EXPORTS AND ECONOMIC GROWTH UNDER STRUCTURAL CHANGE: A CO-INTEGRATION ANALYSIS OF EVIDENCE FROM MALAYSIA

A number of studies have tried to establish a causal link between export expansion and economic growth. Empirical studies of the relationship have pursued two different approaches-one set has used inter-country statistical comparisons and the second set has focused on the economic performance of individual countries. Our contribution to the work is to recognize that structural changes will, over time, change the sources of growth and this will affect the export-growth relationship. We use country case study approach focusing on Malaysia, a country with one of the world's highest sustained growth rates over the past 3 decades. Malaysia has also had a long history of commodity trade but has been successful, in the last 2 decades in diversifying and shifting its export base toward manufactured goods. We use VAR analysis of Malaysian quarterly trade and GDP growth to test for the presence of export-led growth from 1965 to 1996. Trade data are disaggregated into primary and manufactures exports and causality tests are applied to the entire period as well as two subperiods-the 1965-80 period when policy emphasis was on import substitution and the 1981-96 period when government policies strongly favored export-led growth. Statistical tests confirmed export-led growth for the full period and for the earlier years up to 1980 but tests on the 1981-96 period revealed a reversal of the causal relationship with growth causing exports. Results also show that primary exports apparently have had a stronger direct impact on Malaysian economic growth than manufactures. The explanation for this paradoxical result showing weakening support for export-led growth after Malaysia shifted to an export-oriented development strategy lies with the structural changes associated with the industrialization. Unlike primary commodity exports, for which value-added is derived primarily from domestic sources, Malaysian manufactures exports rely heavily on imported raw materials and equipment. As manufactures increase as a proportion of Malaysia's exports, the export-led causality relationship weakens. The interaction among trade and growth variables becomes more complex. These empirical results not only provide insight into how the Malaysian trade-growth relationship has evolved, they also help explain the inconsistent and, frequently, conflicting results found in the literature. The empirical tests for export-led growth may be effective in capturing the trade-growth interaction at early and intermediate stages of development, but as a nation's economic structure becomes more complex, causality tests on aggregate trade and growth variables will likely fail capture these complicated interrelationships. Future empirical studies of the export-led growth hypothesis need to consider how to incorporate a broadening of the export base and a diversification of the economic structure into the measurement of trade-growth relationships