Determinants of Economic Growth in Malaysia 1970-2010

Economic growth of a country can be seen in term of increase or growth of Gross Domestic Product (GDP). The rapid economic growth will result in per capita income growth and changes in national economic sectors. Thus economic growth is an important indicator in measuring economic development. The objective of this study is to examine the determinants of economic growth in Malaysia. This study uses trade openness, foreign direct investment, government development expenditure and gross fixed capital formation as an independent variables. The empirical analysis is based on time series data for 40 years for period 1970 to 2010. The model that used to tested the long run relationship is by using Johansen and Juselius cointegration approach shows that trade openness, foreign direct investment, government development expenditure and gross fixed capital formation are the determinants of economic growth in a long run. On the other hand, results that based on Vector Error Correction Model (VECM) shows that trade openness and foreign direct investment are the significant determinants of economic growth in a short run but bring negative impact to economic growth. Furthermore, an ECM variable is negative and significant, that postulates the cointegration among given variables. The response coefficient value is -0.343895, that suggesting moderate adjustment behavior, approx 34.4% percent of the disequilibria of the previous period’s shock adjust back to the long run equilibrium in the current year. Based on causality test in this study found that, firstly OPEN variable is Granger cause to GDP variable. Secondly is GDP variable is Granger cause to GDE variable. Thirdly is GDP variable is Granger cause to GFCF variable. Fourthly is OPEN variable is Granger cause to FDI, GDE and GFCF variables. Based on the Ordinary Least Squares (OLS) regression in this study shows that trade openness, government development expenditure and gross fixed capital formation fixed at 1 per cent significance level. This indicates that these variables have a positive effect on economic growth in Malaysia. While foreign direct investment variable is not significant to the growth of Malaysian economy. Results also shows that government development expenditure is the highest variables affect Malaysia economic growth of 1% increase in development expenses will lead to the growth rate increase by 2.16%. Second highest variable is trade openness of a 1% increase in trade openness will lead to 1.28% increase in the growth of the Malaysian economy. Third highest variable is gross fixed capital formation of a 1% increase in gross fixed capital formation will lead 0.98% increase in economic growth in Malaysia. Results obtained in this study suggest that policymakers should keep an eye on all of the significant variables since it will give impact on economic growth