The Association Between Government Expenditure and Economic Growth Has Been Widely Debated for Centuries
Total Page:16
File Type:pdf, Size:1020Kb
The Association between Government Expenditure and Economic Growth in Malaysia by Khairul Shahril Bin Hamzah September 2011 A Thesis Presented to the Higher Degree Committee of Ritsumeikan Asia Pacific University in Partial Fulfillment of the Requirements for the Degree of Master of Science in International Cooperation Policy Preface Government expenditure and economic growth are both subjects of public attention and inquiry. It is because, in many countries, the source of government expenditures is mainly from public taxes. Therefore, in general, the public would expect high economic growth as a whole in return. Absolutely as tax payers, they would expect that their tax contributions be spent wisely by the government. At the same time, every government also hopes to return the favor of their peoples by giving the best that they probably could. However, the subject of the association between government expenditure and economic growth has been widely debated for centuries. The proponents of government expenditure have been divided into two groups which are the big and small government. There are several reasons that led me to focus my research and study on this topic. My first position as a government official was at a state hospital where I was responsible for managing the hospital operations and its development expenditures. I was later reassigned to the federal level and became responsible for assisting the ministry’s top level management in structuring and implementing the government policies particularly during the Ninth Malaysia Plan. Throughout ii this process, I learnt the importance of government policy in shaping the future prospect of the country. I also learnt how government policy and government expenditure can work together for the country’s economic growth. Therefore, I decided to conduct this study for a better understanding of how the government expenditures are associated with economic growth, in the case of Malaysia. At the same time, I hope that the findings of this paper would shed some light on the debates about the association between these two subjects and would provide some clear ideas that could help the government in structuring their future policies. The empirical results, discussions and conclusions of this study are solely based on the limited scope of this research which deems to be bound with certain incomprehensiveness. Needless to mention that any discrepancy in the facts presented in this work that may lead to any sort of confusion or different opinions, is my sole responsibility. Khairul Shahril Bin Hamzah iii Acknowledgement The completion of this thesis has been possible through the guidance and helps from several individuals and organizations, either directly or indirectly. First and foremost, I would like to take this opportunity to express my gratitude to my supervisor, Professor Nader Ghotbi who continuously encouraged, guided and helped me with patience on this study. Not to forget my heartiest thanks to the late Professor Dipendra Sinha for his teaching and guidance especially during the beginning of this study. Both of them will always be in my thoughts. My deepest sympathy is extended to the wife of the late Professor Dipendra Sinha for her loss. Also thanks to Tejo Birowo, my classmate, for his altruistic sharing of his valuable ideas relevant to the study. Moreover his full support made the completion of this study possible. I would also like to thank my lovely wife, Hasreen Halil and my two lovely daughters, Khaira Sofiya and Khaira Syahmeen for their understanding, support and for being my inspirations as I hurdled through all the difficulties for the completion of this study. Many thanks to all the staff of the APU Ritsumeikan University especially Ms. Emiko for her helps on my queries concerning to the requirements of this study. Also many sincere thanks to the World Bank, the Economic Planning Unit, Malaysia, the Ministry of Finance, Malaysia, and the iv International Monetary Fund and any other organizations or individuals that I may not have mentioned their names here, for their valuable contributions to this study. Last but not the least, the one above all others, Allah, the Almighty God, for extending His grace and bless, and for giving me the strength to deliver this achievement, thank you so much my Dear God. v Table of Contents Preface ................................................................................................................ ii Acknowledgement .............................................................................................. iv Table of Contents ............................................................................................... vi List of the Tables ............................................................................................... xii List of the Figures ............................................................................................ xvi List of Abbreviations ....................................................................................... xvii Abstract ..............................................................................................................xx 1. Introduction .................................................................................................. 1 1.1. Background ............................................................................................... 1 1.2. Problem statement .................................................................................... 11 1.3. Objectives .................................................................................................15 1.4. Research questions ...................................................................................16 1.5. General hypothesis ...................................................................................17 1.6. Scope of research ......................................................................................17 1.7. Limitations of the study ............................................................................19 1.8. Outline of the study ..................................................................................20 2. Government expenditure, economic growth and economic policies..............22 vi 2.1. Overview of Malaysia’s current economic status and its recent history .....22 2.2. Overview of Malaysian government’s expenditure for economic growth...26 2.3. Roles of government .................................................................................29 2.4. The growth of Malaysian government size and its revenue ........................32 2.5. Malaysia’s economic policies....................................................................34 2.5.1. Stage I: Post independence (from 1957 to 1960) .................................36 2.5.2. Stage II: The New Economic Policy (from 1970-1990)…...…………38 2.5.2.1. The Second Malaysia Plan, MP-2 (1971-1975) ......................40 2.5.2.2. The Third Malaysia Plan, MP 3 (1976-1980)..........................42 2.5.2.3. The Fourth Malaysia Plan, MP 4 (1981-1985) ........................46 2.5.2.4. The Fifth Malaysia Plan, MP-5 (1986-1990) ..........................50 2.5.3. Stage III: Vision 2020 (from 1991-2020)………………….………….53 2.5.4. Stage IV: The New Development Policy (from 1991-2000)…….……55 2.5.4.1. The Sixth Malaysia Plan, MP-6 (1991-1995) ..........................56 2.5.4.2. The Seventh Malaysia Plan, MP-7 (1996-2000) .....................60 2.5.5. Stage V: The National Vision Policy (from 2001-2010)……….……..63 2.5.5.1. The Eight Malaysia Plan, MP 8 (2001-2005) ..........................64 2.5.5.2. The Ninth Malaysia Plan, MP 9 (2006-2010) .........................67 2.6. Criticism issues on Malaysian National Policies.....................................71 2.6.1. Economic discrimination and crowding out ........................................72 vii 2.6.2. Rent-Seeking .....................................................................................76 2.6.3. Issues related to public sector .............................................................78 3. Theory, Model and Methodology .................................................................83 3.1. Theory ......................................................................................................83 3.2. Data Collection .........................................................................................87 3.3. The Model ................................................................................................88 3.4. Methodology ............................................................................................91 3.4.1. Data processing ...............................................................................91 a. Determination of variables ................................................................92 b. Data testing .......................................................................................94 3.4.2. Diagnostic Testing ...........................................................................97 a. Linearity test .....................................................................................97 b. Multicollinearity test .........................................................................99 c. Autocorrelation test ........................................................................ 101 d. Heteroscedasticity test .................................................................... 102 3.5. Hypothesis testing ...............................................................................