HomeAsia-Pacific Social Science Reviewvol. 16 no. 3 (2017)

The Role of Tourism, Real Exchange Rate, and Economic Growth in Malaysia: Further Evidence From Disaggregated Data

Hanafah Harvey | Fumitaka Furuoka | Qaiser Munir

Discipline: Social Science



Malaysia is one of the top tourist destinations in the world and the best tourist destination in the Southeast Asian region (Sarmidi & Salleh, 2011). During the past decades, with the support from Malaysian government tourism campaigns, its tourism’s sector has grown by an average of 10% annually. Indeed, the tourism sector has emerged as an important alternative source of national income. Malaysia has successfully diversifed its economic base from an agricultural to manufacturing and currently a service oriented economy. For example, the agriculture sector’s contribution to Malaysian economy was less than onetenth of its income while the manufacturing sector’s contribution decreased to less than one-third of its GDP. However, the services sectors have grown to more than
50% of national income. As such, the tourism sector is the biggest contributor of the Malaysian economic growth within the service sectors (Tang, 2013). There have been numerous empirical studies on the tourism-led growth (TLG) hypothesis in Malaysia. The hypothesis states that tourism generates economic growth (see Brida, Cortes-Jimenez, & Pulina, 2014). The empirical results, however, have been mixed. For example, Li, Mahmood, Abdullah, and Chuan (2013) utilized the Granger causality in vector error correction model (VECM) using annual data 1974–2010. They investigated the long-run triangular relationship for economic growth, tourism receipts, and other variables (physical capital, education, health, exports, and government tourism expenditure). They found evidence
between tourism and economic growth. Tang and Tan (2013) re-tested the TLG hypothesis in Malaysia by using the recursive Granger causality test. They pointed out that there are long-run co integration relationships between the international tourist arrivals and industrial production index in all of 12 countries. By contrast, the recursive Granger causality test detected the unilateral causality from tourism development to economic growth in eight countries out of the 12 countries. These economists concluded that the TLG hypothesis was valid in Malaysia. In addition, Tang (2011), using Malaysia as a case study applying Granger causality test, examined using monthly data (1995 to 2009) the relationship between economic growth with Industrial production index and tourist arrivals. He found that the results are mixed.