Infrastructure Development and Economic Growth: Evidence from Four Northern States of Malaysia
This study attempts to examine the effect of infrastructure development on economic growth of the four northern states of Malaysia namely, Kedah, Perlis, Pulau Pinang and Perak for the period of 2007-2015. An infrastructure development index (IDI) is developed by merging four main indicators such as transportation, electricity, ICT and water & sanitation. These four indicators are further divided into seven sub-indicators and the principal component analysis (PCA) is employed to develop the index. The infrastructure development index (IDI) is then used together with other control variables such as labor force, capital investment and health to estimate its effect on economic growth of the four states. The traditional panel data model; fixed effect and random effect models are employed to analyse the impact of IDI on economic growth and based on the Hausman’s specification test, the random effect model is chosen. The outcomes reveal that the infrastructure development index has a positive and significant impact on economic growth in the four states. In addition, it is also found that labour force capital investment and health also positively and significantly affect the economic growth. Therefore, it is important for the four states to continuously review and implement a necessary policy to improve infrastructure facilities as well as human capital development to promote economic growth in the region. The public sector has to play a leading role through direct investment in various infrastructure services. The government also should encourage more participation of private sectors to invest through policies that tend to enhance incentives for private investors. This strategy is very crucial for the survival and growth of the infrastructure sectors
Keywords - Economic Growth, Infrastructure Development, Principal component Analysis (PCA), Random effect model.