports, capital, labour, terms of trade, foreign output shock, and output growth using quarterly Canadian data.
On the other hand, there is also research focused on Faroe Island which is also regarded as a high income country. Mrdalo (2004) in his research in Faroe Islands come up with the statement that those improvements in human capital, labour skills and capital accumulation fused with technological improvements will generally enable every country to achieve a threshold level upon which the comparative advantage argument can kick-in and lead to export expansion.
For the Asian country who regarded as high income country, I have included the research done by researcher in Japan. Both author, Z. Lawrence and E. Weinstein (1999) conducted a research in Japan to examine the validity of export led growth theory. They suggest that the salutary impact of imports stems more from their contribution to competition than to intermediate inputs. They also discovered that competitive pressures and potentially learning from foreign rivals are important conduits for growth which suggests that further liberalization by Japan and other East Asian countries may result in future dynamic gains.
Author
Variables
Sample
Methodology
Findings
Waithe,
Lorde and
Francis (2011)
Non-export real GDP,
real import,
real exports
Mexico
(1960-2003)
multivariate cointegration techniques,
The Schwarz Information Criterion (SIC),
Augmented Dickey-Fuller (ADF), Phillips-Perron (PP),
Granger-causality test
-Export-augmented neoclassical production function was employed to overcome problem of specification bias.
-The empirical evidence indicates that in the short run exports Granger-causes non-export GDP
Shahbaz,
Azim and
Ahmad (2011)
real GDP,
real exports, real capital and real effective exchange rate.
Pakistan
(1990-2008)
Ng-Perron unit root test,
ARDL bounds testing
approach to cointegration,
error correction method (ECM)
-Exports are positively correlated with economic growth
-Depreciation of exchange is positively associated with economic growth in the country.
Dilrukshini
(2008)
Sri Lanka
(1960-2005)
- cointegration and Granger causality
-Vector Auto Regressions (VARs)
- Impulse Response Functions (IRFs).
-No empirical support for the export-led growth hypothesis for Sri Lanka.
Author
Variables
Sample
Methodology
Findings
Herrerias and
Orts (2010)
GDP,
Labor productivity,
Investment,
Exports,
R&D expenditure,
Real exchange rate
China
(1964-2004)
-Phillips Perron,
-Augmented Dickey Fuller
-cointegrated vector autoregressive (VAR) model
-Both an export-led growth effect and an investment-led growth effect are relevant in the Chinese economy
-exports exogenously drive output and productivity in the long run
Siliverstovs, Boriss, Herzer and Dierk (2005)
Real import of capitalgoods,real exports of manufactured goods,real esport of primary product,labor
Chile
(1960-2001)
-Granger causality analysis cointegrated
-vector autoregressive (VAR) model
- Empirical support of the export-led growth hypothesis
for Chile is rather robust to application of different methodological approaches
Amrinto (2006)
real GDP,
real exports,
real effective exchange rate index,
gross-fixed capital
Philippines
(1981-2004)
-Philips-Perron
- Schwartz Bayesian
Criterion (SBC)
- Cointegration Test
-Granger causality
- Error correction model (ECM)
-Generally bidirectional causality between exports and GDP rather than unidirectional causality from exports to GDP.
Author
Variable
Sample
Methodology
Findings
Maneschiöld
(2008)
GDP,exports
Argentina,
Brazil, Mexico
(1990-2006)
-Augmented Dickey-Fuller(ADF)
- Phillips-Perron
-Johansen cointegration test
- the causal relationship is either
bi-directional or unidirectional from export to GDP
Awokuse
(2003)
Real GDP ,real exports, real
terms of trade,
manufacturing
employment for labour,
gross capital,
industrial production index
Canada
(1961-2000)
-Granger causality
- vector error correction model (VECM)
- augmented vector autoregressive (VAR) model
Support the validity of export led growth hypothesis
Shirazi and Abdul Manap
(2005)
real output (GDP),
real imports,
real exports
Sri Lanka,
India, Pakistan,
Nepal, Bangladesh
-cointegration and multivariate Granger causality tests
- VAR model,
-Strongly supports a long-run relationship among
the three variables for all the countries under study, except Sri Lanka.
-support the export-led growth hypothesis for Bangladesh, Pakistan, and Nepal, but not for India and Sri Lanka.
Author
Variables
Sample
Methodology
Findings
Ekanayake*
(1999)
real exports,
real GDP
India,
Indonesia, Korea,
Pakistan, Philippines, Sri Lanka, Malaysia and Thailand
(1960-1997)
-Granger-causality
- Augmented Dickey-Fuller (ADF)
-Export-led growth valid in Malaysia.
- bi-directional causality exists between export and economic growth in India, Indonesia, Korea, Pakistan, Philippines, Sri Lanka and Thailand.
-No strong evidence for short-run causality running from export growth to economic growth.
Khashaba,
Mahboub,
R. Latham III and
AboElsoud
(2010)
real exports,
real investment,
real GDP
Egypt
(1991-2009)
-Granger causality
- Engle-Granger
-Augmented Dickey-Fuller (ADF)
- VAR model
- There is causality between exports and economic growth, indicating that exports promote economic growth and growth supports exports for Egypt.
Petreski
(2007)
exports, gross domestic product, gross capital formation, labor
Republic of Macedonia
(1998-2006)
-Granger causality
- Augmented Dickey Fuller(ADF)
-vector error correction
-There is a strong support for the ELG hypothesis in Macedonia in short run and long run.
Author
Variables
Samples
Methodology
Findings
Mohan and Nandwa*
(2007)
Exports,
Exchange Rate,
Imports ,
Labor force
Kenya
(1970-2004)
-ARDL Bounds test
-Augmented Dickey Fuller (ADF)
-Phillips-Perron (PP)
-
-Export-led growth hypothesis for Kenya is valid.
Medina-Smith
(2001)
Real GDP,
Real export,
Real gross fixed capital, population
Costa Rica
(1950-1997)
-augmented Dickey-Fuller (ADF)
- Error correction model (ECM)
-Exports led growth is valid in case of Costa Rica
-Physical investment and population mainly drove Costa Rica overall economy from 1950 onwards.
Mrdalo
(2004)
GDP,
Total
Export,
GDP deflator
Faroe Islands
(1962-2001)
-Granger causality test
-error-correction model (ECM)
-augmented Dickey-Fuller (ADF)
-theoretical support for the growth-led export may be applied to the
Faroe Islands' economy
CHAPTER 3
RESEARCH METHODOLOGY
3.0 Introduction
This research uses econometric method to investigate the hypothesis of export led growth hypothesis in Malaysia in the long run. The variables that are measured in this study are Gross Domestic Product, real export, real gross fixed capital formation and real exchange rate. The econometric method applied for this research is Augmented Dicky Fuller (ADF) unit root test, Johansen cointegration test and Granger Causality test.
3.1 Conceptual Framework
The study is to examine the relationship between exports and economic growth. So, for this research, I am adopting the previous theoretical framework by Al-Yousif (1999) and Amrinto (2006) who did the same research on ELG hypothesis for Malaysia and Philippines.
where GDP is the real GDP growth, EXP represents real exports growth of goods and services, GFCF for real gross fixed capital formation and RER for real effective exchange rates index. The expected relationship between each of the explanatory variable with the dependent variable is indicated by the signs above the variables
Export development is said to be a significant catalyst in enhancing productivity growth. According to a research by Mussonda (2007) export growth may also relieve the foreign exchange constraint, allowing capital goods to be imported to boost economic growth. Mishra, (2007) said that he rapid growth of the China and India is driven by the expansion of export from both country
The rationale of the above mentioned independent variables are used in this study is because they are the important variables that can influence the final result. Real Exchange rates are included in the model to reflect the price competitiveness in the global markets Al-Yousif (1999) included this real exchange rate variable in his previous research to reflect its indirect influence on economic performance through export channel.
The influence of other important variables such as gross fixed capital formation also will be dealt with in this study. Based on neoclassical theory, an increase in capital as an input in production will leads to an increases in output. Therefore, Gross Fixed Capital Formation will have a positive relationship with economic growth.
Equation can be written in regression form as follow:
where,
LRGDP is Log Real Gross Domestic Product,
LREXP is Log Real Exports,
LGFCF is Log Gross Fixed Capital Formation
LREER is Log Real exchange rate
3.2 Data Description
In order to make this research reliable, time series data are collected for the period between 1980 till 2010. The reason for selecting this time period is that although the aggregated export data can be traced back since 1970 but the official aggregated data can only be reliably assembled since 1980.In fact, annual data is more preferred for the analysis because the interaction of economic variables best work in long term of period. All the variables, namely Gross Domestic Product, real exports, gross fixed capital formation and real exchange rate are obtained from World Bank.
3.3 Methodology
This study will use E views software to analyze and estimate the data collected. The Augmented Dickey-Fuller (ADF) unit root test, Johansen Cointegration test and Granger Causality test will be used to examine the relationship between the variables under study.
3.3.1 Augmented Dickey-Fuller (ADF) Unit Root Test.
According to Chemeda (2001), in order to examine the effect of export towards economic growth, first thing that must be done is that the time series data of macro level is assessed to test whether each of those variables are a random walk or more generally has a unit root or not.
Nowadays, Augmented Dicky Fuller (ADF) unit root test is used to examine the stationarity of the data series. It consists of running a regression of the ï¬rst difference of the series against the series lagged once, lagged difference terms and optionally, a constant and a time trend. This can be expressed as follows:
where is the real GDP, ∆ is the differencing operator, t is the time trend and ε is the white noise residual while β1,β2 , ∂ and α1…m are parameters to be estimated. The null hypothesis implies unit root or non-stationary and alternative refers to stationarity.
: = 0 ( is non-stationary)
: ( is stationary)
Phillips-Perron (PP) test bandwidth selection and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test are used to check for stationarity of variables.
3.3.2 Co-integration Test
After the unit root of the data series is identified, next thing that should be done is to find out whether there is a long run equilibrium relationship between those variables. Cointegration test is performed when the hypothesis of a unit root is not rejected. According to Mishra (2011),cointegration analysis is very important because if two non-stationary variables are cointegrated ,a Vector Auto Regression (VAR) model in the ï¬rst difference is wrongly stated due to the effects of a common trend. In this stage, Johansen's cointegration test is used to identify cointegrating relationship among the variables.
Based on the research by Lopete (2004), the econometric specification will be captured in various bi-variate (GDP and exports) models without exogenous variables and various bi-variate models with exogenous variables, all expressed in logarithmic form. In the bi-variate models with exogenous variables, gross fixed capital formation and real exchange rate will be treated strictly as exogenous variables. The econometric model of bi-variate form with exogenous variables is represented as follow:
Johansen's co-integration procedure will be used to test for the possibility of at least one co-integrating vector between GDP and exports in all bi-variate models. Trace test and Maximum Eigenvalue test will be used to test the long run relationship between variables where two possibilities are assumed that is the null hypothesis is has no cointegration while the alternative hypothesis implies cointegration
Trace test
Where, N is the number of observation, m is the number of variables and and r* is the i correlation between pair of variables.
Maximum Eigenvalue Test
According to Johansen and Juselius (1990) the maximum eigenvalue test is more influential than the trace test.
Granger causality test
The last stage of this research is to test for the direction of the causation between GDP and exports on bi-variate models without exogenous variables and bivariate models with exogenous variables. In order to test for the causality between GDP and exports, there are three types of Granger-causality alternative which can be specified on both types of bivariate models. The first one is VAR in levels, second is VAR in first differences and the last one is the ECM. The results of the unit root test will determine which Granger-causality alternative of the bi-variate model which will be used
