Economics Report: Analysis of Malaysia's Economic Growth Factors

This economics report analyzes an article on the relationship between monetary policy and economic growth in Malaysia, examining the impact of inflation, interest rates, and money supply on the country's GDP. The report utilizes economic theories such as demand and supply, elasticity, and scarcity to understand the economic performance. It highlights the role of FDI and governmental policies in influencing economic growth, while also discussing economic discrepancies and contradictions within the Malaysian context. The analysis reveals that Malaysia has faced challenges in economic growth due to factors like low inflation, reduced money supply, and a decline in FDI. The report concludes by emphasizing the relevance of economic tools in understanding Malaysia's economic condition and the need for effective policies to address its economic challenges. The report also provides an overview of how various economic theories affect the economic performance of an economy.

Running head: ECONOMICS ASSIGNMENT
Economics assignment
Name of the student
Name of the Assignment
Author note

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Table of Contents
Introduction:....................................................................................................................................2
Analysis of the selected article:.......................................................................................................2
Theoretical economic concepts utilised in the selected article:.......................................................4
Governmental policies to control the situation:...............................................................................5
Economic discrepancies of the selected article:..............................................................................6
Conclusion:......................................................................................................................................7
Reference:........................................................................................................................................8

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Introduction:
Malaysia is one of the developed nations, which has been facing serious issues with its
economic development through last three decades (Diamond 2015). Various issues like oil price
shock, fall in Foreign Direct Investment (FDI) has affected the country’s economic growth
(Akalpler and Duhok 2018). Though the successive government programs have effectively
constrained the inflation below 2.08% level, the country has been facing negative growth since
1985 (Park and Yoo 2014). Post Global Financial Crisis (GFC) country’s economy has been
struggling hard to increase its growth rate, however, it has failed to do so. This report is meant to
analyse an economic journal “Does monetary policy affect economic growth: evidence from
Malaysia: published in emerald insight, on March of 2017in order to understand usage of various
economic tools in real life scenario. The report will consider how well economic theories like
demand and supply scarcity, comparative advantage and elasticity affect the economic
performance of an economy. In addition to this under the purview of the various economic tools,
the report will portray economic growth status of the Malaysian economy.
Analysis of the selected article:
According to the Ergin Akalpler, the selected paper has been primarily developed to trace
the relationship between the economic growth and monetary policy under the purview of the
developing economy. In addition to this, selected business article has provided focus on relation
between the inflation, interest rates, supply of money and Gross Domestic Product (GDP). The
article has considered the case of Malaysia to check the above mentioned relationships through
utilising the various quantitative and qualitative measurements (Akalpler and Duhok 2018).
Moreover, utilising the growth of computer software and least square estimations, the report has
investigated the connection and significance level between the selected variables. From the

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analysis the report has showcased that there is a positive relationship between the economic
growth and factors like money supply, inflation, and interest rate. The report has also showcased
that if there is 1% change in the inflation rate, then it lead to increase in economic growth by
77% (Akalpler and Duhok 2018). On the other hand, rise in money supply and interest also has a
positive effect on the economic growth, which has been quantified through the low coefficient of
least square method estimation. 0.02 being a lower coefficient highlights that a small change in
the selected variables can lead to a major change in the economic growth due to higher elasticity
of the variables (Bhattacharya et al. 2016).
Figure 1: Malaysian growth and FDI
Source: (Fadhil and Almsafir 2015)
Lastly, the report also portrays that Malaysia has been facing reduced economic growth due to
their lower inflation rate, fall in money supply and production of higher labour intensive goods
and service (Mohamed et al. 2017). In addition to this, from figure 1, it can be seen that country
has been facing lower flow of FDI, which has been also promoting lower economic growth of
the country. Considering this it can be stated that it is one of the best suited article for this

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business report. It helps to grow familiarity with the demand-supply, scarcity, elasticity, inflation
and various other economic tools and language of economic analysis and reasoning through
portraying the economic condition of the Malaysia.
Theoretical economic concepts utilised in the selected article:
Chosen article has been developed depending upon the economic theories of demand and
supply, elasticity, comparative advantage, international trade and scarcity of resources. From the
figure 2, it can be seen that there has been certain gap in the money supply and money demand.
Inflation rate of the country has been low since 2000, which caused lack of foreign capital inflow
reducing the demand of Malaysian currency in foreign countries (Ghazail et al. 2015). It has also
constrained the interest rate to rise on investment side. Subsequently the article has found that
there has been casual relationship between the factors like money supply, inflation, employment
and scarcity (Akalpler and Duhok 2018).
Figure 2: monetary indicator of Malaysia
Source: (Evan et al. 2015)

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With rise in money supply, there will rise in inflation and it will provide essential boost
to enhance the interest rate through rise in the employment rate (Friedman 2017). Considering
the supply side, low interest rate has also been hampered the FDI and introduction of new firm in
the country. Due to lack of enough money supply and FDI, employment of the country has been
also been unchanged over a long time, which has curtailed the economic growth to a great extent
(Akalpler and Duhok 2018). The report has highlighted that capital accumulation or the
investment is one of the major factors that lead to economic growth. The report has found that
many Asian countries like China, India, Singapore has been grown at a large scale depending
upon the FDI led growth (Pradhan 2017). Considering the case of Malaysia it has been found
that the country has failed to enhance its interest rate, which has reduced the capital
accumulation to provide stimuli to the economic growth of the nation (Borner et al. 2016). On
the other hand it has also been observed that lack of money supply has failed to spur the real rate
of return, which forced the economy to have lower economic growth over the last three decades.
Governmental policies to control the situation:
The report has found that there has been negative growth in Malaysia since last three
decades, thus it has constructed the research in such a way that it can be utilised by the
governmental authority to form policies for economic growth (Liew et al. 2016). According to
the article, there have been various policies in the past decade from the government, which were
aimed to enhance the economic growth of the country. For instance, the government has used
trade liberalisation policies through export promotion and import substitution; however, it has
failed to boost the economy due to scarcity of skilled labour in the country and lower interest rate
(Ormaechea et al. 2017). On other hand, brain drain is one of the factors that have caused
migration of the labour from Malaysia to developed countries like US and UK (Spaan and

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Naerssen 2017). Under this scenario government has taken financial liberalisation policies
through domestic financial reform, enhanced capital flows and FDI. Scenario remained same
though there has been repetitive try from the government to enhance the economic growth.
Economic discrepancies of the selected article:
According to the theory of money supply, if there is lack of money supply, then it will
lead to rise in the interest rate. With rise in interest rate it is expected that, there will be higher
FDI, which can lead to higher growth of an economy (Engel 2014). However, considering the
case of Malaysia, the selected article has highlighted there were no substantial growth in
economy. This scenario of Malaysian economy hampers the common belief of economic
theories. In addition to this, it has been argued by Porter and Kramer (2018), that if there is fall in
unemployment, then it means that the economy has been growing. Considering the case of
Malaysia, it can be seen that the article has highlighted there is negative growth rate in front of
Malaysia during last three decades (Akalpler and Duhok 2018). Positive relationship between the
inflation and economic development is one of the major factors that have been observed from the
selected article. According to the capitalist model of Keynes, certain level of inflation is
necessary for economic development, however, if it goes beyond the natural rate, then it can lead
to stagflation, where the price of goods and services can become too high and growth of GDP
will be stagnant (Keynes 2016). In addition to this, higher level of inflation can also lead to
market breakdown in absence of lower FDI, depending upon the market scenario of the economy
(McCombie and Thirlwall 2016). Summing these, it can be stated that the finding of the report is
contradictory to some extent under the purview of standard economic theories and the Malaysian
economy.

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Conclusion:
From the above analysis of the selected article it can be highlighted that economic tools
like supply and demand, elasticity, scarcity and comparative advantage acts as effective tools to
discuss economic condition by the researchers. Considering the selected paper, it can also be
stated that the demand and supply gap of the FDI has affected the Malaysia’s economic
condition. Rate of inflation and lack of money supply has caused the country’s economy to face
lower growth rate since past three decades. In addition to this, Malaysia being a labour intensive
country has faced higher elasticity of its produce. It has affected the economic condition of the
country largely, which can be seen from the drop in economic growth during the GFC. Volatility
in the market and lack of incentive as well as scarcity of skilled labours to open new business in
the country has also hampered the economic growth of the country. To conclude it can be stated
that the selected article helps to develop familiarity with the demand-supply, scarcity, elasticity,
inflation and various other economic tools and language of economic analysis and reasoning
through portraying the economic condition of the Malaysia.

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Reference:
Akalpler, E. and Duhok, D., 2018. Does monetary policy affect economic growth: evidence from
Malaysia. Journal of Economic and Administrative Sciences.
Bhattacharya, M., Paramati, S.R., Ozturk, I. and Bhattacharya, S., 2016. The effect of renewable
energy consumption on economic growth: Evidence from top 38 countries. Applied Energy, 162,
pp.733-741.
Borner, S., Brunetti, A. and Weder, B., 2016. Political credibility and economic development.
Springer.
Diamond, L., 2015. Facing up to the democratic recession. Journal of Democracy, 26(1), pp.141-
155.
Engel, C., 2014. Exchange rates and interest parity. In Handbook of international
economics (Vol. 4, pp. 453-522). Elsevier.
EVAN, L., Lee, A.S.Y. and Arip, M.A., 2015. Macroeconomics determinants of external debt in
Malaysia. International Journal of Economic Sciences, 4(4), pp.14-26.
Fadhil, M.A. and Almsafir, M.K., 2015. The role of fdi inflows in economic growth in Malaysia
(time series: 1975-2010). Procedia Economics and Finance, 23, pp.1558-1566.
Friedman, M., 2017. Quantity theory of money. The New Palgrave Dictionary of Economics,
pp.1-31.
Ghazali, M.F., Lean, H.H. and Bahari, Z., 2015. Is gold a good hedge against inflation?
Empirical evidence in malaysia. Kajian Malaysia: Journal of Malaysian Studies, 33.
Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers &
Dist.

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Liew, S.L., Mansor, S.A. and Puah, C.H., 2016. Macroeconomic determinants of capital flight:
An empirical study in Malaysia. International Business Management, 10(13), pp.2526-2534.
McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments
constraint. Springer.
McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments
constraint. Springer.
Mohamed, M.R., Singh, K.S.J. and Liew, C.Y., 2017. Impact of foreign direct investment &
domestic investment on economic growth of Malaysia. Malaysian Journal of Economic
Studies, 50(1), pp.21-35.
Oecd.org. (2018). [online] Available at: http://www.oecd.org/countries/malaysia/2682426.pdf
[Accessed 22 Mar. 2018].
Ormaechea, M.S.A., Komatsuzaki, M.T. and Correa-Caro, C., 2017. Fiscal Reforms, Long-term
Growth and Income Inequality. International Monetary Fund.
Park, S.Y. and Yoo, S.H., 2014. The dynamics of oil consumption and economic growth in
Malaysia. Energy Policy, 66, pp.218-223.
Porter, M.E. and Kramer, M.R., 2019. Creating shared value. In Managing Sustainable
Business (pp. 327-350). Springer, Dordrecht.
Pradhan, J.P., 2017. Emerging multinationals: A comparison of Chinese and Indian outward
foreign direct investment. Institutions and Economies, pp.113-148.
Spaan, E. and van Naerssen, T., 2017. Migration decision-making and migration industry in the
Indonesia–Malaysia corridor. Journal of Ethnic and Migration Studies, pp.1-16.

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The Business Times. (2018). Malaysia monetary policy to focus on growth after inflation ebbs.
[online] Available at: http://www.businesstimes.com.sg/government-economy/malaysia-
monetary-policy-to-focus-on-growth-after-inflation-ebbs [Accessed 22 Mar. 2018].
Article link: https://www.emeraldinsight.com/doi/abs/10.1108/JEAS-03-2017-0013?
journalCode=jeas