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Ageing Population and Economic Growth: Evidence From Malaysia

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DOI: 10.9734/SAJSSE/2020/v7i430196

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 South Asian Journal of Social Studies and Economics

7(4): 11-18, 2020; Article no.SAJSSE.59144

ISSN: 2581-821X

Ageing Population and Economic Growth: Evidence

from Malaysia
Shairilizwan Taasim1*
1
Department of Social Science and Management, Faculty of Humanities, Management and Science,
Universiti Putra Malaysia Campus Bintulu, Malaysia.

Author’s contribution

The sole author designed, analysed, interpreted and prepared the manuscript.

Article Information

DOI: 10.9734/SAJSSE/2020/v7i430196
Editor(s):
(1) Dr. Alexandru Trifu, “Petre Andrei” University of Iasi, Romania.
(2) Dr. Gerald Aranoff, Ariel University, Israel.
(3) Dr. Velan Kunjuraman, University Malaysia Kelantan (UMK), Malaysia.
Reviewers:
(1) Carina V. Ganuza, Universidad Nacional de Rosario and Instituto de Investigación de Ecuador, Ecuador.
(2) Rangalal Mohapatra, Sikkim University, India.
Complete Peer review History: http://www.sdiarticle4.com/review-history/59144

Received 06 June 2020

Accepted 12 August 2020
Original Research Article
Published 21 August 2020

ABSTRACT

This main purpose of this article investigated the impact of ageing population on economic growth
in Malaysia. Annual time series data for 27-year duration (1990-2017) was used and the
autoregressive distributed lag (ARDL) was applied. This study will focuses on addressing role of
ageing population in Malaysia by context that failed to receive much attention especially in
employment sector. By using Romer [1] endogenous theory, the cointegration result revealed that
exists a long run relationship exists between ageing population in Malaysia government
development expenditure in education and economic growth. Our analysis recommends further
investment in government expenditure in education sector to achieving higher human capital
capability as a towards high income country and ageing phenomena.

Keywords: Ageing; economic growth; ARDL; labor; human capital.

1. INTRODUCTION mortality rates and lower fertility levels [2]. In

Malaysia, numbers of ageing population showed
Most developed countries are facing an aging increasing. In Malaysia, Chart 1 shows that the
population because of increased longevity, lower number of citizen age more than 55-year
_____________________________________________________________________________________________________

*Corresponding author: Email: shairil@upm.edu.my;

 Taasim; SAJSSE, 7(4): 11-18, 2020;; Article no.SAJSSE.59144
no.

increase steadily. The proportion of people aged group tends to be associatediated with decreasing
65 and above in Europe is expected to increase productivity levels, lower savings, and higher
from 14 percent in 2010 to 25 percent in 2050 government spending [3,4].. A typical method for
according to the World Health Organization evaluating these changes is to assume age age-
(WHO). Hence, the prime working age group is specific constant habits with regard to jobs,
expected
ected to be lower in the immediate future consumption and savings and to evaluate the
than the older age group. effects of adjustments in the relative size of
different age groups for these main contributors
Bloom and McKinnon [3] conclude that to national income. Lisenkova, Merette, and
demographic changes do not inherently impede Wright [5] find that increasing the retirement age
technological progress and therefore economic will help to overcome a decreasing labour
growth. The endogenous growth theory Romer market, workers of different ages
ges are not perfect
[1] emphasizes that human capital is important substitutes and so there will definitely be a
role to a country economic growth. In recent decline in productivity per worker. While
years, the Malaysia GDP has come increasing theoretical and empirical contributions to the
due the government policy. Like any developing ageing population are significant, these
and develop country with open market economy, contributions are diffuse and lack an integrated
labor force playing important role as a country view of the various mechanisms by which
asset to movement economy stability. But an aging population impacts economic
demographic transition happen once population growth.
growth and this effect to country.
The Malaysia Human Development Index (HDI)
Most economists argue that a country with a value in the high human development category
higher proportion of inhabitants in the old age ranges from 0.559 in 1980 to 0.802 for 2018
person

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Year

Chart 1. Ageing population in Malaysia

Source: World bank, 2018

Table 1.. Malaysia human development index

Year Life expectancy Expected years Mean years GNI per HDI value
at birth of schooling of schooling capita
2018 75.5 13.7 10.2 26,107 0.802
2011 74.2 12.6 9.5 13,685 0.761
2010 74 12.6 9.5 13,192 0.758
2005 72.9 12.7 8.9 11,220 0.738
2000 72.1 11.8 8.2 9461 0.705
1995 71.1 10.5 7.6 8765 0.674
1990 70.1 9.8 6.5 6375 0.631
1985 68.8 10.0 5.6 5125 0.600
1980 64.4 9.1 4.4 4722 0.559
Source: UNDP Human Development Report, 2018

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 Taasim; SAJSSE, 7(4): 11-18, 2020; Article no.SAJSSE.59144

Table 2. Federal government development expenditure 1990-2018 (RM Million)

Year 1991 2000 1991- 2015 2018* 2000-

2000** 2018**
Economic 4684 11639 23286 26342,1
Agriculture and rural development 1126 1183 3105 2523
Energy and public utilities 681 1517 3637 2746
Trade and industry 969 3667 5638 4149
Transport 1897 4683 6693 10479
Communications 1 228 1 105
Environment 0 0 1331 2013,08
Others 10 181 2881 4327
Social 2426 11076 11160 11720
Education and training 1285 7099 452% 4758 5256 25,96%
Health 572 1272 1442 1910
Housing 66 1194 2008 1167
Others 503 1511 2952 3387
Security 2211 2332 4754 5214
Defence 1866 1854 4078 3842
Internal Security 345 478 676 1372
GENERAL ADMINISTRATION2 244 2894 1568 2724
TOTAL 9565 27941 40768 46000,1
*Budget estimate, excluding 2018 Budget measures
**author calculation
Source: Malaysia, 2019

according to the United Nations Development policies for 55 to 60 years of retirement that are
Plan (UNDP). In the world, ranking for HDI was still relevant in Malaysia as a country against
57 in 2018 from 61 during 2011. Table 1, shows ageing. This paper will be organized as follows
the performance Malaysia since 1980. As shows part 1 begins with a brief introduction and
in the table, Malaysia life expectancy increasing literature review on the previous research that
from 64.4 years (1980) to 75.5 years (2018), its were related to this article. Meanwhile, part 2 will
show we a in phase aging population. From the discuss on data and our research economic
statistic also, Malaysia in the right track to model. Next, part 3 explains on the theoretical
becoming develop country and sooner ageing model that employed in this article. Part 4
population will be higher. provides discussion and conclusion on this article
and model.
Based on Table 2, Malaysia government
expenditure budgeted with lagers investment in 2. LITERATURE REVIEW
human capital capability. According Table 2,
education and training almost 13% from total A number of empirical studies have been
budget in 1990 and 11.3% in 2018. We calculate conducted in trying to find out contribution local
number of budgets for education decrease since labor to economic growth. But less in focusing
2000 from RM7099 million to RM5256 million in elderly population role in economic has been
2018. But expenditure for health a consistent conducted in Malaysia. According to Doris, Nor
increasing yearly. Its shows Malaysia has Aini, Norlaila and Ong [7] and Field et al. [8]
preparation to moving impact of the ageing increase in the number of elderly in is due to
population in increasing health expenditure. reduced number of births and mortality, better
Following human capital theory [6], education control of epidemic and improved health facilities.
and training are thought to improve an Elderly measurement by age limit but in
individual’s skills and thus their productivity. In chronology age represent by mental volatility.
addition, education expenditure by government Furthermore, Lopes and Albuquerque [9] also
may effect to human capital because their skill demonstrate that population ageing is changing
and experience related to lifelong learning. the age structure of the Portuguese workforce
with considerable regional heterogeneity.
The goal of this research is to examine the effect Malaysia [10] in 1980 elderly recorded 7,452,000
of ageing on economic growth and to identify where 6,045,000 was age 60-74 years and

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 Taasim; SAJSSE, 7(4): 11-18, 2020; Article no.SAJSSE.59144

1,407,000 people age 75 years above. The productivity in Scotland regardless of the sector
estimated global life expectancy, according to in view.
Bloom and McKinnon [3] is 65 years, and this is
expected to rise to 75 years by 2050. 3. MODEL SPECIFICATION
While the ageing population has a number of The model used in this study based on Romer [1]
significant theoretical and empirical contributions, which implemented the theory of endogenous
these contributions are fragmented and lack a growth was the assertion that human capital is a
comprehensive view of the various mechanisms significant determinant of economic growth.
by which an aging population impacts on
economic growth. Malaysia [10] in addition, when Yt= f (Kt, Lt, Ht) (1)
our population reaches 60 years and more than
15 percent of the total population, Malaysia Where Yt is output, Kt is capital, Lt is labor and Ht
projected to become ageing nation in 2030. is human capital represents aging population (55
According to Lisenkova et al. [5] with an ageing years old and above). The normal logarithm is
population the productivity level of the individual extended to both sides of the equation (1):
worker would be lower, given their physical
capacity to engage effectively in the labor + + + + (2)
market.
Y in our model represent gross domestic product,
Most of the literature argues that there is a K represent allocation budget for education and
negative relationship between population ageing L for active labor. From equation (2), the error
and economic growth [3]. Even so, some correction model for ARDL is specified
authors, such as Prettner [11] claim the below:-
existence of a positive effect. Likewise, Bloom
and McKinnon, [3] labor force participation rate ∆ = +∑ ∆ +∑ ∆ +
will decline for about three quarters of the ∑ ∆ + + + +
countries analyzed with constant age and sex + (3)
specific labour force. The analyzes used
demographic impact on labor supply and ∆ is the symbol of differentiation, the coefficients
ultimately on economic growth with demographic β represent the short run dynamic and
shifts in relation between 1960 and 2005 to determines the long run relationship and error
expected changes between 2005 and 2050. term is the white noise error. To test the long run
Assuming that labour-force participation will relationship among the variables, the following
remain constant, i.e. that women and men of a hypotheses are tested in analysis. The first steps
specified age group are equally likely to be active in the ARDL model of analysis are to look at the
in the labour force in 2050 as they were in 2005 long-term relationship by using F-test. If the
[3]. calculated F-test is higher than upper bound and
critical value, the null hypothesis of no
Our article employed Romer [1] model as a cointegration is rejected.
guideline to produce our economics model and
extension from model purpose by Prettner [11]. H0: 1= 2 = 3 = 4= 0 (No cointegration)
Positive effect defined form increases in
longevity have positive effects on per capita H0: 1≠ 2 ≠ 3 ≠ 4≠ 0 (Cointegration exists)
output growth [11]. The interpretation for this
finding is that a decrease in mortality, while When cointegration has been developed, the
holding fertility constant, leads to an increase in long-term ARDL model can be estimated as
the population growth rate. Gobel and Zwick [12] being:
focus metal manufacturing and service sector in
Germany using the generalized method = +∑ +∑ +
moments (GMM), this research showing that for ∑ + (4)
the labour age group at the 55-60 has no
significant effect on productivity in both sector.
For the short run can be estimated
Hence, the study differences between each
sector in the size of age group profiles. However,
∆ = +∑ ∆ +∑ ∆ +
Lisenkova et al. [5] demonstrate that the age-
specific impact would, in general, affect ∑ ∆ +∑ ∆ + + (5)

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 Taasim; SAJSSE, 7(4): 11-18, 2020; Article no.SAJSSE.59144

Where are the short run dynamic coefficients force in Malaysia and government expenditure in
of the model convergence to equilibrium and the education sector (current US$). All variable are
speed of adjustment. stationary at first difference (constant and
constant & trend). Table 4 presents the results of
4. EMPIRICAL RESULTS the cointegration test among variable using
bound test.
In this analysis, data from 1991-2017 is used to
examine the long run relationship between GDP From Table 4, results indicate that the F-statistic
and senior citizen in Malaysia. First, the results of for our model is higher than upper bound critical
the unit root test are considered. ADF and PP value at the 10% level. Analysis successful to
unit root test is employed to test data stationarity rejected null hypothesis at 10% significant level.
of time series. The results indicate that GDP and We can conclude that existence of long run
population senior citizen are stationary at the first cointegration relationships among the variables.
differences. According to Shairilizwan and Based on the optimum lags selected exceed the
Remali [13] the aim is to ensure that variables upper bound of the critical bounds table develop
are not I(2) to avoid false results. The results of by Narayan [14].
the unit root test based on ADF and PP are
shown in Table 3. The results presented in Table 5 show that in the
long run aging population has a significant
Based on analysis, LGDP and LHUM positive relationship with GDP. While
represented for gross domestic product (current government expenditure in education also has a
US) and number of ageing population (LSEN) significant relationship with GDP and this
Malaysia. LCAP AND LAB represented for labor suggests that labor (elderly citizen) and

Table 3. Unit root tests

Test Variable Level First difference

Constant Constant & Trend Constant Constant & Trend
ADF LGDP -1.97 -1.25 -4.47*** -4.87***
LCAP -1.08 -1.73 -3.93** -3.85**
LAB -1.95 -3.12 -3.88*** -3.89**
LHUM 0.96 -2.79 -3.49** -3.52*
PP LGDP -1.98 -2.57 -5.43*** -6.78***
LCAP -1.08 -1.73 -3.83*** -3.72**
LAB -2.05 -3.12 -4.59*** -4.61***
LHUM -0.76 -1.95 -3.48** -3.48*
Note: (*)Significant at the 10%; (**)Significant at the 5%; (***) Significant at the 1%

Table 4. F-Statistic of cointegration relationship

F-Statistic Lag Significant level Bound critical values

I(0) I(1)
1% 3.65 4.66
3.65 3 5% 2.79 3.67
10% 2.37 3.20
Note: number of independent variable k=4

Table 5. Estimated long run coefficients

ARDL (1, 1, 0, 3) selected based on SBC. Dependent variable is LGDP

Variable Coefficients Std error t-statistic Prob.
C 102.52* 20.38 5.03 0.00
LCAP 0.23 0.13 1.71 0.10
LHUM 7.88* 1.26 6.25 0.00
LAB -8.45* 1.83 -4.61 0.00
*significant at the 1% level

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 Taasim; SAJSSE, 7(4): 11-18, 2020; Article no.SAJSSE.59144

Table 6. Results of ECM

Variable Coefficients Std error t-statistic Prob.

C 0.02 0.15 0.11 0.91
ECT(-1) -0.25 0.08 -3.23 0.00*
DLGDP(-1) -0.03 0.13 -0.22 0.83
DLABOR 2.96 2.99 0.99 0.34
DLSEN 4.57 2.15 2.13 0.05*
DLEX 0.59 0.11 5.27 0.00*
2
R 0.71
-2
R 0.63
F 9.28*
DW 1.79
*significant at the 1% level

government expenditure in Malaysia has an Watson statistic and F-statistic indicate that the
impact despite the positive sign of coefficient to model is a good fit.
economic growth.
5. DIAGNOSTIC TEST
Table 6, indicates that short run results working
aging population is positive and significant at 1%. As suggested by Pesaran, Shin and Smith [15]
This mean that a rise in number of aging stability test to analyses stable over the studied
populations improves growth in short run. The period must be within the straight lines of the
equilibrium correction coefficient of the ECM is critical bounds at a 5% significant level. Figs. 1a
estimated at -0.25 and significant at 1%. The and 1b of cumulative sum of recursive residual
results indicate that on average the (CUSUM) and cumulative sum of squares
disequilibrium of the previous period is corrected recursive residuals (CUSUMQ). The straight
by about 25% in the following period. Value R- lines represent critical bounds at 5% significant
squared is 71% and indicates that 71% level. The test indicates no evidence of
dependent variable is explained by independent misspecification and instability during period
variable in our model. The adjusted R2, Durbin estimated by the model.

12

-4

-8

-12
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

CUSUM 5% Significance

Fig. 1a. Plot of CUSUM – Cumulative sum of squares of recursive residuals

16
 Taasim; SAJSSE, 7(4): 11-18, 2020; Article no.SAJSSE.59144

1.6

1.2

0.8

0.4

0.0

-0.4
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

CUSUM of Squares 5% Significance

Fig. 1b. Plot of CUSUMSQ

6. CONCLUSION addressed ability of elderly in labor force limited

due of healthy and capability especially labor
The paper presented examined the long run and force in construction industry. Research by
short run impacts of increasing ageing population Lisenkova et al. [5] in Scotland, regardless of the
in Malaysia on economic growth during period sector in focus, the age-specific will influence
between 1991-2017. There are some studies that productivity. As purposed by Romer [1]
support such a finding Bloom and McKinnon [3] government and private sector play a crucial role
and Prettner [11]. The findings of this study in providing incentive for individuals to be
argue that how economy operates although inventive. Further research should be done in
higher ageing population and effect positive Malaysia to identify category of industry
implication to economic growth in Malaysia. Doris applicable to implementation retirement age as
et al. [7] life expectancy increasing government an each have own policy and scope of work.
expenditure pension, EPF and medical cost to Lopes and Albuquerque [9] ageing population
elderly as a proven by government data. Similar, changing structure of workforce industry. From
Bloom and McKinnon [3] most economists claim analyze ARDL method by Romer [1] model, we
that a country with a higher proportion of the found that each of variable have positive
older age group appears to be correlated with relationship and further research to separate age
lower rates of production and investment and by sector.
higher government spending. This study findings
education investment by Malaysia government COMPETING INTERESTS
has positive relationship and special cases for
Malaysia budget yearly education is higher Author has declared that no competing interests
portion every year. This effect to productivity exist.
workers in Malaysia although ageing population
is increasing yearly. Based on Malaysia vision to
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