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Testing of the “Export-led growth” Hypothesis: Case Study of Sabah

Testing of the “Export-led growth” Hypothesis: Case Study of Sabah

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Published by fairus
Malaysia has adopted the so-called “Export-led growth” strategy since its independent
from Britain in 1957. This paper chooses Sabah as the case study to test the hypothesis
and examine the relationship between Sabah’s exports and economic growth. The case
of Sabah is interesting because the State has promoted exports as the “engine” for its
economic growth. On the other hand, exports have been playing a crucial role in the
Sabah’s economy, there is still lack of systematic empirical analysis of the impact of
exports on the state’s economic performance. There are two main empirical findings
from this study. Firstly, the Johansen cointegration tests indicate that there is no
existence of equilibrium relationship between exports and economic growth in Sabah
state. Secondly, the “Granger” causality tests indicate that there is also no causality
between exports and economic growth in Sabah. Therefore, the results of the empirical
analysis do not support the “export-led growth” hypothesis. Some recommendations for
policy makers could be drawn from this empirical research. Despite of exports’ important
role in the Sabah’s economy, exports don’t seem to “Granger” cause economic growth.
In other word, some other economic activities, such as consumption, investment, or
government expenditure, could be alternative sources of its economic growth. The
future research may incorporate these variables into the econometric model in order to
identify a real “engine” of the Sabah economy.
Malaysia has adopted the so-called “Export-led growth” strategy since its independent
from Britain in 1957. This paper chooses Sabah as the case study to test the hypothesis
and examine the relationship between Sabah’s exports and economic growth. The case
of Sabah is interesting because the State has promoted exports as the “engine” for its
economic growth. On the other hand, exports have been playing a crucial role in the
Sabah’s economy, there is still lack of systematic empirical analysis of the impact of
exports on the state’s economic performance. There are two main empirical findings
from this study. Firstly, the Johansen cointegration tests indicate that there is no
existence of equilibrium relationship between exports and economic growth in Sabah
state. Secondly, the “Granger” causality tests indicate that there is also no causality
between exports and economic growth in Sabah. Therefore, the results of the empirical
analysis do not support the “export-led growth” hypothesis. Some recommendations for
policy makers could be drawn from this empirical research. Despite of exports’ important
role in the Sabah’s economy, exports don’t seem to “Granger” cause economic growth.
In other word, some other economic activities, such as consumption, investment, or
government expenditure, could be alternative sources of its economic growth. The
future research may incorporate these variables into the econometric model in order to
identify a real “engine” of the Sabah economy.

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1
 Testing of the “Export-led growth” Hypothesis:Case Study of Sabah
Ting Siew King
1
, Dr. Fumitaka Furuoka
2
, Lim Fui Yee Beatrice
2
and
 
Chong Hui Ing
3
  Abstract
Malaysia has adopted the so-called “Export-led growth” strategy since its independent from Britain in 1957. This paper chooses Sabah as the case study to test the hypothesis and examine the relationship between Sabah’s exports and economic growth. The case of Sabah is interesting because the State has promoted exports as the “engine” for its economic growth. On the other hand, exports have been playing a crucial role in the Sabah’s economy, there is still lack of systematic empirical analysis of the impact of exports on the state’s economic performance. There are two main empirical findings from this study. Firstly, the Johansen cointegration tests indicate that there is no existence of equilibrium relationship between exports and economic growth in Sabah state. Secondly, the “Granger” causality tests indicate that there is also no causality between exports and economic growth in Sabah. Therefore, the results of the empirical analysis do not support the “export-led growth” hypothesis. Some recommendations for  policy makers could be drawn from this empirical research. Despite of exports’ important role in the Sabah’s economy, exports don’t seem to “Granger” cause economic growth.In other word, some other economic activities, such as consumption, investment, or government expenditure, could be alternative sources of its economic growth. The future research may incorporate these variables into the econometric model in order to identify a real “engine” of the Sabah economy.
Keywords
Sabah, Exports, Economic Growth 
1
Lecturer, Universiti Teknologi Mara, Faculty of Business Management, Sabah Branch.
2
Lecturer, Human Resource Economics Program, School of Business and Economics, Universiti MalaysiaSabah
3
Master Research Student, School of Business and Economics, Universiti Malaysia Sabah
 
2
 1. Introduction
The Malaysian government has adopted the so-called “export-led” economicdevelopment strategy since its independent from Britain in 1957. The effectiveness of this strategy seems to depend on whether the country could find its own niche in theglobal marketplace. In other word, whether the country could tap into the demands of the world economy. Some developing countries could overcome their dismal economicsituation by promoting exports. In these efforts, exports have been viewed as “engine” of economic growth.In recent decades, the validity of export-led growth hypothesis has been supported byimpressive success stories from Asian countries. For example, Japan’s remarkableperformance in the global export market in the 1960s was repeated in the 1970s by Asian Newly Industrialising Economies (NIEs) and in the 1980s.More recently, China’s economic success highlighted the importance of exports tostimulate its economic growth. Until the end of the 1970s, China’s doors were closed forforeigners, and the country was in grips of economic stagnation and pervading poverty. After the introduction of the “open-door policy” in the end of the 1970s, China has beenexperiencing a very rapid economic growth.There are some successful stories among the ASEAN countries. However, each countryhas its own different niche for international market. For example, Singapore could beplaced at one end of the most successful case as its exports consist mostly of high-techand capital-intensive manufactured goods. By contrast, Indonesia could be placed atanother end since its exports are mainly primary commodities, such as petroleum,plywood, and rubber.Malaysia and Thailand could be considered as the ‘in-between’ they export both primarycommodities and manufactured goods. Thailand’s exports include automobiles,electronic parts and rice while the main bulk of Malaysia’s exports are electroniccomponents, petroleum, Liquefied Natural Gas (LNG) and palm oil.Sabah's external trade sector remained strong registering increasing trade surplusessince 2001. The State's trade surplus has risen from RM1.14 billion in 2001 to RM5.68billion in 2003(External Trade Statistics Sabah, 2006). Such encouraging growth wasmainly attributed by commodities exported by the State such as crude palm oil, rubber,sawn timber, plywood, wooden mouldings, crude petroleum, palm kernel oil, methanol,hot briquetted iron (HBI) and uncoated printing and writing paper. The State hasintensively promoted the three priority productive sectors, namely agriculture, tourismand manufacturing sectors to sustain the economy growth.Figure 1 shows the relationship between the natural log of external export of Sabah andthe natural log of Gross Domestic Product (GDP) in Sabah for the year of 1970-2005.There is a positive and upward relationship between external export and GDP over theyears. However, external exports seemed more vulnerable to the world fluctuationscompared to GDP and experienced major decline in 1975, 1981, 1983, 1986 and 2001.
 
3
Realising the importance of the relationship between external export and economygrowth, this study aims to examine whether the hypothesis is applicable to Sabah byusing econometric analyses.Figure 1: External Export and GDP in Sabah, 1970-2005
678910111970 1975 1980 1985 1990 1995 2000 2005LEXPORT LGDP
 The main objective of this research is to examine the “export-led growth” hypothesis forSabah’s economy. The paper consists of five sections. Following this Introduction,Section 2 offers literature review on the relationship exports and economic growth.Section 3 discusses the research methodology adopted in this study, and Section 4reports findings of the research. Section 5 concludes.
2. Literature Review
For more than two centuries, the role of exports in the economic growth has been atopic of intense debate. Classical economists Adam Smith and David Ricardo emphasisedthe importance of international trade for a country’s economic growth. They argued thata country could benefit considerably if it specialised in a certain commodity or productand then exported it to the foreign countries that lacked this commodity (Smith, 1976;Ricardo, 1817).There are several criticisms on the simple version of classical international trade theory.Firstly, the theory does not incorporate a perspective on the consequences of thedeteriorating terms of trade, which became a central trade issue between the developedand developing nations. Cypher and Dietz (1998, p.305) argued, “Especially for poor,

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