Measuring the economic impacts of recent oil price shocks on oil-dependent economy: evidence from Malaysia

ABSTRACT

This paper examines the economy-wide impacts of recent oil price shocks on the Malaysian economy. To achieve this objective, an integrated methodological framework that combines econometric and input–output models is utilized to assess the impacts of an oil price shock on tax revenues, employment, labor income and gross domestic product (GDP). Our results reveal that the recent oil price shocks significantly affects these macroeconomic variables. The decline in oil prices from 2015 to 2016 reduces tax revenues by 10.5%, lower GDP by 1.9% and increases the unemployment rate by 0.3%. As such, the sharp crunch in oil prices serves as a reminder to policymakers on the vulnerability inherent in overreliance on oil exports and the urgent need to diversify the economy.

KEYWORDS:

• Oil price
• econometric
• input–output
• Malaysia

Acknowledgements

We would like to thank the anonymous referees for their useful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributor

Ibrahim Kabiru Maji obtained his PhD in Economics from Universiti Putra Malaysia. He is currently a lecturer at the Department of Economics, Bauchi State University, Gadau, Nigeria. His main research interests are energy economics, financial economics and environmental economics.

Mohd Yusof Saari obtained his PhD in Economics from the University of Groningen, the Netherlands. He is currently a senior lecturer at Faculty of Economics and Management, Universiti Putra Malaysia (UPM). He is also the head of Quantitative Methods for Policy Analysis at the Institute of Agricultural and Food Policy Studies, UPM. His research areas are mainly planning and development economics with particular applications to input-output, social accounting matrix and general equilibrium models.

Muzafar Shah Habibullah is currently a Professor at the Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia (UPM). He holds a PhD in Economics from the University of Southampton, UK. His current research concerns are on growth convergence; shadow economy; crime, war and conflicts; and the economics of natural disasters.

Chakrin Utit is a Social Research Officer at the Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia. He obtained his Master Science degree in Agricultural Policy from Universiti Putra Malaysia. In the recent years, he has been working on a number of research and consultation projects funded by the government and private agencies in Malaysia. His research interest is mainly on input-output economics.

Notes

1. For example, in 2010 exports of crude oil and gas constitute more than 90% of total final demands, which contribute about 3.5% of total Malaysian exports (see Department of Statistics Malaysia 2014).

2. Correlation index for two variables ranges from 0 for perfect no relationship and 1 for perfect relationship.

3. Input–output model involves matrix operations. For notations, matrices are denoted by bold capital symbols. Column vectors are represented by lowercase bold symbols, while scalars are indicated by lowercase italics. Primes denote transposition, and hats refer to diagonal matrices with the elements of a vector on the main diagonal.

4. In our input–output table, value added is separated between compensation of employees (essentially labor income) and operating surplus (essentially capital income). This information allowing us to calculate the impacts on labor income, which is very important for the Malaysian context.

Additional information

Funding

This work was supported by Putra Grant provided by Universiti Putra Malaysia [Grant No. GP-IPB/2014/9440901].