Investigating Exports Performance between Malaysia and OIC Member Countries from 1997-2012

The purpose of this study is to examine the impact of macroeconomic factors such as GDP, CPI, TRGDP and ER on exports between Malaysia and other OIC countries using a panel data for the period of 1997-2012. The panel unit root tests have been applied to confirm the stationarity and level of integration. The overall unit root tests (Dickey & Fuller, 1979; Im, Pesaran, & Shin, 2003; Levin, Lin, & James Chu, 2002) result shows that all the variables are stationary at level and become non-stationary after taking first difference. The Kao cointegration test results approved the cointegration among the panel of proposed countries. After confirm the stationarity level and cointegration FMOLS test is employed to analyze whether a long run relationship between variables exist. The results obtained show that only GDP, TRGDP and ER have significant effect on exports. In examining the short-run relationships among variables, a panel ECM is the applied and it is observed that only ER and TRGDP have positive effect on exports. Results from this study can be used as guidance for policy makers on exports where government can give more attention on both ER and TRGDP to influence exports in the short run.


Introduction
There are several researcher developed the definition of international trade but the most common is "The buying and selling of goods and services across national borders is known as international trade".International trades have huge contribution in the world economy.International trade plays an important role in the development process in Malaysia particularly in transforming the economy from a low income to upper-middle income category.Since three decades the United States of America, The European Union (EU) and Japan were Malaysia's major trading partners.Nevertheless, Malaysian importing and exporting trends have been changed after the world economic and financial crises in 2008 and 2009.The Malaysian main trends of imports and exports are changes towards new and non-traditional markets such as (MITI, 2010).Under the New Economic Model (NEM), the Malaysian government has embarked on a new strategy to shift its trade dependency on the traditional markets and exploring new markets for exports and imports.One of the markets being targeted is the Middle Eastern countries.In addition, exports relationship between Malaysia and other OIC countries becoming more relevant especially after the world economic and financial crisis in 2008 and 2009.Therefore it is vital to study and analyze the on-going Malaysia-OIC trade relationship in this context.Figure1.1 shows the Malaysian trade with other OIC countries.
The purpose of this study is to examine the impact of macroeconomic factors i.e.GDP, CPI, TRGDP and ER on exports between Malaysia and other OIC countries using a panel data from 1997 -2012.The results of this study will reveal whether all variables have impact on exports between Malaysia and other OIC countries, therefore appropriate policies can be implemented by the government.According to author's best knowledge this is one of the pioneer study which probe the relationship between Malaysian exports and other macroeconomic variables of Malaysia and other OIC members countries.Furthermore, applying recently developed Fully Modify OLS for long run and short run relationship and recent time period from 1997-2012 are also be the contribution of this study.

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The rest o internation empirical concludes.transportation costs as proxy for the distance factor which constitutes a significant barrier to trade among OIC countries.Ghani (2007) used Tobit procedure to explore the effects of trade among members of Arab Maghreb Union (AMU) and the members of Gulf Cooperation Council (GCC).The results show that effects are negative, which is patently unusual from estimates for other free trade agreements (FTA).Utilizing cross-country regressions, M. K. Hassan, Sanchez, and Hussain (2010) demonstrate that trade openness has a positive and significant impact on growth for many countries, the effect has been smaller.

Exports
ABU-HUSSIN (2010) also explore the scope of economic integration between five members of the Arab States (LAS) and include five of their major partners; the results show that the LAS economic alliance has not been effectual in cause trade growth, representing a collapse of its members to instate integrative procedures.Meanwhile, Hassan (2001) examines the role of exports towards development in SAARC countries.He argue that SAARC countries need trade rectification to boost trade among them because the size of trade between SAARC countries is small as compare to trade with non-SAARC countries.K. Hassan (2002) investigate Malaysia-OIC trade using gravity model approach from the period 1980-2006.The empirical results of this study claim that GDP of Malaysia and OIC countries, exchange rate, foreign direct investment (FDI) and distance are the major determinants of exports in Malaysia.

Analytical Framework and Data Source
There are number of studies that estimate export equations for OIC.However, since there have been many economic changes in the world generally, and in OIC, in particular, a re-examination, using the latest data available, and employing the current econometric techniques, is essential.Therefore, the purpose of this section is to develop the following model of exports in which all the methodological issues concerning the exports equation estimation will be taken into consideration.

Model Specification
We specify the following equation to analyze the effects macroeconomic factors on exports between Malaysia and other OIC countries;

Data Sources
The annual time series data of Malaysia and other 54-OIC countries has been selected from various sources.The data of real Gross Domestic Product, Consumer Price Index, Trade contribution in the GDP and real exchange rate of Malaysia and other OIC member countries from the year 1997 to 2012 was taken from World Development Indicator (WDI).Whereas, data of Malaysian exports with other OIC countries are taken from the Direction of Trade Statistics, CD-ROM database and website of International Monetary Fund (IMF).

Estimation Method
There are several econometric techniques for panel data analysis.This study will apply Fully Modify OLS proposed by Pedroni (2001)to confirm the long run relationship between selected macroeconomic variables of Malaysia and other OIC countries.To investigate the long run and short relationship overall six different steps have been applied.First, to confirm the stationarity and order of integration panel unit root test such as Maddala and Wu (1999); Levin et al. (2002) and Im et al. (2003) are utilized.There is assumption for FMOLS that all variables must be stationary at level I (0) or at first difference I (1).For the time series data it is possible to analysis the mixture of level I (0) and first difference I (0) variables by applying Autoregressive Distributed Lag Model (ARDL) but unfortunately there is none econometric technique has been developed to analysis the mixture variables in panel data.Second, assume that all the variables are stationary at level I (0) or at first difference I (1).The panel cointegration approach proposed by Kao (1999) will applied to examine the residual based cointegration among proposed variables.Third, after confirm the order of stationarity and cointegration the FMOLS technique has utilized to investigate the long run relationship between the proposed variables.It is observed that the long run relationship results from FMOLS some time show spurious results.To confirm the results are not spurious fourth step to used unit root tests of the residuals of FMOLS model without trend and intercept formation.Fifth, explore the short run relationship by applied panel Error Correction Model (panel ECM).

Panel Unit Root Test
The available literature such as Phillips and Perron (1988) and Dickey and Fuller (1979) provide the unit root test for the individual and time series data.These tests are suffering with several problems especially have low power against the alternative of stationarity of the series, especially if the sample size is small.The panel unit root test such as Im et al. (2003); Levin et al. (2002) and Maddala and Wu (1999) have numerous advantages.For example, theses tests are provide large no of point data, increase the value of degree of freedom and reduce multicollinearity between the two regressors.Panel unit root can written as follow: where

Panel Cointegration Approach
After examine the unit root test if the results shows that all the variables are stationary at same level Kao (1999) panel cointegration will applied.The model for panel cointegration can be written as follow:  Kao (1999) drives two types (Dickey & Fuller, 1979;Phillips & Perron, 1988) of panel cointegration tests.Both test can be written as follow

Fully Modify OLS
As mentioned earlier to explore the long run relationship it is important to confirm the stationarity level and cointegration.At this stage study assume that all the variables are stationary and there is cointegration the long run relationship test FMOLS proposed by Pedroni (2001) has been applied.Let Equation ( 2), can obtain the between-dimension Equation ( 5) is the FMOLS estimator for individual variable.

Panel Unit Root Results
The panel unit root test results are presented in Table1.The results based on various (Dickey & Fuller, 1979;Im et al., 2003;Levin et al., 2002;Phillips & Perron, 1988) tests are suggested that all the variables are stationary at level but after taking first difference all variables become non-stationary and significant at 5% critical value.(Levin et al., 2002); panel B consist on (Im et al., 2003); Panel C consist on (Dickey & Fuller, 1979), panel C consist on (Phillips & Perron, 1988); *denoted significant at 1 percent critical value The unit root test results presented in the above Table are based on different tests.The decision of stationarity based on the majority decision.According to overall results all the variables are stationary at first difference.There is no evidence of mixture of stationary at level I (0) and I(1) or stationary at second difference I (2).Consequently, these results are allowed to proceed further for Kao cointegration test and FMOLS long run relationship test.

Panel Cointegration Test Results
To investigate the panel cointegration Kao (1999) test has been applied.The results of panel Kao cointegration are reported in Table2.The results show that Malaysian exports and other macroeconomic variables of Malaysia and other 54-OIC countries are cointegrated within the panel of proposed countries.According to given p-value there is significant cointegration between proposed variables.

FMOLS Results
Based on the previous results it is confirmed that all variables; export, GDP i , GDP j , PCGDP i , CPI i , CPI j , ER i , ER j , TRGDP i , TRGDP j are cointegrated.We then proceed to analyze whether there exist a long run relationship between variables using a panel cointegration technique.The results of FMOLS are reported in Table 3.The results presented in the Table3 variables such as GDPi, TRGDPi and ERi has significant positive effect on exports.(Levin et al., 2002) -6.563 000 -12.094 000 (Dickey & Fuller, 1979) 96.940 000 162.22 000 (Phillips & Perron, 1988) 95.989 000 183.15 000

FMOLS Residual Test
The results show that long run results are not spurious.

Panel ECM Model
A panel ECM is then applied to examine the short-run relationships among all variables.Results of panel ECM are reported in Table 5.The short run results are presented in Table4 shows that 1 % disequilibrium increase exports by 0.44 percent so it takes 2.27 time periods to restore the equilibrium.From the short run variables it is observed that there are ER and TRGDP positively causing exports in short run.

Conclusions
This paper examines the role of macroeconomic factor in influencing exports between Malaysia and other OIC countries during the 1997-2012.First the panel unit root tests such as Levin, Lin & Chu (2002), Im, Pesaran& Shin (2003), ADF Fisher Chi Square and (Phillips & Perron, 1988) Chi Square was applied.The results indicate that all the variables are stationary at first difference.Furthermore, Koa (1999) test confirm the cointegration among proposed variables.Study found that all variables are cointegrated within the panel of 55-OIC countries.
In addition the FMOLS results confirmed that a long run relationship exists between all variables.By using a panel ECM model, it is revealed that ER and TRGDP positively influencing exports in the short run.Therefore in order to continue and increase competition on exports, it is crucial for Malaysia to formulate policies regarding to exchange rate and trade.

3. 7
Panel Error Correction Model (Panel ECM) Furthermore, a panel ECM were applied to analyze the short-run relationship among variables.A panel ECM model is specified as follows;

Table 1 .
Unit Root Test Results

Table 4 .
Results of FMOLS Residual