Population And Economic Growth

UNIVERSITI UTARA MALAYSIA FACULTY OF ECONOMICS

ASSIGNMENT ADVANCED MACROECONOMICS (EEB 5023)

PREPARED FOR: DR. AHMAD ZAFARULLAH ABD JALIL

AIDAROHANI SAMSUDIN (800024) PREPARED BY: MOHAMAD IDHAM MD RAZAK (800109)

The Correlation Between Population and Economic Growth in Malaysia

TABLE OF CONTENT CHAPTER 1 INTRODUCTION 1.1 Abstract

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1.2 Background of the study

3

1.3 Problem Statement

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CHAPTER 2 LITERATURE REVIEW 2.1 Population and Economic Growth

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2.2 Life Expectancy and Economic Growth

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CHAPTER 3 METHODOLOGY OF THE DATA 3.1 Theoretical framework

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3.2 The model

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3.3 Sources of data

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CHAPTER 4 4.1 Analysis / Results

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CHAPTER 5 5.1 Conclusion and Recommendations

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REFERENCES

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The Correlation Between Population and Economic Growth in Malaysia

CHAPTER 1: INTRODUCTION

1.1 ABSTRACT The main purpose of this research is to analyze the relationship between population and economic growth in Malaysia from the year 1974 - 2004. This is done through reviewing the existing literature and analysis of the basic Ramsey and also Malthus Catastrophe Model. Empirically, the results showed that Population, and Average Life Expectancy have a significant impact and also a positive correlation with economic growth which represented by Gross Domestic Product (GDP) in Malaysia. In conclusion, the results support the interventionist argument where government policies play a fundamental role in determining the growth of population in Malaysia.

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The Correlation Between Population and Economic Growth in Malaysia

1.2 BACKGROUND OF THE STUDY Generally, When Malaysia was formed in 1963, the population of the whole country was approximately nine million. The total population increased to more than 10.8 million in 1970 and 13.7 million in 1980.

The rate of

population growth had declined gradually from a high level of 3.0 per cent per annum in 1966 to 2.30 percent in 1980. With the high influx of immigrants during the period of 1980-1991, the average annual growth rate has risen to 2.64 per cent per annum giving the total population of Malaysia in 1991 to more than 18.5 million. The 2000 population census gives a population of 23.3 million, growing at an annual growth rate of 2.60 per cent per annum for the period 1991-2000.

In addition, there is another factor that becomes a major contribution to make the population growth in Malaysia increase gradually. Family Planning has been a national programme since the establishment of the then National Family Planning Board (NFPB) in 1966 and later with full integration into the Primary Health Care and Maternal and Child Health Services of the Ministry of Health (MOH) beginning from 1971. The programme is complemented by family planning clinics of the Federation of Family Planning Associations of Malaysia (FFPAM) and private clinics and hospitals in the urban areas. Through this tripartite collaboration, knowledge of family planning is almost universal and family planning services are widely accessible, affordable and acceptable to all, and are provided on the basis of health benefits to the mother, child and family. There is no coercion or discrimination and individual couples are free to choose the most suitable contraceptive method based on the timing, spacing and numbers of their children. Based on this statement, it is obviously shown that our government policy is different from the other country policy such as Singapore and China, where our local government encourages and promotes the local society to have the unlimited children as their want.

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The Correlation Between Population and Economic Growth in Malaysia

Next, Malaysia is one of the fast-growing economies in the Asian and Pacific region that has done well despite the setback of the 1997/1998 financial crisis. The inflation and unemployment rates have been low and Malaysia’s average annual GDP growth rate was 7 per cent over the last three and a half decades. While much of this growth was driven by growth in the manufacturing sector, the World Bank (1993) noted that the rapid manufacturing growth helped to absorb women and Malays into the modern labor market and helped to alleviate poverty and inequality. The increase in real GDP per capita has been strong, growing from M$1,932 in 1970 to M$15,380 in 2003 (currently US$ 1 = approximately 3.67 Malaysian ringgits).

Furthermore, Malaysia’s growth performance has been enviable. This was not a coincidence as growth; poverty alleviation and redistribution in Malaysia from 1970 to 1990 were achieved under circumstances of interventionist policies and market coordination (Rasiah and Shari, 2001). The country’s New Economic Policy, which was implemented between 1971 and 1990, had “redistribution through growth” as one of the main instruments for achieving its overriding objective of promoting national unity. The success of the Plan made it possible to achieve political stability in a multi-ethnic society, which later became a very important factor in attracting foreign direct investment (FDI) for fuelling further growth. The Plan was then succeeded by the National Development Policy 1991-2000, which retained the Plan’s basic strategy of growth with equity. Today, Malaysia is spearheaded by the National Vision Policy 2001-2010, which emphasizes a more balanced and equitable participation among Bumiputras and non-Bumiputras.

As a conclusion, it is shown that the population and economic growth in Malaysia face a prosper changes for the last three decades. Therefore, this dissertation is to prove that there is a positive correlation between population and economic growth in Malaysia although it is not follow the theories from the abroad. 4

The Correlation Between Population and Economic Growth in Malaysia

1.3 PROBLEM STATEMENT

In the era of globalization, the role of population in determining the local economic growth in Malaysia is slightly significant. Malaysia is fortunate in being relatively well endowed with data on population and vital social statistics. Nowadays, various agencies and institutions are actively involved in population related research in terms of data collection and analysis. The National Population and family Development Board, in accordance with its enabling Act of 1966 (Revised 1998), is responsible for the promotion of research efforts on the inter – relationships between social, cultural, economic and demographic changes as well as studies relating to fertility and birth.

Therefore, in this study of research, the problem arises are: (1) How does the rate of population will give a significant impact to the trend of economic growth in Malaysia? (2) How does the average life expectancy will influence the economic growth in Malaysia?

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The Correlation Between Population and Economic Growth in Malaysia

CHAPTER 2: LITERATURE REVIEW

With increasing interest to study the relationship between population and economic growth, there is a growing body of empirical and theoretical literature that analyzes the correlation between the two main variables. Many empirical studies present evidence proving a negative relationship between these two variables through diverse empirical analysis. However base on the Malaysia perspective, the research done is to prove otherwise. 2.1

POPULATION AND ECONOMIC GROWTH

Generally, the most well known “economist” and cannot be excluded from any discussion related to population and economic growth is Malthus. In addition, several assumption such as “food is necessary for the life of man” (Malthus 1992 p.15) and “The passion between the sexes has appeared in every age to be so nearly the same that it may be always considered…as a given quantity” (Malthus 1992 p.40) and lastly, the and finally that food supply could only be expected to increase at an arithmetic ratio, while population if unchecked would increase at a geometric ratio. Based on these assumptions Malthus showed that there would be a constant tension between population and available resources. However, while Malthus saw population as constrained by food production, with population growth being the endogenous factor, Boserup (1965) effectively reversed the picture. She assumes that “population growth is. . . the independent variable which in turn is a major factor determining agricultural developments” (Boserup 1965, p. 11).

Moreover, according to Kelley and McGreevey (1994, p. 108) “revisionism” can be described as a “. . . methodological perspective that highlights the intermediate to longer run, taking into account both direct and indirect impacts, and feedbacks within economic, political, and social systems”. From this perspective population growth can have both positive and negative effects to the economy, and one cannot a priori decide whether the 6

The Correlation Between Population and Economic Growth in Malaysia

total effect is positive or negative. Futhermore, previous study have found no or an insignificantly negative relation for the period up to 1980, include Kelley and Schmidt (1994, p. 27), Bloom and Freeman (1988), Brander and Dowrick (1994), and Barro and Sala-i Martin (1995, p. 438). On the other hand, Mankiw, Romer and Weil (1992) found a significantly negative relation for the period 1960-85, using a Solow and a human capital augmented Solow model. However, the lack of correlation appears to have disappeared in the eighties. All the studies found a significantly negative relation between population growth and economic growth for the eighties in the complete country set or in parts of it. According to Kelley and Schmidt (1994, p. 27) the results show that the least developed countries have the strongest positive relation between population growth and economic growth, while Brander and Dowrick (1994) only find a significantly negative relation for the more developed countries in their sample. Thus, it has been proven that at the developed country the relationship between the two variables are negative but Malaysia is developing country and the result probably different. This statement is supported by the research that has been done by Everett Hagen (1975) and Charles Kindleberger (1965) show visually, and Simon and Gobin (1979) show in multivariate regressions, that higher the population density in less developed countries is associated with higher rate of economic growth.

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The Correlation Between Population and Economic Growth in Malaysia

2.1

LIFE EXPECTANCY AND ECONOMIC GROWTH

A vigorous finding from the recent economic development literature concerns the positive effect of good health status, as measured by life expectancy, on economic growth. Apparently, this finding reflects the greater incentives long-lived people have to save for old age (Mason1998), increased returns to investments in human capital associated with having longer horizons over which to recoup those returns (Meltzer 1995), higher productivity, and lower rates of absenteeism.

Next, also in the case of life expectancy, Fogel (1994) argues that declines in European mortality during the industrial revolution followed economic growth. Preston (1975, 1980) attributes most of the decline in death rates observed around the world between 1930 and 1970 to factors such as advances in health care technology, and only a small portion to economic growth. Working with data from 1960 for developing countries, Pritchett and Summers (1996) find a significant effect of income and education in reducing infant mortality and argue that the relationship is causal, but they find no significant effect of income on life expectancy. It may seem plausible, even obvious, that economic growth leads to improved health and longevity, but the evidence is far from conclusive.

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The Correlation Between Population and Economic Growth in Malaysia

CHAPTER 3: METHODOLOGY OF THE DATA 3.1

THEORETICAL FRAMEWORK

By gathering all the relevant data and econometric models from various empirical studies, the dependent and the independent variables have been identified as follow:

Dependent Variable Total Amount of Gross Domestic Product (GDP) in Malaysia

Independent Variables Total Number of Population in Malaysia Average Life Expectancy in Malaysia 3.2

THE MODEL

The model that will be developed is based on the theoretical framework and also from the empirical study. The model is as follow: GDP = β0 + β1pop + β2life Where; GDP =

the Malaysia Gross Domestic Product

pop

=

the total population in Malaysia

life

=

the average life expectancy in Malaysia

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The Correlation Between Population and Economic Growth in Malaysia

3.3

SOURCES OF THE DATA

Data Collection Method The data used for this particular study is secondary data. The data consist of the total amount of Gross Domestic Product (GDP) in Malaysia, total number of population in Malaysia and also average number of life expectancy in Malaysia. The main source for all the variables are taken is mainly from the book of Malaysia Economic Statistics – Time Series.

Sample Size There are 31 sample size has been selected for each variables from the year 1974 to the year 2004. The data used is in time series data which is mean that it has been collected yearly.

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The Correlation Between Population and Economic Growth in Malaysia

CHAPTER 4: ANALYSIS / RESULTS GRAPH ANALYSIS

GDP,POPULATION AND AVERAGE LIFE EXPECTENCY

30000000 25000000 20000000

GDP POP A LIFE E

2002

1998

1994

1990

1986

1982

1978

15000000 10000000 5000000 0 1974

GDP,POP,ALE

4.1

year

The above graph shows the trend of economic growth, population and also average life expectancy in Malaysia between years 1974 until year 2004. According to the graph it’s clearly proved that for 31 years, Malaysia’s economic growth had responded positively with an increment of population. Whereas, the average life expectancy illustrate only small changes to the economic growth due to the average value used in this paper.

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The Correlation Between Population and Economic Growth in Malaysia

4.2

REGRESSION ANALYSIS OLS estimates using the 31 observations 1974-2004 Variable const

Coefficient 4.36268e+0 7 population 1.53967 averaga_life_ex -903964

Std. Error 1.07397e+0 7 0.0861371 173279

t-statistic 4.0622

p-value 0.00036

***

17.8746 -5.2168

<0.00001 0.00002

*** ***

Mean of dependent variable = 7.76965e+006 Standard deviation of dep. var. = 4.74614e+006 Sum of squared residuals = 1.07953e+013 Standard error of residuals = 620925 Unadjusted R2 = 0.984025 Adjusted R2 = 0.982884 F-statistic (2, 28) = 862.383 (p-value < 0.00001) Durbin-Watson statistic = 0.60359 First-order autocorrelation coeff. = 0.685972 Log-likelihood = -455.917 Akaike information criterion = 917.835 Schwarz Bayesian criterion = 922.137 Hannan-Quinn criterion = 919.237 Estimation Result

The Ordinary Least Squares estimation result identify that a joint F-test of the explanatory variables in the linear model indicated that it is significant overall at the 1% level. With respect to the coefficient estimates, the population coefficient estimate was contradictory to the previously referenced correlation between economic growth and population done by Malthus , Mankiw, Romer and Weil (1992), and Brander and Dowrick (1994). However this coefficient was consistent with the result found by Everett Hagen (1975), Charles Kindleberger (1965) and Simon and Gobin (1979) that there is a positive relationship between population and economic growth.

In addition, the average life expectancy indicated an inverse relationship between average life expectancy and economic growth. One possible explanation may be due to the unhealthy life style which most of Malaysian people love to eat high calories food and lack do exercises to keep 12

The Correlation Between Population and Economic Growth in Malaysia

them healthy. This result was consistent with Pritchett and Summers (1996) which they find no significant effect of economic growth on life expectancy even though the economic growth leads to improved health and longevity, but the evidence is far from conclusive.

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The Correlation Between Population and Economic Growth in Malaysia

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS

As a conclusion, based on the Malthusian connection, negative correlation between population and economic growth become controversial issues due to the several factors. Firstly, there is a widespread lack of clarity about the aspects of the development that the population growth is claimed to affect.

Secondly, the available evidence from the empirical studies does not clearly show or still ambiguous because still did not prove on how that population growth will exerts a negative influence on the economic development. Next, difficulties arise from ethical perspectives and policy issues by comparing Europe countries with Malaysia for example, and especially the North – South debate, such as an issue of concerning sexuality such as transgender issues in, reproduction, relationships between men and women where the Europe countries did not forbid their citizens to stay together without married or married with the same gender which is differ with the Malaysia norms, culture, and policy, and also questions relating to family planning itself.

Lastly, as what has been discussed in the literature review it has been proven that only developed country will face the inverse relationship between the two variables while the developing country is vice – versa. Thus, Malaysia is still considered as the developing country unlike Europe countries or Japan. Therefore, probably in the next 20 years when Malaysia which is previously focused on the labor intensive in the Small Medium Industries (SMI’s), agricultural sector, and also when the local government encouraged more Foreign Direct Investments (FDI’s) will switch to the capital intensive, then it will get the different results by following the sound economic theories.

However, in order to enhance the result for the future research, it also has to take into the consideration the limitation that has been obeyed. Firstly, do not exclude any externalities either positive or negative. Secondly, give a room for the

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The Correlation Between Population and Economic Growth in Malaysia

government actions, for example in Malaysia the government policy in term of family planning is different from other countries.

Next, it is also has to take into the consideration of the local environment such as the local norm and culture such as discourage sex before married and also abortion. Finally, do not ignore the effect of education in determining the economic growth when the rate of population is increase.

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The Correlation Between Population and Economic Growth in Malaysia

REFFERENCES

Boserup, E. 1981. Population and Technological Change: A study of Long Term Trends, University of Chicago Press, Chicago. Coale, A.C. & Hoover, E.M.1958. Population Growth and Economic Development in Low Income Countries: A Case Study of India, Princeton University Press, Princeton. Deaton, A.S. & C.H. Paxson. 1997. The Effects of Economic and Population Growth on National Saving and Inequality, Demography, 34(1), pp. 97-114. Ehrlich, P.R. 1968. The Population Bomb, Ballentine, New York. Elo, I.T., & Preston. 1992. Effects of Early-life Condition on Adult Mortality: A Review, Population Index, 58(2), pp.186-222.43 Higgins, M. & Williamson, J.G. 1997. Asian Demography and Foreign Capital Dependence, Population and Development Review, 20: 553-559.

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