Shadow Economy and Selected Macroeconomic Variables Affecting Economic Growth in Malaysia

Abstract

This study examines the effects of the shadow economy (SE) and selected macroeconomic variables of the agriculture expenditure (AGRE), foreign direct investment (FDI), tax burden (TB) and tourism (TOR) on the economic growth (EG) in Malaysia over the study period of 1970 to 2020. The auto-regressive distributed lag (ARDL) bounds testing approach is applied to clarify the long-run cointegrating relationship between the EG and its fundamental variables. Simultaneously, the error correction model (ECM) is estimated for the short-run dynamics model in tandem with the long run estimation. Results showed that the effects of the long-and short-run rela-tionships on the EG in Malaysia were verified. From the long-term estimate’ results, AGRE, FDI, TOR and SE positively affect the EG in Malaysia. Their increases have led to a rise in the EG. The TB had a negative influence on the EG. The result may help Malaysian policymakers in revising their current policies to strengthen their macroeconomic indicators, which may attract the Malaysian economy with a higher EG status in the future.