Malaysian Government Expenditure’s Trends

Malaysian Government Expenditures TrendsCHAPTER 1 aditBackground of shootMalaysia is a small and open delivery which has middle income terra firma. Malaysia is a country on the move. Today, Malaysia becomes an export-driven economy which accele straddles ones by graduate(prenominal) technology, knowledge- ground and capital-intensive industries. Malaysias economy achieves successes in scotch ontogenesis because of economy transformation in an effective public polity. The role of policy not only sewer increase the scotch proceeds but also can achieve the goal in the different development stages (Nabulsi, 2001). Thus, the regime plays an important role in sparing development.Economic evolution is defined as an increase in acountrys point of intersectionive capacity, as measured by comparinggross home(a) product (GNP)in a socio- scotchal class with the GNP in the anterior year. An Increase in thecapital stock,advancesintechnology, andimprovementin thequalityand level o f literacy be considered to be theprincipalcausesof frugal ingathering. In recent years, the idea ofsustainable developmenthas brought in additionalfactors much(prenominal) asenvironmentally soundprocessesthat must be taken intoaccountin growing aneconomy. From these definition it shows that economical growth is primarily a quantitative measure based on the rate of change of GDP while economic development is a combination of quantitative and qualitative measures.The question of the family amidst the organization phthisis and economic growth has been created a lot of interest and maintenance among the economist and policy makers. By understanding the descent within it, may attention in make a more goal orientated policy. Therefore, studies on this topic has been made and argued since decades ago. Furthermore, it has also stimulated controversy in macroeconomics studies. This interest has led to empirical studies to hollo several(prenominal) economic doubts, which rela ted to the government usance and the economic growth of the country.Gwartney, Holcombe and Lawson (1998) noticed when the country has moved towards the economic freedom and open market, that government consumption will increased accordingly. A lot of empirical studies were carried out to examine the effect of economic growth on government expending. However the results of from each one country lead to different conclusion where some countries show positive relationship and some countries not. Samudram, Nair and Vaithilingam (2009) state a similar finding based on several studies regarding the relationship of government white plague and economic growth and the results are inconclusive. Landau (1983) studies noticed that the effect of government expenditure on economic growth in 96 countries and finds a negative relationship between government spending and economic growth. Meanwhile, Sinha (1998) found positive relationship between economic growth and government expenditure in Mal aysia for the period of 1950-1992.There are dickens schools of thought called Wagners police, named after the nineteenth century German Professor Adolf Wagner, and the other one the Keynesian views which were suggested by the 20th century British economist John Maynard Keynes. There are also separated though like big and small government. harmonize to Sinha (1998), Wagners law is the first-year thought that illustrated out the possible relationship between economic growth and the growth of government activity. Sinha (1998) reported that Adolf Wagner was probably the first scholar to recognize a positive correlation between economic growth and the growth of government activity. In addition, Henrekson (1993) pointed out from Wagners law three main reasons for the increase in the governments role. In a simple way, Wagners law is interpreted as to say that government expenditure is a consequence of a growing economy. First, Industrialization and modernization would lead to a substit ution of public for private activities and result in change magnitude government expenditures on law and order as well as on contractual enforcement. Secondly, an increase in tangible income would lead to an expansion of the income flexile cultural and welfare expenditures. Wagner cited two areas which are education and culture in which the government could be a better provider than the private heavens. Thirdly, natural monopolies such as railroads had to be taken over by the government because the running cost of such kind of activities are too expensive and the private sector would be unable to obtain such huge investment to finance the development of these activities.FIGURE 1.1.1 THE WANGERS LAWWagners LawSource emaciated by authorOn the other hand, the other economic interpretation for government expenditure and growth is explained by the Keynesian view. The positive contribution in government expenditure economic growth will be based on the multiplier effects stated in the Keynesian sit.Keynesian traffic pattern consists of the following compositionY = C + I + G +Xn .. (1)where,Y = the aggregate output (GDP)C = the consumptionI = the investmentG = the government expenditureXn = the net exports (exports-imports)FIGURE 1.1.2 THE KEYNESIAN VIEWSWagners LawSource Drawn by authorAs we fetch mentioned earlier, this topic has created enormous attention among investigateers with many extensive empirical works that defecate been carried out to test these theories but unfortunately the outcome of these studies has been of a mixed conclusion. The causation of economic growth and government expenditure can be unidirectional, bidirectional or no causality.Unidirectional causality can be running from government expenditure to economic growth and vice versa. This paper is adapting the Keynesian view to examine the relationship between government expenditure and economic growth.Several studies on causality contract been carried out with several conclusions. Si nha (1998) using augmented Granger causality test finds no evidence of causality between GDP and government expenditure in Malaysia for the time period 1950-1992. Again later, Dogan and tanginess (2006) find no empirical evidence to support either of the two theories for Malaysia when using data from 1960 to 2002. While Tang (2001) finds a short-run causality that runs from national income to government expenditure using data from 1960-1998. In all the studies that have been carried out so far, the outcomes are pacify open for debate. Therefore, the purpose of this paper is to examine the relationship between government expenditure, particularly in economic development expenditure and general development expenditure. This plain will cover the government expenditure from year 1981-2013, limitation in obtaining the earlier data has also became one of the reason that the study starting from 1981 and the year 2013, which is the latest data that can be obtain, in order to find as exac t as we could. The source of data is from the website Asian Development lingo Key Indicators for Asia and the Pacific.1.2 Problem StatementStatistics from Economic readying Unit of Malaysia and International Financial Statistics of International Monetary Fund shows that the Malaysian government expenditures trend and real GDP per capitas trend shows almost a consistent increase throughout the period of 1981 until 2013. At the same time its real GDP per capita also shows the same trend.Figure 1.2 The trend of the summarise government expenditure and real GDP per capita in year 1981-2013Source Economic Planning Unit of MalaysiaStarting with the New Economic Policy (NEP) in the 1970s with its objective to restore the ethnic balance of the Bumiputera population through investment in human capital, the Malaysian government was directly and heavily involved in economic activity. This involvement or the so called government handling in the economy has led the Malaysian federal governme nt expenditure to increase steadily. According to Economic Planning Unit (EPU) Malaysia, the report in year 2003 shows that the percentage of total expenditure relative to GDP in 1970 to 1980 has increased about 25% to 33%. Meanwhile, in year 1981, statistics from EPU also show that the total Malaysian bone marrow government expenditure has jumped about 41% from previous year total expenditure while the development expenditure growth percentage of that year compared to the previous year hiked about 52%.EPU Malaysia report that, by looking into the ratio of development expenditure on total expenditure, it is about 13 in 1980. While in the next year, the ratio has increase and achieved a new height at 12. In 1982, the total government expenditure showed about the same pattern as in year 1981. However the scenario changed in 1983.In year 1983 the Malaysian government focused its privatization policy as one of the national policies. This policy has brought more capitalization to the n ation, shifted the government led growth to private sector led growth. This policy represents a new approach in policy development and at the same time complements other policies introduced by the government. This policy was developed to focus on enhancing the role of the private sector in economic development. Facilitate the development of countys economy and reducing financial and administrative burden of the government is also the purpose of this approach. Furthermore it attempts to reduce government intervention in the economy, lowering the level and scope of public spending and allowing market forces to determine economic activity in line with the National Development Policy.During the executing of this policy, the private sector was regarded as the engine of growth. As a result of this policy, the Malaysian government has successfully reduced its expenditure particularly in the development sector. In 1987, the percentage of development expenditure of total expenditure was mar ked lowest at about 20%. In general, it is believed that the Malaysian economic policies have had a big influence on the trend of the government expenditures for economic growth. However, this policy leads the policy makers to become divided as whether the expansion of government promotes or impedes economic growth.As mentioned in the earlier section, there were several studies on the direction of causality between government expenditure and economic growth in Malaysia and the results are mixed. Some concludes that it has no relationship between the government expenditure and economic growth, while some argued there was some positive and significant relationship lies within. However, we presume that the outcome of the same study will possibly lead to either one of the existing results. Furthermore the causality test was unable to get wind the degree of change or effect from one variable to another for this reason this study has no interest in testing for causality.On the other hand , as highlighted in an earlier section regarding the two sides of arguments which are the proponents of big and small governments, at this point, the attention is given to identify the right side of these two arguments. In addition we would also like to identify the degree of crosstie between the government expenditure particularly by its sectors and economic growth. To our knowledge, no such study exists for Malaysia so far. Thus this study attempts to investigate the association between government expenditure in education and healthcare and economic growth in Malaysia from 1981 to 2013.Research ObjectivesThe aims of this study is to evaluate empirically the association between the general government expenditure and economic growth. Specifically, the objectives of this study are1.3.1 General ObejctiveTo identify the association between government development expenditures and economic growth, and its significance by the services and sector.1.3.2 Specific ObjectiveTo determine the r elationship between the education and economic growth of Malaysia.To determine the relationship between the defence and security expenditure and economic growth of Malaysia.To determine the relationship between the general public services expenditure and economic growth of Malaysia.To determine the relationship between the transportations and communications expenditure and economic growth of Malaysia.To determine the relationship between the healthcare expenditure and economic growth of Malaysia.Research QuestionTo meet the above objectives, several research questions have been developed to meet the objectives. Answering the below research questions will do the objectives of this study.The research questions are as followsWhat is the relationship between education expenditure and economic growth of Malaysia?What is the relationship between the defence and security expenditure and economic growth of Malaysia?What is the relationship between the general public services expenditure an d economic growth of Malaysia?What is the relationship between transportations and communications expenditure and economic growth of Malaysia?What is the relationship between healthcare expenditure and economic growth of Malaysia?1.5 General HypothesisThe hypothesis is to determine the relationship between the government expenditure and economic growth in Malaysia.EDUCATIONH0 There is a relationship between the education expenditure and economic growth of Malaysia.H1 There is no relationship between the education expenditure and economic growth of Malaysia.DEFENCE AND SECURITYH0 There is a relationship between the defence and security expenditure and economic growth of Malaysia.H1 There is no relationship between the defence and security expenditure and economic growth of Malaysia.GENERAL PUBLIC SERVICESH0 There is a relationship between the general public services expenditure and economic growth of Malaysia.H1 There is no relationship between the general public services expenditure and economic growth of Malaysia.TRANSPORTATIONS AND COMMUNICATIONSH0 There is a relationship between the transportations and communications expenditure and economic growth of Malaysia.H1 There is no relationship between the transportations and communications expenditure and economic growth of Malaysia.HEALTHCAREH0 There is a relationship between the healthcare expenditure and economic growth of Malaysia.H1 There is no relationship between the healthcare expenditure and economic growth of Malaysia.In order to proceed with the interpretation of regression analysis, a significance level should be first considered. The significance level can be set at three different levels which are 1%, 5% and 10%. At each significant level, if the p-value of variables indicates that p-value1.6 Significant of StudyMalaysia is a developing country that has excelled in economic performance during 1980s. However more and more factors are affecting the economic health of Malaysia and the economic performa nce has slowed down over the years. One of the argument found is on the misspending of the government budget. Government expenditure might have failed to greet the real factor that may drive the economic growth therefore this paper may be helpful in the sense of recognizing the real expenditure that may trigger economic growth. This does help in helping government to spend the right money at the right place.Identifying the relationship within economic growth and government expenditure will also give some reference to the policy makers in shaping the countrys future without spare waste of resources. It may also help policy makers to examine the current policy, weighting its strength of influence towards the results they may want to achieve.Furthermore, this paper has also study the government expenditure by separating it into perfect bite-sized, easy to understand and digest. The paper has breakdown the economic expenditure to very small and specific components, and this will help in quantifying the right amount of expenditure in every aspect. This makes the economic analysis become much more an easier and easier to forecast the economic growth by accessing the current expenditure that have invested in.1.7 Outline of the StudyThe following chapters in this study will explain the research process in better details. The social organisation of this study starts with chapter one focusing on the introduction and research proposal.Chapter two is about the literature review, this chapter will discuss on the relevant research that have been carried out by others researchers. This chapter will also discuss and explain in depth about the literatures relevant to the area of economic growth.Chapter three focuses on model and methodology. This chapter will discuss the method that will be used in this research. It included the research design, research method, data analysis and others.Chapter four conducts the empirical tests of a time series regression analysis from year 1981 to 2013 and describes the outcome of the regression analysis. The results of the research will then be analyzed to answer the relevant research question.Chapter five focuses on a countersign of the empirical results and discuss conclusions and recommendations based on the study. This part will provide a summary of the findings, a discussion of the implications of the study and recommendation1.8 ConclusionIn a nutshell, this paper study on the significance of the relationship between government expenditure and economic growth, it is based on secondary data as the paper is accessing the past record of the economic performance to draw a conclusion. The paper will help in certain aspect, especially as a reference in helping policy makers to make a better policy, drive Malaysia towards a more private-enterprise(a) environment.