Infrastructure development and economic growth in Malaysia: An ARDL approach
Nor Aznin Abu Bakar, Siti Hadijah Che Mat
The aim of the study is to analyze the impact of infrastructure development on economic growth in Malaysia for the period of 1983 – 2014. The six main infrastructure indicators are utilized to develop the infrastructure index by using the principal component analysis (PCA). The infrastructure development index is used together with other control variables such as labour force, fixed capital formation and human capital to estimate the long run relationship between independent variables and economic growth. The Autoregressive distributed lag (ARDL) model and the variance decomposition (FEVD) are performed to identify the existence of the long run relationship among all variables and to examine the effect of shocks to the economic growth, respectively. Results obtained indicate that there exists a long run relationship between infrastructure and economic growth for the period under study. The coefficient of expenditure on health and education, investment and infrastructure are 0.02, 0.423 and 0.113, respectively. The results indicate that infrastructure development has a significant positive contribution to economic growth in Malaysia. The forecast error variance decomposition shows that in the long run the infrastructure transitory shock significantly explains 22.44 percent of fluctuations in the economic growth. Therefore the government needs to continuously review and implement a relevant policy to ensure that the infrastructure facilities are adequate and improved as well as the human capital development to stimulate economic growth in Malaysia.