The Impact On Economic Growth

Published Date: 02 Nov 2017

Thesis

Globalization in trade and its impact on economic growth, Malaysia as a role model for Pakistan

Hafiza Saba Waheed Rana

This research explains that how Malaysia improved their economic growth by focusing on the key factors of economic growth and development and also provides an outline for Pakistan’s economy to boost up its economic growth by up grading its trade and investment policies.

Introduction

Globalization refers to the growing interdependence of countries guarantying from the growing trends in trade, finance and ideas in one global marketplace. International trade and cross-border investment flows are the main elements of this integration. Globalization started after World War II but has speed up extensively in the mid of 1980’s. Two main drivers of globalization are technological advancement and liberalization. Pakistan got independence in 1947 and Malaysia got independence in 1957. Since independence, average economic growth rate of Pakistan is higher than the average economic growth rate of the world economy. Today Malaysia is a middle income country with multi sector economy. Malaysia is a top importer from Pakistan. In 2011 Pakistan was the largest trading partner of Malaysia. In fiscal year of 2009-2010 Malaysia’s import increased up to $143.38 Million. Due to low demand for exports Pakistan’s international trade is bearing huge deficit. In Pakistan, political instability is also responsible for deficit in trade. In 2010 Pakistan, trade deficit reached at US $ billion. To reduce this deficit and liberalize the trade and investment in country some steps have been taken such as tariff increased from 20 percent-25 percent to 30 percent-35 percent which decreased trade deficit in 2009 US $9.261 billion to US $3.946 billion in 2010.

Primarily development policy of Malaysia focused on to broaden the horizon of agricultural exports to raise and alleviate its exports earnings. With the passage of time Malaysian economy rapidly practiced a shift from agriculture to industry. This was the mark able development in Malaysia. These configurationally regulations took place due to active government and planned policies. Malaysian economy followed its five year development plans with the purpose of growth. In the earlier time of 1970, Malaysian economy was suffering with many economic disparities. Malaysia reduced its poverty ratio from 1970 which is 49.3 percent to 8.9 percent in 1995. Hence, the income distribution improved from 1970 which was 0.513 percent to 0.445 percent in 1989 according to Gini-coefficient measure amongst households. In 1970 the share of households was 55.5 percent that become 50.3 percent in 1989 due to fall in top 20 percent whereas bottom 40 percent improved 11.5 percent to14.5 percent in the same era. Globalization affected Malaysian economy with its both impacts positive and negative in every social and economic aspect. Evidently proved that globalization enhances any country’s economic growth in the course of trade extension and foreign direct investment.

Globalization and its impact on world economic development analyzed by many explanatory variables such as FDI, PCI, Employment and other social indicators that shows a positive relation of all these indicators with globalization and world economic development (Akram ch et al 2009). Export-oriented FDI has brought noteworthy profits to Malaysia predominantly (Authokorala et al 1996). Trade, investment promoting and poverty alleviating policies have significant positive impact to promote economic growth in Pakistan (Fatima et al 2012). In the Malaysia- Pakistan Business Forum held at Kuala-Lumpur Husain (2005) Address delivered that trade, technological and financial cooperation of Pakistan with Malaysia can be of enormous value for both countries economy.

All previous researches are about examining developing countries or countries comparison but the purpose of our research to provide a proper way to promote economic growth in Pakistan by enhancing Pakistan’s export. In this study we are analyzing Malaysian economy and its trade and investment impact on Malaysian economy. This research proves that how Malaysia’s economy achieved persistent growth by focusing on its trade pattern and increasing investment in country. Pakistan is still an emerging economy, by adopting Malaysian economic policies it can improve its economic growth. This study highlighting the key factors of economic growth that how we can achieve a sustainable growth by introducing beneficial trade policies? Also how we can attract more investment in our country? How Malaysian economy achieved sustained growth by? What trade and investment policies that Malaysian economy adopted? Which How inflation can be reduced and employment opportunities increase in our country? Answers of such these questions we will try to find in this research.

Pakistan is a country which also rich in its agricultural and natural resources. Malaysian government and policy makers focused on their agricultural sector by implementing such policies which explored their economic growth and export growth rate and also reduced poverty. Pakistan’s economy also need to adopt and implement these policies to expand the export growth rate in country and promote industrial sector to reduce poverty in country and enhancing economic growth in Pakistan. Malaysia can be a role model for Pakistan for economic development and growth in country. There is a need of political stability and proper implementation of policies.

This study comprises on five chapters. First chapter is introduction which gives brief overview that what is our topic and what researches before this had done related to our topic and what we will try to find in this research. Second Chapter of this study is literature review which is about previous studies and their results and policy recommendations. Third chapter is methodology which tells about variables specification and time span of our data and data type and source of data. Fourth step is data analysis which consist on implication of statistical techniques that we will apply on our data to check the significance of our research. Fifth step is conclusion or policy recommendation that shows that what we conclude from our research and what policies we are suggesting on the base of our study.

Theoretical Review

Kraev (2005) rationalized the effects of trade liberalization on GDP with the reference of developing countries. He discussed in his study that globalization in trade enhances growth but in developing countries import growth rate much greater than export growth rate. That’s why they suffering from very slow economic growth and development. To explore his study he used Heckscher-Ohlin Model (H-O) and Computable General Equilibrium Model (CGE) and run regression. He discussed import, export, GDP, real exchange rate and income growth as the indicators of growth. He used annually time series data 1970-2000 comprised on 31 observations. The results of the complete study of this study concluded that costly imports damaging the growth of developing countries and the poor mostly affected by it. So, the government should take steps to promote their export and reduce import by imposing tariff and by providing import substitutes in their countries. Also give attention to reduce the impact of income inequality in developing countries and take action to exert a pull on foreign investment and industrialization in developing countries.

Yusoff et al (2000) evaluated the role of globalization, economic policy and equity in economic growth with respect to Malaysia. They defined economic growth as dependent variable and structural and macroeconomic indicators as independent variables such as real GDP, saving investment ratio, import export ratio and exchange rate. They used time series annual data of 26 years 1970-1995 and analyzed it. The results of the findings suggested that Malaysia is a role model for other developing nations. The governments of other developing countries need to give attention for the betterment in their fiscal and monetary policies and also improve their trade and eradicate income inequality to achieve sustained growth.

Empirical Review

Javed et al (2012) inspected the effects of international trade on economic growth with the reference of Pakistan. They defined economic growth as dependent variable and investment to GDP ratio, trade openness, imports to GDP ratio, exports to GDP ratio and terms of trade as independent variables. They used time series data of 37 years 1973-2010 to verify the impact of international trade on economic growth. They used ADF (Unit Root Test), White test,Breusch- Godfray test and Durbin Watson d-test to examine the effect of international trade on economic growth of Pakistan. The results of this study showed that by rising up the import of raw material, the output of the country would get better. Trade openness has direct and considerable impact on Pakistan’s economy. To improve the economic growth of Pakistan government needs to play a sound role. Government should adopt perfection in tax and tariff policies to cut down the import of costly goods with proper substitute policies and also needs to spotlight economic and structural amendment policies to make them superior for economic growth of Pakistan.

Zaman et al (2010) postulated the impact of key indicators on economic growth in perspective of Pakistan and India. They took PCI (Per Capita Income) as dependent variable whereas GDP, GNP, inflation, import, export, population and FDI (Foreign Direct Investment) as independent variables in their study. To further justify their study they applied ADF test, correlation, and regression and co-integration analysis on time series data of 37 years 1970-2006. The results of this study supported to the evidence that all these independent variables have strong and positive impact on dependent variable. They suggested that Pakistan and India both developing countries, both governments should encourage foreign investment and also promote their exports.

Mollick et al (2008) built the relationship among globalization, inflation and economic growth with the reference of up and coming economies. To extend their study they used panel data which is based on time span of 35 years (1970-2004). They used GDP per capita, investment and trade as their dependent and independent variables and relate OLS (Ordinary Least Square Method) and GMM (Generalized Method of Moments). The findings of this study recommended the relationship between international trade and real per capita income. AS a whole we found positive impact of international trade on income growth and financial globalization.

Khan et al (2007) explored the impact of trade liberalization and financial reforms on economic growth. They explained economic growth as dependent variable and trade and financial policies as independent variables. To verify their study they exploit time series data of 55 years 1961-2005 and applied co-integration bound testing approach, ARDL, UECM (unrestricted error correction model) and results of the study explain a long run relationship among real GDP, trade liberalization, financial development and real interest rate. On the base of these results, the study told that Pakistan should promote trade and financial liberalization to boost up economic growth and also needs to implement such strong policies which will lead to a persistent economic growth.

Khair et al (2007) embarked on the impact of globalization and economic development in Pakistan. They explained PCI (per Capita Income) as dependent variable and import, export, FD (Foreign Debt), FDI (Foreign Direct Investment) and political instability as independent variables in their analysis. They used 37 years time-series annual data 1970-2006 to extend their study and applied ADF (Augmented Dickey Fuller) test and simple ECM (Error Correction Model). The study concludes that globalization has positive impact on economic development. Empirical results of this study advised that Pakistan’s economy needs political stability and enhance exports and FDI (Foreign Direct Investment) in Pakistan to achieve economic development.

All these researches illustrated the impact of key indicators of economic growth and development in the perspective of growth and development in the whole world and in developing countries. Researchers of all these studies separately showed the direct impact of key factors of economic growth. In our research we will combine all these indicators GNI per capita, inflation, population, FDI, imports and exports with their annual growth percentage to examine the economic growth of Pakistan and Malaysia and try to find out that Is Malaysia as a role model for Pakistan by implementing econometric techniques.

Table: Theoretical and Empirical studies related to Pakistan and Malaysia

Years

Author name

Dependent variable

Independent variables

Statistical technique

Findings

Sample period

2005

Kraev

GDP growth

Trade impact, Balance of payments impact, investment, income growth and Real exchange rate

Theoretical research

Study suggests promoting export and reducing import take action to exert a pull on foreign investment and industrialization in developing countries.

1970-2000

2000

Yusoff et al

GDP growth

Exchange rate, saving investment ratio and import export ratio

Theoretical research

Results proposed that Malaysia is a role model for developing countries they need to advances their fiscal and monetary policies and trade policies.

1970-1995

2012

Munir et al

Inflation

Import, export, real GDP and money

ADF, Unit root test, Co-integration and VECM

Findings of this research advised that non fiscal and non monetary policies to overcome inflation and increase production capacity.

1976-2010

2012

Javed et al

GDP growth

Import, export and investment

ADF,White’s test, Breusch Godfray test and Durbin Watson test

Government of Pakistan need to amendment in economic and structural policies to enhance economic growth.

1973-2010

2010

Zaman et al

PCI

GDP, GNP, import, export, inflation, population and FDI

ADF, correlation, Regression and Co-integration

Findings of this study recommend that Pakistan and other developing nations need to promote their export and attract foreign investment in their country.

1970-2006

2008

Mollick et al

GDP per capita growth

Investment and trade

OLS and GMM

Researchers of this study give an opinion that International trade and financial globalization positively impact economic growth of a country.

1970-2004

2007

Khan et al

GDP growth

Trade and financial policies

ARDL, Co-integration bound testing approach and UECM

Results of this study suggest that trade liberalization and financial policies can leads to a sustainable growth in Pakistan.

1961-2005

2007

Khair et al

PCI

Import, export, FD, FDI and political instability

ADF and ECM

This study concluded that political stability, export promotion and foreign direct investment play a vital role in the growth of Pakistan’s economy.

1970-2006

Methodology

Methodology is something that plays pivotal role in research. According to our variables we have planned such a methodology that empirically investigates the impact of globalization in trade on economic growth to support the statement of this research. For this we are using panel data from 1970-2011 which is based on 42 observations. The data source is World Bank data bank. The purpose of this study is to examine the key factors of economic development in Pakistan and Malaysia in the perspective of globalization in trade and its impact on economic development and growth. This research explains that how Malaysia improved their economic growth by focusing on the key factors of economic growth and development and also provides an outline for Pakistan’s economy to boost up its economic growth by up grading its trade and investment policies.

The general equation is:

GDP = f (GNI, Pop, FDI, Inf, Imp, Exp) … … … (1)

When we specify this equation it become as:

… … … (2)

Where

GDP= Economic growth

GNI= Gross national income

Pop= Population

FDI= Foreign direct investment

Inf= Inflation

Imp= Imports

Exp= Exports

This model is showing the relationship between GDP as a dependent variable and GNI, FDI, Pop, Inf, Imp, Exp are as independent variables.

For Pakistan:

… … … (3)

For Malaysia:

… … (4)

Variables specification

Dependent Variable

Economic Growth: Economic growth of a country is the increase in country’s output by comparing from one time period to another.

Independent variables: Economic growth of a country can be measured in real or nominal terms which include GDP PC Growth ( annual %), GNI PC Growth (annual % ), FDI net inflows (% of GDP), population growth ( annual %), Inflation, GDP deflator (annual % ), Imports of Goods and services ( annual % growth ), Exports of Goods and services ( annual % growth ). These indicators could be used as to measure the differences between countries.

GDP PC Growth (annual %) and Economic Growth:

Dependent variable

(Economic growth)

Independent variable

GDP PC Growth (annual %)

Relationship

Positive, (+ve )

GDP per capita annual growth rate is based on local currency at market prices. GDP per capita is measured by the ratio of GDP dividing by midyear population. GDP has positive impact on economic growth. According to World Bank report which is published in 2012, the GDP per capita growth (annual %) was last reported at 0.53 percent in 2011 in Pakistan. Pakistan’s GDP per capita is 5 percent in a comparison of world’s average GDP per capita. While Malaysia’s GDP per capita 43 percent in a comparison of world’s GDP per capita. In 2011 Malaysia’s GDP per capita was recorded at 5364.50 US dollars.

GNI Pc growth (annual %) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

GNI PC Growth (annual %)

Relationship

Positive, (+ve )

Gross national income per capita growth (annual %) is explained in terms of GDP plus net receipts from abroad of wages and income of property. GNI per capita growth (annual %) is calculated by changing national currency in US dollars at official exchange rate for comparing different economies. GNI has positive relation with economic growth. According to World Bank report GNI per capita of Pakistan recorded at 1.78 percent and Malaysia’s GNI per capita was 4.37 percent US dollars in 2011.

FDI, net inflows (% of GDP) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

FDI, net inflows (% of GDP)

Relationship

Positive, (+ve )

Foreign direct investment is the net inflow of investment in a country is a reactive investment in the securities of that country which may be bonds form or in stock. The main purpose of FDI is to funding of foreigners to expand business and government to create new opportunities in country to boost the economy. FDI has positive role in economic growth. According to World Bank report in 2011 Pakistan’s FDI, net inflows (% of GDP) was at 0.62 percent and Malaysia’s 4.16 percent US dollar.

Population growth (annual %) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

Population growth (annual %)

Relationship

Positive, (-ve) and negative (-ve)

Population growth is the change in population over time. Population growth over a period of time is determined by four factors births (B), deaths (D), immigrants (I) and emigrants (E). A population growth has both positive and negative impacts on economic growth. Some advanced economies are growing faster as compare to the backward economies. According to World Bank report Pakistan’s population growth is 1.79 percent and Malaysia’s 1.60 percent.

Inflation, GDP deflator (annual %) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

Inflation, GDP deflator (annual %)

Relationship

Positive, (+ve )

Inflation is measured as the percent change in aggregate price level which is associated to the percent change in the GDP deflator over a period of time from one year to the next year. Inflation has positive relation with economic growth as inflation increases economic growth also increases. According to World Bank report inflation rate in Pakistan in 2011 was 18.31 percent and Malaysia’s 5.46 percent.

Imports of Goods and services (annual % growth) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

Imports of goods and services (annual % growth)

Relationship

negative, (-ve )

Imports of goods and services stand for the value of goods and services received from the whole world. Annual growth rate of imports of goods and services is based on local currency. Imports of a country have negative impact on the growth of that country’s economy because it slows down the economic efficiency of domestic market and also causes of balance of payment deficit.

Exports of Goods and services (annual % growth) and Economic growth:

Dependent variable

(Economic growth)

Independent variable

Exports of goods and services (annual % growth)

Relationship

Positive, (+ve )

Exports of goods and services stand for the value of goods and services provided to the whole world. Annual growth rate of exports of goods and services is based on local currency. Exports of a country have positive impact on economic growth because greater exports enhance economic growth of that country. Greater exports causes surplus in balance of payment.