International Journal of Academic Research in Business and Social Sciences

search-icon

The Impacts of Employment-to-Population, Interest Rate Spread and Inflation on Malaysian Economic Growth: Evidence from 1991 to 2019

Open access
The International Monetary Fund (IMF), in its latest Global Financial Stability Report issued in October 2022, foresees that the world economy is going to be in deep recession in 2023. The main issues highlighted in the report that contribute to the global recession are the multi-decades higher-than-anticipated inflation and the hike in the interest rates. The report further highlights that the large-sized firms are facing a declining profitability due to skyrocketing cost and the increasing number of bankruptcy cases among the small and medium-sized firms because of rising borrowing cost. In the wake of this, the firms need to close down the businesses or to scale down by cutting down the number of employees. This, consequently, will affect the employment rate relative to increasing number of world population. Therefore, based on these current issues, we aim to examine the relationship and the impacts of the macroeconomic determinants on the economic growth focusing on Malaysia. Four macroeconomic determinants were selected namely employment-to-total population ratio (EPR), MYR-to-USD exchange rate (EXC), lending-borrowing interest rate spread (IRS) and consumer price index (CPI). Gross domestic product growth rate (GDPGR) was used as a proxy for the economic growth. Annual secondary data from 1991 to 2019 were gathered from the World Bank Open Data and the Department of Statistics Malaysia (DOSM) Official Portal. We based our analyses on the descriptive statistics to look at the mean, maximum-minimum and standard deviation of the data of respective variables, then we use the Pearson’s correlation test to show the negative or positive correlation between the dependent variable (DV) and independent variables (IVs) and finally we employ the multiple regressions test to reveal the significant or insignificant relationships together with the positive or negative impacts of each IV on the DV. The main findings from the correlation test indicate EPR, EXC and IRS have negative correlations, where EXC has moderate correlation whilst the other two have very weak correlations with GDPGR. Meanwhile, CPI shows positive but very weak correlation with GDPGR. Meanwhile, the regressions test reveals EPR and IRS positively influence GDPGR whilst EXC and CPI have negative impacts on the Malaysian economic growth. However, only EXC is found to be significant out of the four determinants. The results imply the higher employment creates larger productivity to the economy and the more stable monetary policy (IRS) the better contribution to economic growth. On contrary, depreciation of MYR against USD and fluctuation in price level of goods and services lead to economic instability. The findings have significant implications for policy makers, businesses and investors in their decision making. For future research, we suggest to test on other economic variables such as industrial production index, foreign direct investment and money supply together with non-economic variables such as human development index, corruption perception index and global peace index of the country. We also suggest future studies to apply other methodologies for robustness. Comparison with other countries will also make the findings more meaningful.
Agalega, E., Antwi, S. (2013). The Impact of Macroeconomic Variables on Gross Domestic Product: Empirical Evidence from Ghana. International Business Research, 6(5), 108-116.
Andolfatto, D. (2005). Macroeconomic Theory and Policy. Preliminary Draft Simon Fraser University.
Antwi, S., Mills, E. F., Zhao, X. (2013). Impact of Macroeconomic Factors on Economic Growth in Ghana: A Cointegration Analysis. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(1), 35-45.
Ayyoub, M., Chaudhry, I. S., Farooq, F. (2011). Does Inflation Affect Economic Growth? The Case of Pakistan.” Pakistan Journal of Social Sciences, 31(1), 51-64.
Bhalla, S. S. (2007). Second among Equals: The Middle Class Kingdoms of India and China. Peterson Institute for International Economics.
Divya, K. H., Devi, V. R. (2014). A Study on Predictors of GDP: Early Signals. Procedia Economics and Finance, 11, 375-382.
Dotsey, M. (1998). The Predictive Content of the Interest Rate Term Spread for Future Economic Growth. FRB Richmond Economic Quarterly, 84(3), 31-51.
Gadanecz, B., Mehrotra, A. N. (2013). The Exchange Rate, Real Economy and Financial Markets. BIS Paper, 73b, 11-23.
Gala, P. (2008). Real Exchange Rate Levels and Economic Development: Theoretical Analysis and Econometric Evidence. Cambridge Journal of Economics, 32(2), 273–288.
Haron, S., Shanmugam, B., Doran, H. (1997). Determinants of Islamic bank profitability [Thesis Doctoral thesis, Research University of New England (UNE)].
Jilani, S., Cheema, F., Asim, M. (2010). Exploring Impact of Macro Economic Variables on GDP of Pakistan. IBT Journal of Business Studies, 6(2), 65-73.
Kogid, M., Mulok, D., Beatrice, L. F. B., Mansur, K. (2010). Determinant Factors of Economic Growth in Malaysia: Multivariate Cointegration and Causality Analysis. European Journal of Economics, Finance and Administrative Sciences, 24, 123-135.
McConnell, C. R., & Brue, S. L. (2008). Economics: principles, problems and policies. New York: McGraw-Hill Irwin.
Munir, Q., Mansur, K. (2008). When Does Inflation Hurts Economic Growth: A Case Study of Malaysia. Proceedings of the 3rd International Borneo Business Conference, 196-205.
Mutinda, D. M. (2014). The effect of lending interest rate on economic growth in Kenya [Masters dissertation, Department of Finance and Accounting, University of Nairobi].
Obansa, S. A. J., Okoroafor, O. K. D., Aluko, O. O., Eze, M. (2013). Perceived Relationship between Exchange Rate, Interest Rate and Economic Growth in Nigeria: 1970-2010. American Journal of Humanities and Social Sciences, 1(3), 116-124.
Qayyum, A. (2006). Money, Inflation, and Growth in Pakistan. The Pakistan Development Review, 2, 203-212.
Ramzan, M., Asif, M., Mustafa, M. (2013). Impact of Trade Openness and Macroeconomic Variables on GDP Growth of Pakistan. Paradigms: A Research Journal of Commerce, Economics and Social Sciences, 7(1), 37-47.
Saget, C. (2000). Can the Level of Employment Be Explained by GDP Growth in Transition Countries? (Theory versus the Quality of Data). Labour, 14(4), 623-643.
Semuel, H., Nurina, S. (2015). Analysis of the Effect of Inflation, Interest Rates, and Exchange Rates on Gross Domestic Product (GDP) in Indonesia. Proceedings of the International Conference on Global Business, Economics, Finance and Social Sciences (GB15_Thai Conference), 1-13.
Sodipe, O. A., Ogunrinola, O. I. (2011). Employment and Economic Growth Nexus in Nigeria. International Journal of Business and Social Science, 2(11), 232-239.