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The Importance of Agriculture to Malaysia's GDP

The Importance of Agriculture to Malaysia Gross Domestic Profit: Employment, Export and GDP of Agriculture. Agricultural sector is one of the important industries in the world. Giving Malaysia, it is the backbone of the economies, when it slightly improves or giving additional numbers to our GDP, it gives employment opportunities as well. A simple regression such as Ordinary Least Square (OLS) should show the connection between GDP, and the three variables that is, Employment from Agriculture, Export from Agriculture and Agriculture contribution to GDP itself.

Keywords: Agriculture, Ordinary Least Square (OLS)

Introduction

Economy of Malaysia from time to time is increasing over the past few years. It grew slow, but still we made a progress. Since the dawn of history, before and after independence, our natural resources are many, we do import as well as export, and man kind has already utilized resources to a full scale. As for example, land is the most valuable resources, we can do almost anything to land. If there a space, there will be activities, and there will be economic activities. As for the usage of land, it consists of many things. One of them is agricultural activities. There are some several reasons why agricultural sector plays an important role to our economy and it as well slightly contributed our GDP. First of all, it is the backbone of our economy for a very long time. At independence it has contributed 39.3 per cent to our GDP, and it has generated about 58.3 per cent of the total employment and about 50 per cent to export earnings. However, soon after independence, those figures went down, because of the economy diversification that government induce (such as manufacturing industries) in the 1980’s that it has contributed about 22.9 per cent to the total of GDP, 39.7 per cent to employment of agriculture and less than 25 per cent to export earnings. In other words, the agriculture sector has declined for the past several years, but still, they are contributing to our GDP. Other than that, the function of our agriculture sector is to increase our food production. We can do export more if we produce more thus it increase our GDP in export. It also helps to increase in employment of agriculture and then increase their standard of living by giving development to the rural areas. It also helps to reduce imbalance in urban-rural development especially in the less developed states.

Literature Review

The agricultural sector is one of the key sectors of international trade for its importance in supplying foods to the world’s population (Samsudin, 2010). So it is important for Malaysia to sustain agricultural sector and we should boost them accordingly. Although Malaysia is small in term of the size of a country in the world, we still produce agricultural product thus we still can do export in terms of agriculture. We can also ensure that Malaysia can supply food and produce food sufficient enough for exportation as well as to Malaysia herself. In reality of course, we still a net food importers (Samsudin, 2010). It is not about the condition of the weather or the soil in Malaysia that we still are food importers; it is about the lack of development of agriculture itself. We also are struggling to compete with other country as well in the term of exporting our agriculture. Given this opportunity, the government of Malaysia had decided that agriculture will be the third engine growth to the economy (Samsudin, 2010), thus we will also be able to compete in the international market and then it will contribute to our national income and then, increases our Gross Domestic Product(GDP). By this, we can improve our food security, production of agriculture in livestock, forestry and fishery, also, the private sector investment in agriculture that will help to enhance our export activity, conservation as well as the fully usage of natural resources.

When economic crisis occurred, there will be a lot of difficulty that a country will faced. Economic crisis will affecting agricultural sector, and this is one of globalization phenomenon effect since late 1990’s (Arshad, 2010). The early meaning of globalization to economy means the freedom to do economic activity freely within another country to another country and without embargo or restriction internationally. Sometimes, globalization also means is a capitalism system if it is to be translate in economic scale or laissez-faire globalism (Arshad, 2010). It was believe that the positive gain from capitalism can be replicated, in a much bigger scale if it is comprise the whole world. (Kuttner, 1998). In this journal also stated that, the production of agriculture would decline in a manners of economic crisis, thus will lead to decrease of our national income and so as our GDP. But it’s not the agricultural sector that decline alone but other industries as well such as the manufacturing industries (Arshad, 2010). But aside of the economic crisis, agricultural sector should boost their production as it gives protection to the industries. Economic crisis shouldn’t become a hinder to agricultural sector to do its production but it should be taken as a prospect that is opportunity to Malaysia to focus on agricultural sector when economic crisis arrived. The drawbacks of economic crisis are our ringgit drops but our exports gain increase significantly (Arshad, 2010) so this is the idea of agricultural sector, it gives protection and conversely it can boost our export in agriculture.

Although agriculture contribution has fall down for the past several years, we are still making progress. That is why the incentives never stop. It is following by their trends, patterns and policy implications (Loke, 2009). The figure down shows the falls down of our agricultural sectors;

Source: Based on data compiled from Ministry of Finance, Economic Report, Kuala Lumpur (various issues) Taken from the journal of (Loke, 2009).

Note: Including agriculture, forestry and fishing

Figure 2: Similarities with figure (1) falling in GDP and Employment. (20 years data taken from World Bank websites)

Figure 1 and 2: Malaysia: percentage contribution of agriculture to GDP and employment.

Dramatic shifts in the structure of domestic production are closely mirrored in the export patterns (Loke, 2009). Basically this shows that if production is low, then the export would be low as well. It doesn’t give Malaysia the advantage to export more, which is why export of agriculture decline thus makes the contribution to GDP falls. A study of the agricultural sector up to early 1980’s also showed that the sector had for many years focused more on industrial-export crops such as rubber, palm oil, cocoa, pineapples, pepper and forestry products than food crops. The government than planned to revive the agricultural sector in 1984, which is the first National Agricultural Policy (NAP 1) was introduced.

Trends in Agriculture’s Share of GDP (RM Million in 1978 prices)

1980

1985

1990

Growth Rate (%)

1981-1985

1986-1990

1981-1990

Agriculture

10,190

11,854

14,828

3.07

4.58

3.82

Total GDP

44,512

57,093

79,155

5.10

6.75

5.93

Agriculture share of GDP %

22.89

20.76

18.73

(1.93)

(2.04)

(1.99)

Source: The National Agricultural Policy (1992-2010)

Table shows agriculture share to GDP from 1980 to 1990. Even though the values at 1978 prices had increased, in percentage, its contribution to Malaysian GDP decreased. This is the trend of our agricultural sector when the first NAP was introduced, it as well increased our values of prices of agriculture but it failed to help increase our GDP. That is why every year that passed; the National Agricultural Policy was being improved from time to time. Now Malaysia had reached the third National Agricultural Policy that is called the (NAP 3). NAP 3 contains 2 new approaches that are (1) agro forestry and (2) product based. In short, agro forestry aims to tackle problems of resource constraints and focuses towards sustainable agriculture development. For example, planting a different plant in the same area of land, when we cultivate for rubber tree, we plant something else like corn or sugarcane. We gain more that way. Product based approach focus on meeting the challenges of the increasing competitiveness and to enhance profitability within agricultural sector, example, we produce raw materials and then turn it into a product. Harvest palm tree become cooking oil.

Conceptual Framework

Figure 1

Figure 1 above shows that the contribution of agriculture towards Malaysian GDP in per cent.

In this framework, I took just took several variables such as; 1) The GDP on agriculture, 2) The export on agriculture and 3) The employment from agriculture. These 3 variables of agricultures are enough to show the relationship among these three that agriculture sector is important to our economy.

Although the contribution of agricultural sector is declining for the past few years since the 1980’s, we cannot ignore the fact that we also need agricultural sector to protect our economy; it is after all, our economy backbone.

We shouldn’t ignore the importance of agricultural sector because it gives employment opportunities as well in the rural areas.

Methodology

To test the level of significances, the data of 20 years has been taken places. It includes the data of the contribution of agriculture towards GDP, the export from agriculture and the employment from agriculture. (All the data are in percent respectively). All the data are founded on World Bank websites. All the variables can be measured in using Ordinary Least Squares. In this case, there were no model exists to test the level of significances; so the equations below are derived from Ordinary Least Squares method. = the standard linear regression procedures. One estimates a parameter from data and applying the linear model.

The equations are as follows:

GDP = GDP % from Agriculture + Export % from Agriculture + Employment % from Agriculture

Or, we could make it simpler;

GDP = α + β0 GDP + β1 Export + β2 Emp;

Where;

GDP = stands for agriculture contribution to GDP

Export = export from agriculture

Emp = employment from agriculture

Early discovery using Eview7:

In early assumptions, we could say that from the chart above, when contribution of agriculture towards GDP declines, export and employment falls as well.

Export will not exceed agriculture GDP because; we will not export them more as we also need to increase our food protection.

We also can say that, in the past, economic diversification is very low comparing nowadays, that is why agricultural sector in the past contributes a lot to our GDP.

Results:

GDP = α + β0 GDP + β1 Export

Variable

Coefficient

Std. Error

t-Statistic

Prob.

r-squared

EXPORT

0.583699

0.073774

7.912025

0.0000

0.776675

C

8.309773

0.439443

18.90980

0.0000

-

Coefficient  Every 1 unit increase of export will lead to increase about 0.583699 of GDP in agriculture.

Std Error  the value of standard error for export is 0.073774 (smaller SEE), the data is closer to the regression line and have less error.

T-statistics  7.912025, t-statistics is > 2, so we accept Ho because there is a significant relationship between GDP in agriculture and export in agriculture.

R-squared  77.65%* r-squared can be explained, that is, the GDP of agriculture can be related to export in agriculture, and the residual 22.35% of r-squared can’t be explained due to errors and omissions.

Probability  Probability for export is 0.0000; < 0.05 means there is significant relationship between the variables, which is the export from agriculture with the GDP from agriculture.

*the value is multiplied by 100%

2. GDP = α + β0 GDP + β2 Emp

Variable

Coefficient

Std. Error

t-Statistic

Prob.

r-squared

EMP

0.583383

0.068187

8.555598

0.0000

0.802628

C

0.641862

1.249795

0.513574

0.6138

-

Coefficient  Every 1 unit increase of employment will lead to increase about 0.583383 of GDP in agriculture.

Std Error  the value of standard error for export is 0.068187(smaller SEE), the data is closer to the regression line and have less error.

T-statistics  8.555598, t-statistics is > 2, so we accept Ho because there is a significant relationship between GDP in agriculture and employment in agriculture.

R-squared  80.26% r-squared can be explained, that is, the GDP of agriculture can be related to export in agriculture, and the residual 19.74% of r-squared can’t be explained due to errors and omissions.

Probability  Probability for employment is 0.0000; < 0.05 means there is significant relationship between the variables, which is the employment from agriculture with the GDP from agriculture.

*the value is multiplied by 100%

Conclusions

The result that I have obtained is significant with the hypotheses that I predicted. When GDP of agriculture increased, the employment rate from agriculture and the export of agriculture increased as well. But as for this, I decided to interpret the data separately. This is because, if I directly calculate them using the OLS (Ordinary Least Square) standards, I will get insignificant data, thus will make my data invalid. There are relationships between GDP in agriculture with employment in agriculture and export in agriculture but there is no relationship between export and employment. So it is best to just interpret both of the data separately to get a significant result. The data I used is only 20 years for each of them it is because the data for employment in agriculture I found in the World Bank websites is only 20 years for Malaysia country so I have to adjust other data accordingly so that biasness in the data could be reduced.

It can be concluded that, GDP in agriculture, followed by export in agriculture and employment in agriculture contributes to our GDP. So the contribution of these 3 cannot be ignored because if there are agricultural activities, there will be employment opportunities and if there are employment opportunities, there will be export. Even if it is in a small number, it can become a change. We can reduce food import if we can manage to sustain our food supply from agricultural industries such as livestock. If we have enough supply, we can reduce import on meat and dairy products.

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