The History Of Endogenous New Growth Theory

Published Date: 02 Nov 2017

Economic growth is an increase in the total goods and services produced by an economy, compared from one period of time to another. It can be measured in nominal terms – Nominal Gross Domestic Product (NGDP), or in real terms which adjusted for inflation – Real Gross Domestic Product (RGDP). Besides, GDP or GNP per capita is used as the measurement to compare one country’s economic growth another. Additionally, there is another measurement of economic growth in a given year, which is the annual percent change of gross domestic product (GDP).

Source: The World Bank, Malaysia Growth Rate, n.d.

The bar chart above shows the GDP growth rate of Malaysia over the years from 1996 to 2012. As our observation, there are several significant changes from one period of time to another. The dramatic decline of growth rate to -7.4% during 1998 was caused by the Asian Financial Crisis. Besides, there was also another crisis – Global Financial Crisis which happened during 2009. It has caused the GDP growth rate of Malaysia to decline till -1.5%. Both the financial crisis has caused by the negative effect of collapse of exports. Consequently, Malaysia has taken several responses in order to recover the economy from recession which will be discussed in later section in this assignment. Eventually, Malaysia successfully to recover its economy from recession whereby the growth rates after the crisis have rose to 6.10% in 1999 and 7.2% in 2010.

THEORETICAL BACKGROUND OR ISSUES

2.1 Keynesian Theory

Keynesian theory is an economic theory founded by John Maynard Keynes which stated that active government intervention is essential for economic growth and stability. The followers of Keynesian economics do not agree with the Classical theory, which the market will automatically adjust itself to the full-employment equilibrium. They believe that economy usually fails to utilize the available resources and cause the economy to settle down at any level of unemployment equilibrium. Therefore, policy implementation is required to move the economy in the direction to full employment.

While Classical economists tend to trust the free market, Keynes did not have the same confidence in the market. From the view of labour market, Keynes argued that unemployment is a natural consequence from deficient demand for goods and services. This is because workers would resist wage cuts and firms would not employ workers to produce the goods or services which are not demanded by consumers. Since wage rates are not allowed to fall, therefore unemployment would persist and full employment will not be restored. For money market, Keynesianism stated that excess savings will encourage the economy condition become worse. He explained that savings would not increase the investment but would reduce the consumer spending which will decrease the aggregate demand. Hence, encourage savings, the view of Classical economist would only aid in recession or even depression.

Keynesian theory indicates that governments play a major role to stimulate the aggregate demand in the economy. The multiplier effect can use to justify that any increase in aggregate demand would bring a greater increase in the national output. Based on the multiplier effect, any increase in demand would increase profits and allow firm to employ more workers and led to more incomes and encourages more spending on goods and services. Again, spending would increase the demands and increase the employment and led to more spending. This process will go on and on until all the extra income was spent. As a result, national output will increase more than the initial increase in the aggregate demand.

Keynesianism claimed that government should solve the problem of economic downturn in the short run instead of waiting for the market to adjust itself in the long run because Keynes assumed that we are all dead in the long run. Therefore, government is encouraging to use fiscal and monetary policies or either one to boost up the demand for goods and services. This show that government have discretionary power in conducting policy. However, fiscal policy is viewed to be more effective and useful. As Keynesianism perceived that the aggregate supply curve is flatter in the short run, therefore stabilization policy would bring a big impact on the output and employment.

2.2 Monetarist Theory

Monetarism is an economic theory that emphasizes on changes in the money supply to determine the economic growth rate. This theory is founded by Milton Friedman, who previously is a follower of Keynesian economics then criticize and oppose the discretionary stabilization policy as they tend to view Aggregate Supply curve is more vertical. Monetarists do not support intervention of government as they think that excessive government intervention may destabilize the economy. They always believe that supply of money is the primary determinant of nominal GDP and price level.

The building block for monetarism is Quantity Theory of Money, which explains the relationship between the amount of money supplied and the price level. It is also known as Fisher identity or the equation of exchange. It says that: M x V = P x Y where M is the supply of money, V is the velocity of money circulation, P is the level of price and Y is the real national output, RGDP.

Since the monetarist assumed that short term velocity (V) will be constant, therefore in the short run, any changes in the money supply (M) will affect the nominal GDP (P x Y). Meanwhile, in the long run, monetarist believes the economy is always stable and operating at full capacity, which the output level is equal to the natural level of output (Y=Yn). Hence, V and Y will be fixed and M and P are the only variables that will be changed. This indicates that any changes in the money supply will have a direct impact on the price level. As a result, an increase in money supply will causes an increase in inflation.

According to Friedman, "inflation is always and everywhere a monetary phenomenon." He argued that increase in money supply only provide temporary boost to economic growth but for long term, it will lead to inflation problem. (Kimberly Amadeo, n.d.) Therefore, policy authorities should concentrate mainly on maintaining the price stability which is the equilibrium between money supply and money demand rather than controlling the supply of money. This can be achieved by reducing the discretionary power of the government and conducting rules-based monetary policy. They perceived the policy authorities should gradually increase the money supply to in line with the inflation growth rate. As a result, the economy will be at lower unemployment rate with acceptable inflation level.

2.3 Endogenous Theory

Endogenous growth theory, also known as new growth theory is an economic theory stating that economic growth is contributed by investment in human capital. In another words, knowledge plays an important role in determining the economic growth. This theory is developed primarily by Paul Romer. The followers of new growth theory resist the neoclassical view, which exogenous factor would determine the changes in technology. They believe that technology growth is determined endogenously and can be developed through enhancement of human capital. Therefore, government policies which encourage innovation, competition and education are required to promote the economic growth. The creation of technological knowledge will increase the rate of innovation which will then increases the productivity and this would definitely lead to the long run economic growth.

The new growth theory can be expressed with the AK Model:

Y = AK

Where A is a positive constant of technology level while K is referring to the physical and human capital.

This equation shows that diminishing returns do not exist. This is because the investment in physical and human capital such as education and workforce training can create positive productivity. At the end, the decreasing returns occur can be offset by the increase in productivity. Therefore, based on this model, new growth theory rejects the assumption made by neoclassical economists which the increase in investment will lead to a decline in marginal returns. Yet, increase in the investment rates will have positive effect on long run economic growth as investment is not suffers from decreasing returns.

In short, new growth theory mainly emphasize on enhancing human capital investment as they believe that human capital investment is an essential elements in raising a country's economic growth rate. Therefore, appropriate government policies that focus on developing skills, nurturing innovation and enhancing competencies can contribute to the long run economic growth rate. For example, government can enforce laws to protect the property rights and patents for the inventors in order to encourage individuals actively engaged in research and development activities. As a result, new technology arises and improves the productivity which leads to an increase in the economic growth rates.

DISCUSSION AND ARGUMENT

3.1 Keynesian Theory

Keynesian theory proposed by John Maynard Keynes claimed that active government intervention is the key factor for economic growth and stability. Specifically, this economics theory recommends that increasing government spending or decreasing tax rates will be the most appropriate method to stimulate aggregate demand. Subsequently, an increase in aggregate demand would bring a greater increase in the national output.

From our observation, Keynesian theory is applicable in Malaysia. One of the best situations to prove the claiming of Keynesian economics would be during the Asian Financial Crisis on 1997 to 1999. In 1998, Malaysia’s Gross Domestic Product (GDP) suffered a contraction of growth rate 7.4%. For example, construction sector shrunk 23.5%, manufacturing sector contracted 9%, and the agriculture sector shrink 5.9% (The 1997-1998 Asian Financial Crisis in Malaysia, 2010). Besides, Malaysia is an export-driven country with large shares of exports and imports in GDP. During that time, the contraction in export is the most serious reason which burdened the whole economy.

To recover the economy, Malaysia government had implemented expansionary fiscal policy by increasing government spending in order to stimulate aggregate demand. Because of the positive relationship between government spending and aggregate demand, increasing in government spending helps in stimulate aggregate demand which recover the economy from recession.

Government spends money in several ways, such as military, services (e.g.: education, healthcare), transfer payment (e.g.: subsidies, social welfare) and so on. In July of 1998, the government launched a fiscal stimulus package of total RM7 billion to support economic activities and sustain growth to overcome the negative effects of the recession. The fiscal stimulus package was allocated in the following development expenditure: RM2.2 billion for Dana Pengurusan Harta, RM1.5 billion for infrastructure and public amenities, RM1 billion for education, RM0.65 billion for cyberview, RM0.35 billion for agriculture, RM0.3 billion for health, and poverty eradication respectively, and RM0.2 billion for industrial development, for housing, for rural development respectively (Economic Stimulus Package: How Effective Are They??, n.d.). Consequently, the economy recovered its growth from recession, whereby its GDP growth rate increases to +6.1% in 1999 from the initial -7.4% in 1998.

Later on during 1999 to 2003, the government was still implementing the fiscal policy in expansionary stance, due to the continuous economic uncertainties. Consequently, Malaysia was able to maintain a positive growth rate. Nevertheless, during 2007, the global financial crisis occurred which contributed another difficult year to Malaysia. The great negative impact of the global financial crisis would be a collapse of exports to United States. As a result, Malaysia had a contraction in aggregate demand, which led to reduction in economic growth of -1.5% growth rate.

Again, in order to offset the decline in aggregate demand because of the significant decline in exports of Malaysia, the government had launched 1st fiscal stimulus packages (EPS1) of RM7 billion in November 2008, and 2nd packages (EPS2) of RM60 billion in March 2009. As general, the main 3 aspects of EPS1 were:

Ensuring citizens’ well-being.

- E.g.: building additional low cost houses, upgrading and repairing of public transportation (Commuter, Bus, and LRT), and adding business premises for small/medium entrepreneurs.

Developing quality human capital

- E.g.: Skill Training Funds, youth skill training programs, preschool education and so on.

Strengthening national resilience

- E.g.: upgrading and maintenance of public amenities (schools, hospitals, roads, police stations), and implementing High Speed Broadband Project.

While the EPS2 of RM60 billion was implemented with the purpose of:

Reducing unemployment and increasing employment opportunities

- E.g.: creating 163,000 training and providing employment opportunities, etc.

Easing the burden of citizens

- E.g.: Allocating RM1.154 billion to providing subsidies on daily food staples such as sugar, wheat flour and bread, and toll subsidies, increasing house ownership, and etc.

Assisting the private sector in dealing with the crisis

- E.g.: Reducing the cost of business, providing Working Capital Guarantee Scheme of RM5 billion as working capital for companies with shareholder equity less than RM20 million.

Consequently, associated with positive effect of monetary policy implemented by Bank Negara Malaysia which will be discussed in next section, and with the implementation of EPS as fiscal tool, the economy recovered its growth from recession, whereby its GDP growth rate increases to +7.2% in 2009 from the initial -1.2% in 2008.

In a nutshell, Malaysia government believes that by implementing expansionary fiscal policy, it can effectively stimulate aggregate demand which will recover the economy from recession. Therefore, Keynesian theory is proven as it is applicable in Malaysia as intervention of government is the key factor to ensure economics stability and growth.

3.2 Monetarist Theory

Monetarist theory propose by Milton Friedman claimed that changes in the money supply to determine the economic growth rate. They always believe that supply of money is the primary determinant of nominal GDP and price level.

From our observation, the monetarist theory is applicable in Malaysia. One of the best situations to prove the implementing of Monetarist theory in economics would be during the Global Financial Crisis on 2008 to 2009. In second half of year 2008 and early of 2009, due to the collapse of exports to United States, Malaysia had a huge decline in aggregate demand, which led to reduction in economic growth of -1.5% growth rate.

This is when Monetarist theory took place where monetary policy has been implemented by Bank Negara Malaysia. Bank Negara Malaysia has adjusted the interest rate to slowdown the economy from deeper contraction. The central bank reduces the policy interest rates by 150 basis points to 2 percent between November of year 2008 and February of year 2009. Theoretically, the interest rates would affect the aggregate demand, which generally refers to consumption and investment. Lowering the interest rate leads to decline of costs of borrowing. This induces people to borrow and to spend rather than save. Eventually, it encourages an increase in consumption which potentially increases the aggregate demand, and the Malaysia economy will recover from the economy contraction.

Besides, Bank Negara Malaysia has reduced the statutory reserve requirement (SRR) by 300 basis points to 1% in order to ease the financial intermediation costs. Reduction in SRR has allowed growth in money supply by increasing the commercial banks’ ability to conduct lending activities. As a result, with the increase in liquidity, the commercial banks were able to lend out more money. Subsequently, the money supply in the market increased, it allows greater consumption and investment of public, and thus the aggregate demand of Malaysia had increased. In other words, reduction in RRR can facilitate economic recovery during recessionary gap.

Again, with the implementation of fiscal stimulus packages by government, the economy recovered its growth from recession, whereby its GDP growth rate increases to +7.2% in 2009 from the initial -1.2% in 2008. In a nutshell, we can conclude that by implementing monetary policy, the BNM can alter the money supply in the market, and thus the economic growth can be affected as money supply affect the aggregate demand. This is what Monetarist Theory claimed and it is proven to be applicable in Malaysia as well.

3.3 Endogenous/ New Growth Theory

According to new growth theory, human capital investment is the fundamental and critical factor in promoting a country's growth rate. A country can achieved economic success by implementing appropriate policies that focus on developing innovative human capital which will stimulate the economic growth. This indicates that government plays a significant role in leading the long run economic growth for a country. Based on our observation, we found that government policies that access to the human capital investment have brought a significant impact to Malaysia's economic growth. This implies that new growth theory is applicable in Malaysia.

In order to become a high-income developed country by 2020, Malaysia is essential to develop an innovation ecosystem which consists of education, government, industry and ventures. Among these four key components, education is considered as the root of innovation ecosystem as it creates innovative workforce for the economy. Therefore, in March 2010, the Ministry of Higher Education (MOHE) established a taskforce for innovative human capital implementation plan development via tertiary education at higher learning and technical education and skill training level. The MOHE Implementation Plan is designed to nurturing innovation, educating technical skills, upgrading knowledge and enhancing competency and motivation among the workforce to drive the economic growth. By monitoring, reviewing and revising, the taskforce propose five recommendations under the 12 P Initiatives of the Strategic Thrusts Towards an Innovation Nation, STTAIN model.

The 12 P Initiatives are as follows: (MOHE Implementation Plan for Development of Innovative Human Capital at Tertiary Level, 2010)

P1 Initiative : Policy on Innovation

P2 Initiative : Public Awareness & Appreciation

P3 Initiative : People Competency

P4 Initiative : Pioneer Mindset on Innovation

P5 Initiative : Practical and Market Relevant Innovations

P6 Initiative : Product/Idea Performance on Innovation

P7 Initiative : Professional Partnership on Innovation

P8 Initiative : Premise for Idea Incubation and Development

P9 Initiative : Provision, Accessibility and Connectivity to ICT

P10 Initiative : Political Will

P11 Initiative : Proprietary Ownership

P12 Initiative : Principal Investors and Venture Capitalists

The five recommendations included reviewing, revamping and restructuring/strengthening the curriculum at tertiary institutions, creating a special Innovation Fund for innovative human capital development, enhancing the move from "idea to the-market-place", providing resources for full ICT accessibility and penetration with fast broadband capabilities campus-wide, and lastly establishing a National register for the innovative human capital workforce in tertiary institutes.

The recommendation for immediate implementation has been accepted by JTPIN and is monitoring by MOHE to respond to the environment change. The implementation of each of these 12 P Initiatives have been coordinated for higher learning and technical education and skill training level and for the successful of innovative human capital development. It is believed that this MOHE Implementation plan would allow Malaysia to reach high income status by 2020 via the development of innovative human capital in tertiary institutions.

Besides that, the government has recently giving out book voucher worth RM200-RM250. The aim of book voucher is to improve and expand the education system of Malaysia. Government hoped that the vouchers provided are able to assists the students from low-income family in reducing their financial burdens as the tertiary textbooks are quite expensive. According to Datuk Mohamad Zahir Abdul Khalid, the chairman of Education, Higher Learning, and ICT Committee, government has given emphasis to education with 40 percent of the allocation would be channeled to the sector every year. It is clear that government has paying the effort toward human capital investment. Moreover, the government also launches 1Malaysia student discount card program to provide financial assistance to the university students. This card is issued free to all Malaysian students from public and private institutions around the country to combat the rising in living costs. Many companies have participated in this program to offer various items and services such as stationery, books, food, clothes, IT products, accommodation and also health benefits to all students at discounted price. Government believes that a good education is important in nurturing future talent for the country. By providing affordable education via the discount card program will able to encourage more students to obtain a tertiary education and it will result in economic success of Malaysia.

From the chart below, we observed that Malaysia’ Gross Domestic Product (GDP) has increased from year 2010 to year 2012. This shows that the high growth performance of Malaysia can be linked to the government policies that emphasize on human capital investment. In conclusion, the growth process of Malaysia is endogenous since government can promote economic growth by investing in the educational sector.

CONCLUSION AND RECOMMENDATION

4.1 Keynesian Theory

As discussed in previous chapter of this assignment, there is no doubt that what Keynes claimed is proven in Malaysia. However, as our recommendation, Malaysia’s government is not advisable to continue its plan to implement fiscal policy to stimulate aggregate demand especially during recession. There is a common negative implication for increasing government spending during Asian Financial Crisis (1997) and Global Financial Crisis (2008), which is the increasing budget deficit of Malaysia’s Government.

As a result, implementing the fiscal stimulus package of RM7 billion during Asian Financial Crisis in 1998 has turned the budget from a surplus of 2.5% of GDP in 1997 to a deficit of 1.8% in 1998 and 3.2% in 1999 after 5 years of budget surpluses (Lim, M. H., Goh, S. K., n.d.). The government was unable to recover its budget deficit, even after the economy recovered in 1999 after implementing expansionary fiscal policy. Furthermore, another situation would be the increasing of fiscal deficit after implementing the fiscal policy during the Global Financial Crisis in 2008. Malaysia’s budget deficit was 4.8% of GDP in 2008 (after the launching of EPS1 of RM7 billion) and then, it has risen dramatically to 7.6% of GDP in 2009 (after the launching of EPS2 of RM60 billion). Therefore, it has been proven that there is positive relationship between budget deficit and government spending (fiscal policy).

Yes, no doubt on the correctness on what Keynes claimed that fiscal policy helps in recovering economic growth during recession. However, the recovery of declining economy will only be in short-run. In long-run, increasing huge budget deficits would ruin the level of economic growth in short-run. Instead, it would induce Malaysia to struggle in repaying back all the national debt to recover the deficit. To use as reference, the implementation of expansionary fiscal policy did help Morocco and Italy grow because of its excessive spending that assists in reducing the burden of taxation from the consumers’ perspective. However, they had situated themselves in distress whereby they got no way to recover its excessive spending and huge budget deficit.

Apart from that, the problem of bankruptcy will be arisen as a result of rise of budget deficit continuously. Consequently, level of confidence of investors both domestics and foreign would decrease. As Investment is one of the key components of aggregate demand, a reduction in investments leads to a reduction in aggregate demand; eventually it further reduces the economic growth of Malaysia. Besides, Malaysian would perceive that the Malaysia’s government authorities have already lost control in managing its funds and debts for this high budget deficit. As a consequence, there is a chance of re-election process to be conducted, which probably even further reduces the confidence among Malaysian, investors and etc.

However, if fiscal policy is the only method to be implemented in order to recovery the economy in short run. There are several criterions that Malaysia’s government needs to take into account.

The size of spending budget

- Somehow, the spending budget of government could be too small. There are 4 components of aggregate demand (AD) which are Consumption (C), Investment (I), Net Export (NX), and Government Spending (G). If there are any collapse of C, I, and NX, these forces are large enough to offset the increase in government spending if the spending budget is too small. Eventually, the AD would decrease and economy would not get recovered from recession. Yet, the government has to bear the costs of spending which refers to the budget deficit.

The existence of implementation and effect lags

- Again, somehow the implementation of a project in Malaysia could be taking place in months or even years. The most common reason for this problem to be happened would be complicated legal procedures. Therefore, the government needs to be aware of these lags. This is because by the time the government put the project into action, most probably the economic situation has already varied, and eventually the policy has already ineffectual.

Dependence on monetary policy

- Somehow, if the government only implement expansionary fiscal policy during recession, it may not be sufficient to overcome the attack of recession. There is a need to go hand-in-hand with monetary tools such as reducing interest rates and/or lowering the Statutory Reserve Requirements. Besides, when working together between fiscal policy and monetary policy, it will be very powerful to take the pain out of stages of the business cycle.

By considering these 3 factors, we believe that Malaysia’s government will be able to implement an effective fiscal policy to overcome the negative consequences in each stages of the business cycle.

4.2 Monetarist Theory

Monetarists do not support intervention of government as they think that excessive government intervention may destabilize the economy. It emphasizes on the changes in money supply to determine the economic growth. Nevertheless, as our recommendation, monetary policy should be implemented together with fiscal policy at the same time to reduce the pain out of the stages of business cycle. Specifically, as mentioned previously, there will be a powerful, strong and effective positive effect if the government and central bank to implement both fiscal policy and monetary policy at the same time. There is no a clear cut line between the choice to implement whether fiscal policy or monetary policy as both policies have their different consideration.

However, there are few considerations if the central bank intends to implement monetary policy. Let set the economic situation as recession. For the method of reducing interest rates:

Aware of economy environment when consumer confidence is very low

- When consumer confidence is low, implementing monetary policy by reducing interest rates may not be effective as consumer may not want to incur any extra financial obligation due to job insecurity during recession. To be as a reference, during March 2001 to July 2006 Japan implemented 0% interest rate policy had failed misfortunately to recover its declining economy. Another reference would be United States, there is no any signal of increase in lending activities even its interest rate at low as 0.25% because of the extremely low consumer confidence.

Reducing the interest rate is a broad tool.

- Unlike fiscal policy, monetary policy cannot be used to target to particular industry of the economy. Specifically, changes in interest rate bring impacts to all the economics activities. Whereas fiscal policy can be used to target specific industry such as increase government spending on IT sectors, education, etc. Therefore, before adjusting the interest rate, Bank Negara Malaysia needs to consider the impact of the monetary policy to every single industry.

For another method of reducing the Statutory Reserve Requirement (SRR), Bank Negara Malaysia should take into account of:

Possibility of falling in borrowing

- During recession, the commercial banks will face a shortage of liquidity. Consequently, the banks may not be willing to lend out money to each other even though the SRR has reduced. Besides, as mentioned previously, when the consumer confidence is very low, they are reluctant to borrow funds from the banks which may increase their financial commitment. Eventually, the monetary policy becomes ineffectual. Therefore, Bank Negara Malaysia needs to ensure that there is low possibility of declining in borrowing before reducing the SRR.

In a nutshell, rather than relying solely on monetary policy, Malaysia’s government and Bank Negara Malaysia are advisable to implement both fiscal policy and monetary policy at the same time in order to create the optimum positive effect to the economy. This is because government spending can directly create aggregate demand in the economy and eventually help out the economy to out of recession. Especially in severe recession, if the economy only relies on monetary policy alone, there may be not sufficient to recover the economy. Besides, the fiscal policy will be as a vital tool to improve the consumer confidence which may lead to increase in lending activities; eventually it brings the maximum result to promote the economic growth.

4.3 Endogenous/ New Growth Theory

As mentioned earlier, it is proven that Malaysia has moved its economic development path toward new growth theory. The growth theories claimed that policies that access to human capital investment will have positive effect on the long run economic growth. Therefore, it is suggested that government should continue to invest in educational sector to enhance the quality of human capital. As a result, Malaysia is able to achieve the developed status by 2020 with the increase in economic growth rate.

A quality education system that nurtures skilled and innovative workforce is vital for sustained economic growth. So, it is important for the education institutions in Malaysia such as schools, universities and skills centers to actively participate in the exposure of students to the technological innovation. Students should be instilled the values of creative and innovative to strengthen their skills and knowledge for the contribution of the future technology advancement. A greater economic growth can be driven by bringing in various new technology approaches, and this will improve the quality and living standards of Malaysians. Thus, government should provide incentives to the education institutions to encourage them to expose the students to the state of the art technologies.

Higher education environment can produce high quality, innovative, and competent workforce that meet the country's needs. However, a country may likely losing the talents if they do not care about the talents. Therefore, government should take necessary action to attract and retain the highly specialized human capital especially in term of retaining. The current trend and threat which Malaysia presently facing is the leakage of talents to other foreign countries such as Singapore, United States and etc. Since government has spent a lot of money in the human capital investment, it will be definitely a great loss if Malaysia cannot retain its talents. For example, government can provide enough facilities and basic needs for the students. This is a way to show the country's caring. As a result, the fresh graduates will work hard to repay the country's kindness and increase the Malaysia’s growth rate. Apart from this, firms are also responsible to retain their employees within the organization. They have to take a good care of the employee welfare to reduce the turnover rate. For instance, firms can provide good working environment and some benefits that satisfy the needs of the employees.

Some organizations which have a lower risk tolerance may resist the change and innovation. In this case, even if the workers are innovative and knowledgeable, there will be no opportunities for development of new ideas or technology. Hence, government is advised to implement some policies that encourage the firms in Malaysia to embrace and adopt new ideas and technology. By creating an innovative culture within the organization, workers are encouraging to generate new ideas to contribute to the advance in technology. In addition, the organization should also more emphasize on research and development to develop new technological product that may increase the productivity and stimulate the economic growth.

In brief, investment in human capital plays a significant role in promoting Malaysia’s long run economic growth. It is suggested that other related parties should also cooperate with the government policies in order to contribute to Malaysia’s growth. Hence, Malaysia will be able to transform itself into high income nation.

As a conclusion, Malaysia as the best growing countries in the Asean-5-economies, we believe that if government and Bank Negara Malaysia to be cooperate in implementing both fiscal policy and monetary policy together, it will be a very powerful tool to promote the Malaysia’s economic growth. Lastly, Malaysia is also advisable to continue invest in human capital and redirect its growth model to Endogenous Model in order to sustain its long-run economics growth effectively.