The Empirical Effects of Islam on Economic Development in Malaysia

Abstract

The studies on the effects of religion on economic development and growth had intrigued the economists to further develop quantitative plausible hypotheses for empirical testing. In Malaysia, albeit implementation of Islamic based policy in economic development had been started since 1969 with the inception of the Pilgrimage Management and Fund Board (Tabung Haji), and recently with the development of Islamic banking and takaful sector; there was very little evidence on the effectiveness of such policy that had been reported by the researchers over the last 40 years. This study was to fill the gap and to review the previous research findings on relationship between Islam and economic development. The objective was to investigate the empirical effects of Islam on economic development in Malaysia. The subject of Islam and economic development had raised a hypothesis whether there was a level relationship in short and long-run equilibria. The Islamization index was employed as a proxy of Islam. Real per capita GDP is used as the indicator of economic development. An autoregressive distributed lag (ARDL) approach was utilized for empirical analyses based on 42-year dataset from 1969 to 2011. Basically, the results from the cointegration analyses using ARDL approach suggested that Islam, as a religion of the population, had a significant effect on economic development in Malaysia.