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Jurnal
EKONOMI
PEMBANGUNAN
Kajian Ekonomi Negara Berkembang
Hal: 1 – 6
A TEST OF ENDOGENOUS GROWTH THEORIES
IN MALAYSIA
Mohd. Nasir b. Saukani
Abd. Ghafar b. Ismail
Rizaudin b. Sahlan
Abstract
The aim of this paper is to investigate the determinants in per capita growth rate in
Malaysia. The determinants draw on the recent endogenous growth theories and apply the
Solow methodology to time series data from Malaysia, In our model, we develop a three
different mode-IS, i.e. Solow model, Mankiw-Romer- Weil model and modifies Solow model.
Our results indicate that, the growth rate of investment/GDP ratio, the growth rate of export
trade over GDP ratio and the ratio of quasi-liabilities of the financial system to GDP lead to
improved growth performance.
JEL classification: E23
Keywords: endogenous growth model, international trade, government budget, and financial
intermediation
INTRODUCTION To test the augmented Solow model,
Over the past few years economist several authors have considered to include
studying growth have turned increasingly to domestic and foreign capital (see,
1
endogenous growth models . Advocates of Balasubramanyam, Salisu and Sapsford
endogenous growth models present them as (1996)); inflation rate (see, DeGregorio
alternatives to the Solow model and motivate (1992), Fischer (1993)); financial development
them by alleged empirical failure of the Solow (see, Greenwood and Jovanovic (1990), and
model to explain cross-country differences. De Gregorio and Guidotti (1995)); and
The empirical evidence initiated by Mankiw, government expenditure (see, Barro (1991)
Romer and Weil (1992) try to prove that the and Fischer (1993)) as an additional
confirmation of Solow growth model. By explanatory variable or as a test of individual
adding both the human and physical capital variable such as export (see, Balassa (1978),
variables into the Solow model, they show Feder (1982), Frankel and Romer (1999);
that the cross-country differences in economics population (see, Kapuria-Foreman (1995)
growth can be explained by the differences and Darrat and Al-Yousif (1999)). The
2
in both variables and population growth. inclusion of these variables is to ascertain
the differences in growth rates across countries.
1 Renelt (1991) provides a recent of overview and The primary objective in this paper is
empirical testing of endogenous growth models. to reexamine this evidence on convergence
2 Lucas (1998) also find that the differences in growth rates
across countries is determined by each country’s initial. (in terms of levels of economic growth) to
capital level. Two types of capital rate that are crucial to assess whether it contradict the Solow
stimulate growth are physical capital and human capital. model. Also, our primary objective is to test
JEP Vol. 7, No. 1, 2002 1
Abdul Ghafar b. Ismail dkk, A Test of Endogenous Growth Theories in Malysia ISSN : 1410-2641
the modified Solow model derived from Inflation.
recent work in growth theory. In addition, Appropriate use of monetary policy
this study brings new empirical evidence of is thought to promote a stable financial
the existing studies in Malaysia (see, Pang environment necessary for economic growth
(undated) and Rahmah (1999)). by maintaining a low inflation rate. We use,
as suggested by DeGregorio (1992), Fischer
MODEL AND DATA (1993)), and Grier and Tullock (1989), the
The model in this paper adopts a average rate of inflation () as our indicator
supply side description of changes in aggregate of the effects of monetary policy and
output. In so doing, it follows a practice macroeconomic stability.
widely used in empirical studies of sources
of growth, (see, among others, Romer (1990), International trade.
Grossman and Helpman (1991) and Aghion The role of international trade in
and Howitt (1992). In the usual notation the economic growth has been debated for over
production function can be written as follows: two centuries. The studies of Balassa (1978),
and Frankel and Romer (1999) have
Y=g(K,L) (1) included an indicator of export performance
in explaining economic growth. They produce
where Y is gross domestic product in real a proposition that more outward-oriented
term, K is capital stock and L is labor input. economies tend to grow faster. This
From equation (1), Solow (1956) proposition has been tested extensively and
suggests a simple decomposition that provides the majority of the evidence tends to support
a useful model for further analysis. Under the 3
this proposition. A measure frequently used
assumptions of constant returns to scale and is the share of trade (export plus import) in
competitive markets, Romer (1987) simplify GDP. However, in this study, the measure
the Solow model as shown in equation (2). we use is the growth rate of export trade
over GDP ratio (g ). We believe that this to
x
g = ag + (1-a)a + (1/a)q (2) be a preferable measure of openness; economies
y n k
that adopt more outward-looking policies
where g , g and g , are the growth rates of will experience faster growth in this ratio.4
y n k
output, labor and capital, respectively, and a
is the share of labor in output; q then Fiscal policy.
measures that part of growth that cannot, The role of fiscal policy indicators
under the maintained assumptions, be has received considerable attention in the
explained by either growth of labor or growth literature. Most studies have focused on
of capital. This term has been dubbed the government consumption expenditure because
Solow residual. Within this framework, we of the most availability data (see, Grier and
will investigate the residual by looking at Tullock (1989), Romer (1989) and Barro
the role of various economic policies that a (1991)). A few studies have looked at the
number of the "new" growth theories have impact of budget deficits on economic
identified as potential determinants of the growth (see, Landau (1986) and Fisher
long-run rate of economic growth. We will
provide a brief summary here. 3For most recent overview and empirical testing of this
proposition, see Frankel and Romer (2000).
4 This finding is supported by Balasubramanyam, Salisu
and Sapsford (1996)).
2
JEP Vol. 7, No. 1, 2002
ISSN : 1410-2641 Abdul Ghafar b. Ismail dkk, A Test of Endogenous Growth Theories in Malysia
(1993)) or tax revenue (see, Landau (1986)). FINDING
Most studies have used the average ratio of The dependent variable in equations
government consumption expenditure to (3) - (5) is the annual growth rate of real per
GDP as the indicator of fiscal policy. In this capitaGDP. As for the explanatory variable,
study, we follow Grier and Tullock (1986) a number of different equations were estimated,
and use the growth rate of in the government the results are shown in Table 1. Furthermore,
consumption/GDP ratio (g ) as our indicator we present an t-statistic for the significance
g
of fiscal policy. Therefore, in this paper, we of each estimated coefficient, the corrected
2
test the hypothesis that it is not the size of coefficient of determination (adj. R ) and the
the government sector per se that is DW-statistics for the identification of
2
detrimental to economic growth but the autocorrelation. Overall, the adjusted R are
growth in this sector. satisfactory and there is no autocorrelation
problem.
Financial development The model estimated in column (1)
Since the pioneering contributions of tests the hypothesis using the Solow (1956)
McKinnon (1973) and Shaw (1973)), the as elaborated and augmented by Mankiw,
relationship between financial development Romer and Weil (1992). The model includes
and economic growth has remained an the growth rate of investment/GDP ratio (g )
k
important issue of debate. In recent years, a as a measure of physical capital accumulation
number of authors (among others, Bencivenga and the growth rate of population (g ). The
n
and Smith (1991), Greenwood and Jovanovic results are quite satisfactory. The coefficient
(1990), and De Gregorio and Guidotti (1995) of g is positive and highly significant,
k
have dealt with different aspects of this confirming the importance of physical
relationship at the both the theoretical and capital accumulation for Malaysia. The
empirical levels. The indicator that they chose estimated coefficient implies that 1 percentage
when reporting results from crosscountry point increase in the growth rate of
regressions was the ratio of quasi-liabilities investment/GDP ratio increase real per capital
of the financial system to GDP (q ). GDP growth by 0.30 percentage point.
m
Thus, we will estimate the following However, the growth rate of inflation does
three models: not produce a negative (and significant) to
g = + g + g + u per capita economic growth as predicted by
k 0 1 k 2 n 1
Solow model (3) the Solow model.
g = + g + g + g + u The next model estimated is the
k 0 1 k 2 n 3 ed 2
Mankiw-Romer-Weil model (4) Solow model augmented by Mankiw, Romer
and Weil (1992) to consider human-capital
gk = + g + g + g + + g + accumulation. In empirical terms, it implies
0 1 k 2 n 3 ed 4 5 x
g + g + u adding a variable measuring human-capital
6 x 7 g 3 accumulation. Mankiw, Romer and Weil
Modified Solow Model (5)
(1992) measure this as the percentage of the
where (i=0, ..., 2), (i=0, …,3 ) and government expenditure on education to
i i i total government expenditure (g ). The
(i=0, ..., 7) are parameters and a vector of ed
parameters, respectively, to be estimated. estimation results are shown in column (3)
The descriptions of each explanatory variable of Table 1. The signs and significance of the
estimated coefficients of g and g remain
will be discussed in the following, section. k n
the same as reported in column (1). On the
other hand, the coefficient of g is
ed
3
JEP Vol. 7, No. 1, 2002
Abdul Ghafar b. Ismail dkk, A Test of Endogenous Growth Theories in Malysia ISSN : 1410-2641
insignificant. Although our finding, contrary results are reported in column (4), we find
to the results reported in Rahmah (1999), it that the estimated coefficients of g and g ,
x m
should not be interpreted as indicative of the are positive and significant. A1 percentage
unimportance of human-capital accumulation point increase in the annual growth rate of
in Malaysia. The lack of significance may export/GDP tends to increase the growth rate
reflect measurement problems. The ratio of of real per capita GDP by 0.53 percentage point.
government expenditure to total Government The estimated coefficient of g is
m
expenditure does not measure accurately significant. We find that per capita real GDP
investment in human capital and does not growth is positively related with g .This
m
identify for differences in quality of investment. result implies that 1 percentage point increase
The empirical results, to identify the in g increases growth by 0.38 percentage
m
potential determinants of the rate of point. Thus, these findings support the
economic growth, are shown in column (4) hypothesis that the effects of financial
of Table 1. The estimated coefficient of g intermediation on growth, as indicated by
k
remains highly significant, while that of g most of the literature, are primarily
n
and g are insignificant. The next result is transmitted through an increase in the
ed
the tests of modified Solow model. By growth rate of quasiliquid liabilities of the
incorporating other variables such as , g , financial system to GDP ratio.
x
g and g , into the Solow model and the
m g
Table 1.
Results of regression analyses of growth rate equation, Malaysia 1971-1999
Independent variable Solow Model Mankiw, Romer, Weil Model Modified Solow Model
Constant 2.5051 1.2216 0.5640
(0.3834) (0.1889) (0.0729)
g 0.2972 0.3001 0.2712
k
(4.3091)* (4.4491)* (3.9296)*
g 1.9279 2.5560 -0.9140
n
(0.7902) (1.0523) (-0.4218)
g -0.2179 0.0376
ed
(-1.4356) (0.2809)
-0.0758
(-0.2321)
g 0.5279
x
(3.1627)*
g 0.3849
m
(2.5824)*
g 13.3501
g
(0.2827)
2
Adj. R 0.4362 0.5164 0.7004
DW 2.0187 1.9691 1.9613
Note: figures in brackets are t-values and the asterisk sign shows the estimated coefficients are
significant at 1% level.
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JEP Vol. 7, No. 1, 2002
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