The Elasticity of Selected Macroeconomic Determinants and Economic Growth: A Panel Regression Model of the ASEAN-Five

Abstract

The main objective of the study was to examine the elasticity of selected macroeconomic determinants such as Gross Capital Formation (GCF), Foreign Direct Investment (FDI), and Employed Labor Force (LFE) to economic growth in terms of the Real Gross Domestic Product (RGDP) for the period 2005 to 2015 using the Cobb-Douglas production function. This study focused on the general behavior of the variables of the five founding members of the ASEAN which are: Indonesia, Malaysia, Philippines, Singapore, and Thailand. The impact of the explanatory variables to RGDP was estimated through the use of three panel estimation models namely: Pooled Least Squares (PLS), Fixed Effect Model (FEM) and the Random Effect Model (REM). The researcher conducted different statistical tests to confirm or validate the results of these models. The following tests such as ImPesaran and Shin W-statistic, t-test, Durbin Watson Test, Hausman Test, Wald Coefficient Test, and the General F-test, test for Multiple Coefficient of Determination (Adjusted R2), the Jarque-Bera test to test the normality of residuals of the model, and the Breusch-Pagan Test for v Heteroskedasticity. The findings revealed that all of the variables employed in the model had passed the unit root test or test for stationarity. The model also indicated the absences of autocorrelation, multicollinearity, and specification error, and also that there was stability of the regression parameters among the variables. The selected macroeconomic variables such as Gross Capital Formation, Foreign Direct Investment, and Employed Labor Force had a significant impact on the Real Aggregate Output or the Real Gross Domestic Product of the ASEAN-Five. The results of the Pooled Least Squares Regression Model and Random Effect Model showed that, after being corrected for autocorrelation, lnGCF was found to be significant at the five percent level of significance which implies that only the GCF was significant to growth and that it contributed positively to the RGDP of the ASEAN-Five. The results of the Fixed Effect Model showed that, lnGCF, lnFDI, and lnLFE were found to be significant at five percent level of significance. The following were recommended: that the Governments of the ASEAN-Five member countries should further evaluate and enhance programs that promote economic growth; and to continuously promote a more conducive investment climate in as much Foreign Direct Investment was shown to significantly affect the region’s aggregate output.