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  • MACROECONOMIC DETERMINANTS OF ECONOMIC GROWTH IN INDOCHINA COUNTRIES: A PANEL ANALYSIS

    VOON JANNA

    This project is submitted in partial fulfilment of the requirements for the degree of Bachelor of Economics

    with Honours (International Economics)

    Faculty of Economics and Business UNIVERSITI MALAYSIA SARA WAK

    2011

  • ABSTRACT

    Macroeconomic Determinants and Economic Growth in Indochina Countries:

    A Panel Analysis

    By

    Voon Jan Na

    This study examines the mam macroeconomic determinants of economic

    growth in Indochina countries, namely Cambodia, Laos, Myanmar, Thailand and

    Vietnam over the period of 1980 to 2009 where the sample period is dictated by data

    availability. Various econometric methodologies like Levin, Lin and Chu (LLC), 1m,

    Pesaran and Shin (IPS) and Fisher-type (Fisher-ADF and Fisher-PP) panel unit root

    tests, Pedroni's cointegration test and Hausman test are conducted in this study. The

    result shows that there is non-existence of long run relationship between the

    macroeconomic determinants and economic growth in Indochina countries. Besides,

    this study found that the most significant macroeconomic determinant contributes to

    the economic growth in Indochina countries is inward Foreign Direct Investment

    (FDI). The negative relationship between inward FDI and economic growth imply

    that FDI-led growth hypothesis is not valid in Indochina countries which violated the

    endogenous growth theory.

  • ABSTRAK

    Faktor Penentu Makroekonomi dan Pertumbuhan Ekonomi di Negara-negara

    Indocina: Sebuah Analisis Panel

    Oleh

    Voon Jan Na

    Kajian ini dijalankan untuk mengkaji faktor penentu makroekonomi utama

    bagi pertumbuhan ekonomi di Negara-negara Indoeina, iaitu Kemboja, Laos,

    Myanmar, Thailand dan Vietnam dalam tempoh 1980 hingga 2009 di mana tempoh

    sampel ditentukan oleh kesediaan data. Pelbagai jenis metodologi ekonometrik

    seperti ujian kepegunan panel Levin, Lin and Chu (LLC), 1m, Pesaran and Shin

    (IPS) and Fisher-type (Fisher-ADF and F'isher-PP), ujian kepengamiran Pedroni

    dan ujian Hausman diaplikasikan dalam kajian ini. Hasil kajian ini menunjukkan

    bahawa faktor penentu makroekonomi dan pertumbuhan ekonomi tidak mempunyai

    hubungan jangka panjang di negara-negara Indoeina. Di samping itu, kajian ini

    mendapati bahawa pelaburan langsung asing (PLA) masuk merupakan faktor

    penentu yang signifikan terhadap pertumbuhan ekonomi di negara-negara Indocina.

    Pelaburan langsung asing masuk yang berpengaruh seeara negatif terhadap

    pertumbuhan ekonomi menunjukkan bahawa hipotesis pertumbuhan paeuan PLA

    tidak berlaku di negara-negara Indoeina di mana ia melanggar teori pertumbuhan

    endogen.

  • ACKNOWLEDGEMENT

    First and foremost, I would like to express my deepest thanks to my final

    year project supervisor, Associate Professor Dr Venus Khim-Sen Liew of the Faculty

    of Economics and Business, Universiti Malaysia Sarawak (UNIMAS) for providing

    me with useful insights and advice. His professional as well as patience are more

    than I ever expected that helped me tremendously. He guided me throughout every

    single stage of my study, especially in using the E-Views software to run panel data.

    His detailed comments and suggestions for the revision of draft chapters ofthis study

    are gratefully acknowledged.

    Secondly, thanks are due to my beloved family for their love, support and

    their belief in me all my life. This project would not have been completed without

    the enormous courage and help of my family. Besides, my special thanks go to my

    course mates and friends for their tolerance and cooperation in sharing their point of

    view and ideas with some precious advices as well as supports all the way through

    completing my final year project.

    Last but not least, I would like to express my gratitude to the Faculty of

    Economics and Business, UNIMAS for providing me with an opportunity to do

    empirical study through the availability of final year project. The useful guidelines

    given help me a lot in accomplishing my final year project.

  • TABLE OF CONTENT

    LIST OF TABLES XlI

    LIST OF FIGURES Xl11

    CHAPTER 1: INTRODUCTION 1-33

    1.0 Introduction

    1.1 Background of Country 2

    1. 1.1 Cambodia 3

    1.1.2 Laos 8

    1.1.3 Myanmar 13

    1.1.4 Thailand 18

    1. 1.5 Vietnam 24

    1.2 Motivation of Study 29

    1.3 Problem Statement 30

    1.4 Objectives of Study 32

    1.4.1 General Objective 32

    1.4.2 Specific Objectives 32

    1.5 Significance of Study 32

    VlI

  • 1 6 Organization of Study 33

    CHAPTER 2: LITERATURE REVIEW 34-77

    2.0 Introduction 34

    2.1 Theoretical Framework 34

    2.1.1 Export Expansion 35

    2.1.2 Imports 36

    2.1.3 Domestics Savings 37

    2.1.4 Foreign Direct Investment (FDI) 37

    2.1.5 Human Capital 38

    2.1.6 Inflation 39

    2.1.7 Trade 40

    2.1.8 Government Consumption 41

    2.2 Specification of Model 42

    2.2.1 Vector Autoregressive (VAR) Model 42

    2.2.2 Endogenous Growth Model 43

    2.3 Empirical Testing Procedures 46

    2.3.1 Unit Root Test 46

    Vlll

  • r-.. . ,........

    2.3.1.1 Augmented Dicky Fuller (ADF) Test 46

    2.3.1.2 Phillips-Perron (PP) Test 48

    2.3.1.3 Levin, Lin and Chu (LLC) Test 49

    2.3.1.4 1m, Pesaran and Shin (IPS) Test 50

    2.3.1.5 Fisher's Type Test 51

    2.3.2 Cointegration Test 52

    2.3.2.1 Johansen and Juselius (JJ) Cointegration Test 52

    2.3.2.2 Pedroni's Cointegration Test 54

    2.3.2.3 Engle and Yoo Procedure 55

    2.3.3 Error Correction Model (ECM) 56

    2.3.4 Vector Error Correction Model (VECM) 57

    2.3.5 Hsiao's Granger Causality Test 58

    2.4 Empirical Evi

  • 3.2 Data Sample and Data Collection 81

    3.3 Research Design 81

    3.4 Data Analysing Method 82

    3.5 Panel Unit Root Test 82

    3.5.1 Levin, Lin and Chu (LLC) Test 84

    3.5.2 1m, Pesaran and Shin (IPS) Test 86

    3.5.3 Fisher's Type Test 88

    3.6 Pedroni's Co integration Test 90

    3.7 Hausman Test 94

    3.8 Concluding Remarks 97

    CHAPTER 4: EMPIRICAL RESULTS AND DISCUSSIONS 98-113

    4.0 Introduction 98

    4.1 Panel Unit Root Test 99

    4. L 1 Lag Length Selection 99

    4.1.2 Estimation Procedures 100

    4.1.3 LLC Panel Unit Root Test Result 103

    4.1.4 IPS and Fisher-type Panel Unit Root Test Results 105

    x

  • 4.2 Pedroni's Cointegration Test 109

    4.3 Hausman Test III

    4.4 Concluding Remarks II3

    CHAPTER 5: CONCLUSION AND POLICY RECOMMENDATION 114-119

    S.O Introduction 114

    5.1 Summary and Findings 114

    5.1.1 Summary 114

    5.1.2 Findings llS

    5.2 Policy Recommendation 116

    5.3 Limitations of Study and Further Research Recommendation ll8

    5.4 Concluding Remarks 119

    REFERENCES

    APPENDIX

    Xl

  • LIST OF TABLES

    Table 1.1: The GDP, Constant Prices in Cambodia from 1986 to 2015*

    (2008 est.) 4

    Table 1.2: The GDP, Constant Prices in Laos from 1980 to 2015*

    Table 1.3: The GDP, Constant Prices in Myanmar from 1980 to 2015*

    Table 1.4: The GDP, Constant Prices in Thailand from 1980 to 2015*

    Table 1.5: The GDP, Constant Prices in Vietnam from 1980 to 2015*

    (2009 est.) 9

    (2008 est.) 14

    (2009 est.) 19

    (2009 est.) 25

    Table 2.1: The Summary of Literature Review 64-77

    Table 4.1: Result of LLC Panel Unit Root Test 104

    Table 4.2: Results ofIPS and Fisher-Type Panel Unit Root Tests 106

    Table 4.3. Summary ofPanel Unit Root Tests Results 108

    Table 4.4: Pedroni's Cointegration Test Results 110

    Table 4.5: Hausman Test Result III

    X11

  • LIST OF FIGURES

    Figure 1.1: Trend of GDP Growth Rate in Cambodia from 1986 to 2015 *

    (2008 est) 5

    Figure 1.2: Trend ofGDP Growth Rate in Laos from 1980 to 2015*

    Figure 1.3: Trend ofGDP Growth Rate in Myanmar from 1980 to 2015*

    Figure 1.4: Trend ofGDP Growth Rate in Thailand from 1980 to 2015*

    Figure 1.5: Trend ofGDP Growth Rate in Vietnam from 1980 to 2015*

    (2009 est) 10

    (2008 est) 15

    (2009 est) 20

    (2009 est.) 26

    Figure 4. 1: Macroeconomic Determinants and Economic Growth in

    Indochina Countries from 1980 to 2009. 101-102

    ':" f i

    I

    Xl 11

  • CHAPTER 1

    INTRODUCTION

    1.0 Introduction

    A country's economic growth may be defined as a long-term rise in capacity

    to supply increasingly diverse economic goods to its population, this growing

    capacity based on advancing technology and the institutional and ideological

    adjustments that it demands (Kuznets, 1973). The three main components of

    economic growth are capital accumulation, population growth and technological

    progress. By overcoming the diminishing

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