The Empirical Economics Letters, 10(3): (March 2011)

ISSN 1681 8997

Does Import Affect Economic Growth in Malaysia

Mori Kogid, Dullah Mulok, Kok Sook Ching, Jaratin Lily
School of Business and Economics, Universiti Malaysia Sabah
88400 Kota Kinabalu, Sabah, Malaysia
Email: morikogid@gmail.com

Mohd Fahmi Ghazali

Labuan International School of Business and Finance
Universiti Malaysia Sabah, Labuan International Campus

Nanthakumar Loganathan
Department of Economics, Faculty of Management and Economics
Universiti Malaysia Terengganu
Abstract: This paper uses the bivariate cointegration and causality analysis based on
the Engle-Granger two steps, Johansen, Toda-Yamamoto, and Hsiaos Granger
procedures to analyze the relationship between the economic growth and the import in
Malaysia from 1970 to 2007. Results show that there is no cointegration exists between
economic growth and import, but there exists bilateral causality between economic
growth and import. Results also show that import could indirectly contribute to
economic growth, and economic growth could also directly contribute to import. These
findings may be vital for future economic growth policy.
Keywords: Economic Growth, Import, Cointegration, Causality, Malaysia
JEL Classification Number: C32, F42, N15, O47

1. Introduction
Economic growth theory is the main focus of economic study by most researchers, and it
is often linked to various factors in a sense that these factors are perceived to be crucial in
spurring the economic growth of a country. Amongst these factors are private
consumption expenditure, government expenditure, investment, import, export, and other
related factors. As cited in Piazolo (1996), the traditional growth theory based on Solow
(1956) and Denison (1962) shows that the setting of output depends on the level of capital
stock, the volume of labour employed, and the types of technology used. The introduction
of an exogenous rate of technological change allows for an exogenously determined rate
of economic growth. At the same time, other factors such as savings, investment, and
institutional framework (e.g. government consumption expenditure) are the minor

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influences for the long term economic development. The new growth theory on the other
hand, focuses mainly on (i) technological change, (ii) the role of government, (iii) trade
policy, and (iv) human capital development as the determinants of economic growth
(Piazolo 1996).
The main objective of this study is to investigate the relationship and causality pattern
between import (M) and economic growth (GDP) in Malaysia for both short run and long
run, in an attempt to capture the possible impact of import on economic growth. In
general, the direction of causality seems to run predominantly from national income to
import, but not the other way round. High income countries will tend to import more, and
vice versa. Nevertheless, the causal relationship underlying import spending and economic
growth is more complex than the statistical tests. Less certain, however, is the direction of
influence between import and economic growth (Humpage 2000). Does import cause
economic growth, or the other way round?
This paper is organized as follows. Section 2 discusses past studies in relation to the
import and economic growth. The data and methodology is discussed in Section 3, while
Section 4 explains the empirical results and findings. Section 5 of this study offers
discussion and conclusion.
2. Literature Review
Past studies heavily focused on economic growth in both theory and empirical. Various
empirical studies tried to determine the significant factors determining economic growth
and most of these studies were associated with the determinants or sources of economic
growth with different methodologies, data, and cases. Tong (1995) explored the
relationship between economic growth and import, and he recognized that import at
different times contributed to economy differently, but as a whole, there was a positive
correlation between import and economic growth. Frankel and Romer (1999) in their study
on cross-country data found that higher trade contributes to long-term economic growth,
after accounting for the effect of growth on trade. Although they considered total trade
(export plus import), their research methodology attributed the same response to import
that it applies to export; that is, import causes economic growth. Humpage (2000) on the
other hand, stressed that import does not lower economic growth. He believed that import
and economic growth are positively correlated, with causality running in both directions.
Faster economic growth does indeed lead to higher import, but the countries that are
opened to trade tend to grow faster than those with a closed economy or less accessible.
Liu (2001) in his research revealed that import has a strong role in the promotion of
national economy by analyzing the data of China from 1980 to 1998. Howard (2002)
examined the relationship between export, import and income in the economy of Trinidad

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and Tobago, using the methodology of Granger causality and error correction modeling.
The results showed that there is unidirectional Granger causation from export to income
(GDP), and bidirectional causation between export and import, and causality running from
GDP to import. Chen (2009) in a different study stated that, import is often recognized as
a leakage of revenue of which will lead to unemployment rather than economic growth.
But he stressed that the impact of import on economic growth on the other hand, should
not be ignored. Import is an important mean to break the bottleneck of economic
development and promote economic growth. Therefore, the research on the relationship of
import and economic growth is necessary. Gao (2004) showed that the relationship
between foreign trade and economic growth is one of the main debating problems in the
economic field. Based on his study, he found that both export and import improve
economic growth, while the promoting effects on economic growth of export are much
weaker than those of import. Shirazi and Abdul Manap (2005) found the feedback effect
running from import to GDP growth in Bangladesh as the consequences of technology
transfer. Ghorbani and Motallebi (2009) studied and analyzed the import demand function
in Iran for the year 1960 to 2005, and found that import demand is elastic related to
increasing in gross domestic income.
Alam, Uddin and Taufique (2009) in their paper attempted to explore the import of
Bangladesh which is one of the most significant factors responsible for unfavourable trade
balance of the country. The paper examined the existence of the gravity theory for the
import of Bangladesh with its eight major trading partner countries such as India, China,
Singapore, Japan, Hong Kong, South Korea, USA and Malaysia by using yearly panel data
from 1985 to 2003. The paper found mixed results for the impact of Bangladesh GDP on
its import. If population is not considered, GDP shows positive relationship with import.
In addition, its major trading partner countries GDP has significant positive impacts on
the import of Bangladesh. Azgun and Sevinc (2010) in a different study explained that in
the smaller and open economies, import and foreign trade play major roles in economic
development and growth. Engle-Granger test was conducted, but the results showed no
causality relationship between import and export.
3. Data and Methodology
This study uses annual time series data from 1970 to 2007 which were obtained from
International Financial Statistics (IFS), and Department of Statistics Malaysia. Such data
include Gross Domestic Product (GDP) and Import (M). All data are transformed into
logarithmic form. For the analysis, this study applies the Engle-Granger two steps,
Johansen, Hsiaos Granger, and the Toda-Yamamoto (TY) procedures for bivariate
cointegration and causality.

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All annual time series data which are Gross Domestic Product (GDP) and Import (M)
from the periods of 1970 to 2007 in this study is obtained from International Financial
Statistics (IFS), and Department of Statistics Malaysia. All data are transformed into
logarithmic form. This research applies the Engle-Granger two steps, Johansen, Hsiaos
Granger, and the Toda-Yamamoto (TY) procedures for bivariate cointegration and
causality analysis.
Unit root tests in this study are conducted by using Dickey-Fuller, DF or Augmented
Dickey-Fuller, ADF (Dickey and Fuller 1979), Phillips-Perron, PP (Phillips 1987, Perron
1988, Phillips and Perron 1988), and Ng-Perron, NP (Perron and Ng 1996, Ng and Perron
2001) tests.
After determining the integration level for all the variables involved, a cointegration test
can be made to test the existence of cointegration between LGDP and LM by using the
Engle-Granger (Engle and Granger, 1987) and Johansen (Johansen 1988; Johansen and
Juselius 1990) methods. In order to support the hypothesis that LGDP and LM are
cointegrated, the cointegration vector must be at level 1.
The causal relationship issue in this research is tested by using Error Correction Model
(Engle and Granger, 1987), Toda-Yamamoto (Toda and Yamamoto, 1995) procedure, and
Hsiao version of Granger causality test (Hsiao, 1981). Generally, in the case where yt and

xt are stationary variables I(0), equation (1) and (2) without the error correction term can
be estimated using the least squares method in level form. However, if yt and xt are nonstationary variables, I(1) and do not cointegrated, the VAR model such as equation (1) and
(2) without the error correction term in the first difference form can be used. Whereas
equation (1) and (2) exactly can be used in the case where yt and xt are I(1) and
cointegrated.
n

i =1

j =1

i =1

j =1

LYt = 0 + 1i LYt i + 2 j LX t j + 3 t 1 + ut
LX t = 0 + 1i LYt i + 2 j LX t j + 3 t 1 + vt
where

t 1

(1)
(2)

is error correction term or cointegration obtained from cointegration tests.

Granger causality test that has been modified or better known as augmented VAR is
considered to be more competent and has a greater ability for features of cointegration
process. This procedure was proposed and introduced by Toda and Yamamoto (1995) with
the main objective to overcome problems relating to invalid asymptotic critical value
when causality tests are conducted on non-stationary variable series. Zapata and Rambaldi

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(1997) explained that the advantage of using the Toda-Yamamoto (TY) approach in
testing Granger causality test in the VAR framework is that the pre-test on variables in
determining the integration level and cointegration features do not have to be conducted.
This is because the use of TY approach provides maximum integration level towards
processes which do not exceed real lag length in the VAR model. In this study, the
dynamic causal relationship between GDP and M are analyzed based on the modified TY
approach which is in the bivariate form as follow:
k +d

k +d

i =1

i =1

LGDPt = 0 + 1i LGDPt i + 2 i LM t i + ut
k +d

k +d

i =1

i =1

LM t = 0 + 1i LGDPt i + 2 i LM t i + vt

(3)
(4)

where and are unknown parameters, k is the optimal lag length and d is the maximum
integration level towards variable series in the system. u and v are error terms and are
assumed as white noise. Lag length, k initially is selected based on AIC. However, the
length of lag k is later added with more lags depending on the probable integration level
(d) for variable series LGDPt and LMt.
Hsiao version of Granger causality test (Aqeel and Butt, 2001) is a systematic
autoregressive method for choosing optimal lag length for each variable in an equation.
This method is the combination of the Granger causality and Akaikes Final Prediction
Error (FPE), defined as the asymptotic mean square prediction error and considered
provides more robust results over both arbitrary lag length selection and other systematic
methods for determining lag length.
4. Empirical Results
The results of the unit root tests based on ADF, PP and NP are shown in Table 1. Based on
the ADF and PP tests, both of the variables, LGDP and LM are stationary at first
difference (both constant, and constant & trend). ADF test on the other hand shows that
LGDP is also stationary at level under the assumption of constant & trend. NP test (only
MZ and MZt statistics are shown in Table 1) is more robust and produces similar result
with PP test. Both of the statistics, MZ and MZt produce similar results and tend to reject
the null hypothesis of a unit root at first difference (both constant, and constant & trend).
In other words, the results using MZ and MZt tend to support stationary for all variables
at first difference.

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Table 1: Unit Root Tests

Test
Type
ADF
PP

NP

Variable
LGDP
LM
LGDP
LM

LGDP
LM

Level
Constant &
Constant
Trend
-1.57(1)
-4.28***(5)
-1.46(1)
-2.28(1)
-1.55[1]
-2.22[1]
-1.24[3]
-1.81[1]
MZ MZt MZ
MZt
0.19 0.10 -3.96 -1.37
(3)
(3)
(0)
(0)
0.75 0.56 -5.56 -1.54
(1)
(1)
(0)
(0)

First Difference
Constant &
Constant
Trend
-4.99***(0)
-5.19***(0)
-4.91***(0)
-5.06***(0)
-4.96***[2]
-5.15***[2]
-4.91***[1]
-5.03***[2]
MZ
MZt
MZ
MZt
-2.97**
-18.07***
-2.98***
-18.01**
(0)
(0)
(0)
(0)
-16.83***
-2.90***
-17.17*
-2.93**
(0)
(0)
(0)
(0)

Note: Figures in ( ) and [ ] indicate number of lag and bandwidth structures respectively. *, ** and
*** indicate significance at 10%, 5% and 1% levels respectively.

The results of the cointegration test based on the Engle-Granger approach are as follow:

et = 0.3851et 1 + 0.2331et 1
(tau)

(5)

(-2.6717) (1.3556)

The critical value for the cointegration test based on Engle and Granger at 5% is -3.17 is
shown in Table 2. Though the coefficient value for et 1 that is 2 < 0.3851 < 0 , but not
significant where the absolute tau value for coefficient et 1 is less than the critical value
that is 2.67 < 3.17 . This test concludes that both GDP and M variables are not
cointegrated in the long run. This means there is no long-run equilibrium relationship
between GDP and M.
Table 2: Engle-Granger Test Critical Value
Without Lag
With Lag

0.01 @ 1%
-4.07
-3.73

0.05 @ 5%
-3.37
-3.17

0.10 @ 10%
-3.03
-2.91

Source: Enders (1995)

Therefore, the analysis on the error correction model such as in equation (1) and equation
(2) is not suitable to be used because a cointegration vector does not exist between GDP
and M. On the other hand, equation (1) and equation (2) in first difference form are
applied without error correction term to analyze the dynamic short-run relationship
between GDP and M.

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The second bivariate cointegration test by using the Johansen approach is shown in Table
3 of which showing similar result with Engle-Granger cointegration test. The results show
that there is no long run cointegration relationship between the GDP and M. This
empirical decision proposes that GDP and M could not be cointegrated in the long run.
Both statistic tests which are Trace-eigen and Maximum-eigen statistic have produced
similar results. This gives the conclusion that in the long run there is no tendency that
GDP moves together with M towards equilibrium.
Table 3: Johansen Bivariate Cointegration Test
H0

H1

Test Statistic:
Trace Statistic:

r=0
r1

trace

r>0
r>1
Max-Eigen Statistic:

r=0
r=1

max

r=1
r=2

11.0568
1.9521
9.104715
1.952064

The absence of a long-run cointegration relationship needs eqs. (1) and (2) without error
correction term to be used to test the causality between GDP and M (see Table 4). The
VAR lag length order selections based on AIC suggest that the optimum lag length is 3.
Table 4: Standard VAR Granger Bivariate Causality Test
VAR(k)
3
Diagnostic Tests: Residual
R2 = 0.3319
AIC = -2.5885
White Statistic = 12.1010
Q(3) = 0.5566
Sum of Squared Residual = 0.0991
Q2(3) = 0.9747
LM

LGDP

Variable
LGDP

Variable
LM

VAR(k)
3

Diagnostic Tests: Residual

R = 0.3489
AIC = -1.3340
White Statistic = 15.4492
Q(3) = 0.7579
Sum of Squared Residual = 0.3474
Q2(3) = 2.4078
2

Wald Statistic
9.2570**
JB = 1.9468
LM(3) = 1.1201
ARCH(3) = 0.8621
Wald Statistic
12.6986***
JB = 0.9017
LM(3) = 2.0515
ARCH(3) = 2.6476

Note: ***, ** and * denote significance at the 1%, 5% and 10% levels respectively.

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The results of standard VAR Granger causality test such as in Table 4 show that there is
bidirectional causal relationship running from the M to the GDP as well as from the GDP
to the M. Bivariate test for causality using the Toda-Yamamoto approach also confirmed
that there is bidirectional causality between GDP and M (see Table 5).
Table 5: Toda-Yamamoto Bivariate Causality Test
Variable
LM LGDP

VAR(k) TY VAR(k + dmax)

3
4
Diagnostic Tests: Residual
R2 = 0.9969
AIC = -2.4982
Sum of Squared Residual = 0.0964
Q(4) = 0.5226
White Statistic = 22.1009
Q2(4) = 3.0403
Variable
VAR(k) TY VAR(k + dmax)
LGDP LM
3
4
Diagnostic Tests: Residual
R2 = 0.9941
AIC = -1.2961
Sum of Squared Residual = 0.3208
Q(4) = 0.6644
White Statistic = 22.1009
Q2(4) = 3.5921

MWald Statistic
8.3810**
JB = 3.1967
LM(4) =1.2856
ARCH(4) = 3.5157
MWald Statistic
11.2612**
JB = 0.6113
LM(4) =2.8720
ARCH(4) = 17.3574

Note: ***, ** and * denote significance at the 1%, 5% and 10% levels respectively.

Table 6: Hsiao Version of Granger Bivariate Causality Test

Dependent Variable F(m*)
LGDP
0.003643
(1)
LM
0.011613
(1)

> or <
>
>

F(m*, n*)
0.0000227
(1)
0.0000230
(1)

Decision
Import does Granger
cause economic growth
Economic growth does
Granger cause import

Note: Figures in parentheses are the optimum lags based on the minimum (lowest) FPE value.

Based on the FPE statistics, Hsiao version of Granger causality test (see Table 6) also
support the results which have been produced by the standard VAR Granger causality test
and TY approach. As a conclusion, all the causality tests used suggest that there is bilateral
causal relationship between GDP and M. In other words, the import indicator does
Granger caused the economic growth indicator as well as the economic growth indicator
does Granger caused the import indicator. The diagnostic tests have also confirmed that
there is no problem with the residual series which is normal, no serial correlation, no
ARCH effects and homokedasticity at the optimal lags selected based on the AIC (see
Table 4 and Table 5).

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This leads to the conclusion that although there is no cointegration relationship between
import and economic growth in the long run, but there is bidirectional causal relationship
between import and the economic growth especially in the short run. In this case, import
does affect economic growth. The empirical results also propose that, perhaps it is not
only economic growth could directly contribute to import, but that import could also
indirectly contribute to economic growth.
5. Conclusion
We perceive that by improving the institutions or the way of how economy operates, we
might be able to change our economic outcomes for the better. When institutions are
weak, even places with abundant natural resources or other inputs will not promise a
sustainable economic growth. To achieve a sustainable economic growth, good
governance and well managed economic resources are crucial. The findings of this study
show that in the case of Malaysia, import has a paramount important role in spurring the
growth of the economy especially in the short run. More emphasis should be accorded on
this determining factor especially in the drafting of the long term economic growth
policies of the country.
To conclude, the major implication from the findings of this study is that, in Malaysia
during the observed period, economic growth is significantly influenced by import, as well
as import is significantly influenced by economic growth. These findings may be vital for
future economic growth policy. The policy adjustments to promote economic growth
should be based on the evidence of what has, and what has not, worked for other countries.
In this concern, we might also have to answer the questions that whether of how we can
replicate this in Malaysia. Can we uncover the best policies to promote economic growth?
Evidence presented in this study is clear that economic growth is significantly influenced
by import. Nevertheless, import does not reduce economic growth. Specialization and
technological transfer can directly promote economic growth, and thus improve the
standards of living in the country. However, the benefits of specialization and
technological progress might not accrue equally to everyone, and perhaps might worsen
the economic situation of some people. Should we, then, ignore or disparage import?
These questions certainly need to be further investigated and this provides avenue for
future researches.
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