Impact of Climate Change on (De)Industrialization in Malaysia: Robust Results

Abstract

The economic performance of the Malaysian economy has been consistently remarkable throughout the last five decades, considering the annual growth of the GDP. Malaysia gained independence in 1957 and had substantial progress over a span of 50 years, eventually reaching the classification of an upper middle-income developing nation in 1992. However, Malaysia has seen deindustrialization in recent years, despite its previous reputation for strong industrialization efforts. Deindustrialization is the process of manufacturing industries losing importance in the economy over time, usually accompanied by a transition towards services and other sectors. Regrettably, Malaysia’s deindustrialization has been categorized as premature deindustrialization since the manufacturing sector’s contribution to the country’s GDP achieves its peak below the threshold level seen in industrialized nations. The objective of this study is to analyze the influence of climate change on the deindustrialization process in Malaysia between 1970 and 2020. The climatic change variables were denoted by temperature and precipitation, whereas deindustrialization was measured by the ratio of manufacturing output to total gross domestic product. We used five estimators to examine the im-
pact of climate change on deindustrialization, namely the Ordinary Least Square (OLS) technique with robust standard error, Robust egression with M-estimator, Fully-modified OLS, Dynamic OLS, and Canonical Cointegrating Regression approaches. The study  ncorporates control factors such as real income level, crude oil price, real interest rate, and financial development. Overall, our results suggests that extreme weather events, such as extreme heat and heavy rainfall, accelerate the deindustrialization process
in Malaysia. Conversely, an increase in the price of crude oil and the real interest rate has an adverse effect on industrialization. On the other hand, a rise in both level of income and financial development directly enhances industrialization as measured by the share of manufacturing output to gross domestic product.