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The thesis investigates three selected issues pertaining to the Malaysian Manufacturing sector namely industries growth channels, imported inputs and intra-industry trade determinants. For each of this issue we have adopted a static and a dynamic estimation approach. In the static estimation the result presented are based on Ordinary Least Square, Fixed and Random Effect besides Generalized Least Square estimations. Meanwhile in the dynamic estimation, we focused on result of the difference and system GMM estimations. For industries growth channels, the findings suggest that at aggregate industry level, fixed capital formation and human capital channels are always statistically significant regardless of the test applied either in static or dynamic models estimation. The significance of fixed capital formation is consistent with the strong and cumulative saving and investment condition in Malaysia which has had a significant effect on the capital formation of the country. Our findings for foreign direct investment channel might suggest that Malaysian manufacturing industries has had problem to absorb the transfer of technology that had impede the growth of the sector. Meanwhile, a negative association between government consumption and economic growth might indicate that the government expenditures pattern might have distort the allocation of resources in the economy especially the manufacturing sector. Our findings suggest that the nature of the relationship between manufactured exports and economic growth is negative which might indicate that Malaysian manufactured exports were actually driven by the economy growth. Further analysis at individual export-oriented industry level shows that manufactured exports and government consumption channels have influence growth in both resource-based and non-resource based industries. Our analysis also include trade liberalization estimation which suggest that trade liberalization has a positive causality relationship with the growth of industries through all selected channels. Regarding the imported inputs analysis, the dynamic estimation results show that imported inputs have a positive relationship with industries owned by the non-Malaysian, but not for industries owned by the Malaysian. Our finding for industries owned by the Malaysian is consistent with the government actions that have strongly encouraged them to use domestic inputs through implementation of various incentives. This is because the implementation of the first round of the Import Substitution phase (1957-1967), had created an industrialization era which relied heavily on imported inputs and machines which resulted in distortions in domestic product prices, low value added, poor domestic economy linkages and inequalities in income and employment. On the contrary, our findings for all static and dynamic models suggest that imported input have a positive relationship with the growth of industries owned by non-Malaysian. This result might indicate that industries whose import their intermediate inputs have increased their growth performance and productivity. Meanwhile, at firms’ level, imported inputs suggest a positive relationship with firms owned by both Malaysian and non-Malaysian. Our analysis again include trade liberalization estimation which show that trade liberalization have a positive relationship with the imported inputs content in industries owned by Malaysia while at firms level, only non-tariff index shows a positive relationship. Last issue relates to the intra industry trade in Malaysian manufacturing sector. Our findings suggest that the gross domestic products variables which proxies the market size of a country, the similarity in income and the relative size effects between Malaysia and its trading partners has had influence the share of intra industry trade of the manufactured goods. As for the other country-characteristic determinants, we found a positive relationship between foreign direct investment and the share of intra-industry trade which support the theoretical framework proposed by Grubel and Lloyd (1975) and Greenaway and Milner (1986). Similarly, distance and trade imbalance also indicates a significant negative relationship with the trade share. Meanwhile at individual industry level, our findings suggest that a majority of the gross domestic product variables indicate a statistically significant relationship with the trade share in the dynamic estimation models for the wood, textiles and electrical and electronic industries. Contradictory, the maximum value of gross domestic products has a statistically significant relationship in the static estimation models for the rubber, textiles and electrical and electronic industries, respectively. Meanwhile, the other country-characteristic determinants such as foreign direct investment, trade imbalance and trade orientation have a statistically significant relationship in both static and dynamic estimations models in a majority of the Malaysian export-oriented industries. On the other hand distance, border and asean have a statistically significant relationship in only the static estimation models for the industries.

Hyman Minsky’s Financial Instability Hypothesis is used to construct two different indices for financial instability: a long-term index (Long Term Financial Instability) and a short-term index (Short Term Financial Instability). The former focuses on the underlying fragility of financial structures of units in the economy while the latter focuses on more immediate developments and manages to follow turmoil – “a financial crisis” – in the economy. The interplay of the indices with each other, with economic growth and with Foreign Direct Investment, both in general and in the financial industry, is probed. In short, we find that long term financial stability, i.e. secure financial structures in the economy or a low level of Long Term Financial Instability, is sacrificed for maintaining short term financial stability. However, more Long Term Financial Instability is associated, as Minsky expected, with more fluctuations in Short Term Financial Instability: market turmoil is more common the more fragile underlying financial structures of units in the economy are. This signals that markets are ruled by short-termism. Economic growth is harmed by Short Term Financial Instability but the effects of Long Term Financial Instability are weaker. The common expectation that FDI activities strengthen financial stability is not confirmed. The relationship found hints rather in the opposite direction: FDI activities seem to cause financial instability. Based on the those investigations and a further empirical work using data from Iceland, Leigh Harkness’s Optimum Exchange Rate System (OERS) is developed further with the intention of solving “The Policy Problem” as described by Minsky. Insights from control theory are used. The OERS, along with public debt management as carried out by Keynes, is argued to have the ability to keep economic activity in the state of a permanent “quasi-boom”. The policy implications are that the OERS should be considered as a monetary policy as it permits a free flow of capital, thereby allowing economies to reap the possible positive benefits of foreign direct investment, while still conserving financial stability.

This thesis addresses the question, whether the impact of financial development on the relative and absolute indicators of poverty is dependent on the levels of the human capital present in an economy. To answer this question, first we develop a theoretical framework to explain the growth process in the context of financial development assuming that human capital is heterogeneous in terms of the skills and education people have. Then, by using the data sets based on five-year averages over 1960-2010 and 1980-2010, covering 107 developed and developing countries, we empirically investigate the extensions of the theoretical framework developed earlier. These extensions cover the relationships between: 1. Income inequality and economic growth 2. Financial development, human capital and income inequality, and 3. Financial development, human capital and poverty We provide empirical evidence using modern panel data techniques of dynamic and static GMM. The findings elucidate that income inequality and economic growth are inter-dependent on each other. There exists an inverse relationship between initial inequality and economic growth. The changes in income inequality follow the pattern identified by Kuznets (1955) known as Kuznets’ hypothesis. The results also show that financial development helps in reducing income inequalities and in alleviating poverty, only when there is a sufficient level of human capital available. On the basis of our findings we develop the term "effective financial development" which means that financial development is effective in accelerating growth levels, reducing income inequalities and alleviating poverty only if there is a sufficient level of human capital available. The empirical study covers multiple aspects of financial development like private credit extended by banks and other financial institutions, liquid liabilities and stock market capitalization. The results of the empirical investigations are robust to multiple data sets and various indicators of income inequality, financial development, poverty and human capital. The study also provides marginal analysis, which helps in understanding the impact of financial development on inequality and poverty at different levels of human capital. This research study of effective financial development can be a useful learning paradigm for the academics and researchers interested in growth economics and keen to learn how poverty and income inequality can be reduced effectively. This study can also be useful for the policy makers in the financial institutions, because it provides robust empirical evidence that shows that financial development cannot help in alleviating poverty and in reducing inequalities unless there is a sufficient level of human capital available. The findings can be useful for policy makers, particularly in the developing countries where high levels of income inequalities and poverty are big problems. This study explains the mechanism of how effective financial development can be used to reduce income inequalities and to alleviate poverty. It also explains the process of inter-linkages between financial development, human capital, inequality, economic growth and financial instability. The policy makers can also take advantage from the marginal analyses that illustrate the minimum levels of private credit and primary and secondary schooling above which the effects of financial development and human capital become significant in reducing inequalities and poverty.

The current global financial crisis centres on the impact of banking sector openness on economies. The tradeoff of banking sector openness between the potential benefit (economic growth) and risk (economic volatility) sparks hot debates. This thesis addresses the question of whether there are sufficient economic reasons to support openness. Banking sector openness may directly and indirectly affect growth. Chapter II reinvestigates these direct and indirect links, using an advanced econometric technique (GMM dynamic panel estimators). The empirical results confirm the presence of direct and indirect links, and thus provide the backbone for countries planning to open their banking sector to international competition, especially developing countries. In Chapter III, we use parametric and non-parametric stochastic frontiers to measure banking sectors’ cost efficiencies, and then use panel data methodology to reinvestigate the empirical relationship between bank efficiency and banking sector openness. Our results suggest the world banking industry becomes increasingly efficient with greater openness. Chapter IV studies the relationship between macroeconomic volatility and banking sector openness. We address several questions: can high levels of volatility be explained by the opening of the banking sector? Are the effects of banking sector openness in developing and developed countries different in a crisis compared with normal times? What is the effect of mis-match between banking sector openness and financial development? We find that the positive relationship between banking sector openness and economic volatility originates from the mismatch between banking sector openness and financial markets development. Banking sector openness in itself eases crisis volatility. Chapter V presents the main conclusions.

In the past two decades, a new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in ASEAN, most notably since the 1997-1998 Asian financial crisis. This thesis addresses the question of whether there are sufficient economic reasons to justify such a move. The first chapter presents an historical overview of the integration process in ASEAN to date and the main motivations for the study. The following two chapters present a review of the main theory (Chapter II) and empirical works (Chapter III) on optimum currency areas and present the basis for the remainder of the study. The fourth chapter investigates whether structural shocks among ASEAN countries are becoming more symmetrical over time, thus verifying whether this region is becoming better prepared to introduce a common currency. The fifth chapter studies the degree of relative price adjustment in ASEAN by providing a study on the degree of exchange rate pass-through into domestic prices, using the distribution chain of pricing. This study includes, for the first time, all five founding members of ASEAN (ASEAN5) and draws inferences on their suitability for further monetary cooperation. The sixth chapter researches whether the recorded increase in intra-ASEAN trade is moving ASEAN members towards closer economic integration by applying a new panel data methodology. The final chapter presents the main conclusions.