ATTEMPTS to test economic hypotheses empirically often encounter two problems. The first is that theoretical formulations do not always result in relationships between variables which can be observed directly. Under these circumstances further relationships between the unobservable variables and other variables which can be observed will have to be specified before the original hypotheses can be tested empirically. This is a legitimate but not always successful method of circumventing the difficulty. 2 The second obstacle encountered is the shortage of reliable statistical data for those variables which can be observed. This is a problem that is especially serious in less developed countries where the machinery for collecting statistical data is still in its infancy. Under such conditions indirect methods have often to be substituted for direct methods in the empirical verification of economic hypotheses. The purpose of this paper is to show the presence of these two problems in, and therefore the difficulty of, substantiating the claim that export instability has been detrimental to the economic development of West Malaysia over the period 1947-70.

I The hypothesis that export instability has affected the rate of growth of the West Malaysian economy adversely consists of three distinct but related parts. The first is the establishment that the degree of export instability in West Malaysia is high by international standards and the reasons for such instability. The second is the establishment that fluctuations in the export sector have been transmitted to the rest of the economy and the third that economic instability per se has resulted in a decrease in the long-term rate of growth of the economy.