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Export orientation vs import substitution : which strategy should the government adopt? Evidence from Malaysia

Nurhaliq, Puteri and Masih, Mansur (2016): Export orientation vs import substitution : which strategy should the government adopt? Evidence from Malaysia.

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Abstract

Many previous empirical studies focused mainly on the effect of export expansion while ignoring the potential contribution of import substitution in developing economic growth especially for the case of emerging countries. This paper attempts to investigate the relationship between trade and economic growth emphasising the role of import and export in Malaysia over the period 1970 to 2014. The study treats the impact of export and import separately to allow the possibility of asym-metric influences on economic growth by adopting recent time series modelling. The study used Granger Causality test and Variance Decomposition (VDC) method to analyse the influences of trade improvement on growth development. This is important in providing evidence whether growth is driven mainly by trade activities or whether there is a reciprocal impact between trade and growth. The result confirms the existence of bidirectional long run relationship between growth and export and between growth and import, suggesting that singular focus on export from previous study tends to be misleading. This is crucial from the policy point of view in developing strategies to enhance growth. If export drives the economic growth, policy should be directed more towards export orientation and likewise for import.

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