The effects of government expenditure on economic growth: the case of Malaysia

Hasnul, Al Gifari (2015): The effects of government expenditure on economic growth: the case of Malaysia.

Abstract

The relationship between government expenditure and economic growth has been debated for decades and has not clearly stated yet. This paper gives a further evidence on the relationship between government expenditure and economic growth in the case of Malaysia. In this study, the government expenditure has been disaggregated in to the government operating and development expenditure. We also classified the government expenditure based on the sector of which it expensed. We used OLS technique to find the fixed effects of government expenditure on economic growth for the last 45 years. This investigation is made by using the time series data during the period 1970 – 2014. Our result indicates that there is a negative correlation between government expenditure and economic growth in Malaysia for the last 45 years. Moreover, the classification of government expenditure indicates that only housing sector expenditure and development expenditure significantly contribute to a lower economic growth. Education, defense, healthcare, and operating expenditure do not show significant any evidence of its impact on the economic growth. These finding may give some overview of policy implications to the Malaysia policymakers on optimizing the effects of government expenditure in economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government Expenditure; Economic Growth, OLS.
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H52 - Government Expenditures and Education

References

Abu-Bader, S., & Abu-Qarn, A. S. (2003). Government Expenditures, Military Spending and Economic Growth: Causality Evidence from Egypt, Israel, and Syria. Journal of Policy Modeling, 25(6-7), 567–583. http://doi.org/10.1016/S0161-8938(03)00057-7

Agell, J., Ohlsson, H., & Thoursie, P. S. (2006). Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment. European Economic Review, 50(1), 211–218. http://doi.org/10.1016/j.euroecorev.2004.11.006

Ahmad, M. (2014). Government Expenditure and Economic Growth. International Journal of Social Science and Humanities Research, 3(2), 79–88.

Alexiou, C. (2009). Government Spending and Economic Growth: Econometric Evidence from the South Eastern Europe (SEE). Journal of Economic and Social Research, 11(1), 1–16. http://doi.org/10.1130/0091-7613(1974)2<41

Alshahrani, S. a., & Alsadiq, A. J. (2014). Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation. IMF Working Papers, 14(3), 1. http://doi.org/10.5089/9781484348796.001

Athukorala, P. (2010). Malaysian Economy in Three Crises. The Australian National University Corresponding Working Paper No. 2010/12.

Attari, M. I. J., & Javed, A. Y. (2013). Inflation, Economic Growth and Government Expenditure of Pakistan: 1980-2010. Procedia Economics and Finance, 5, 58–67. http://doi.org/10.1016/S2212-5671(13)00010-5

Barro, R. (1989). Economic Growth in a Cross Section of Countries. National Bureau of Economic Research Working Paper No. 3120. http://doi.org/10.1017/CBO9781107415324.004

Barro, R. J. (1996). Determinants of Economic Growth: A Cross-Country Empirical Study. National Bureau of Economic Research, Working Paper No. 5698. http://doi.org/10.2307/1061363

Barro, R. J. (1999). Determinants of Economic Growth: Implications of the Global Evidence for Chile.

Barro, R. J. (2003). Determinants of Economic Growth in a Panel of Countries. Journal of Economics and Finance, 274, 231–274.

Bergh, A., & Henrekson, M. (2011). Government Size and Growth: A Survey and Interpretation of the Evidence. Journal of Economic Surveys, 25(858), 872–897. http://doi.org/10.1111/j.1467-6419.2011.00697.x

Bucci, A., Florio, M., & La Torre, D. (2012). Government Spending and Growth in Second-Best Economies. Economic Modelling, 29(3), 654–663. http://doi.org/10.1016/j.econmod.2011.12.016

Butkiewicz, J. L., & Yanikkaya, H. (2011). Institutions and the Impact of Government Spending on Growth. Journal of Applied Economics, 14(2), 319–341. http://doi.org/10.1016/S1514-0326(11)60017-2

Cakerri, L., Petanaj, M., & Muharemi, O. (2014). The Effect of Government Expenditures on Economic Growth: The case of Albania. European Journal of Social Sciences, 2(1), 242–253. http://doi.org/10.1142/S0217590803000608

Carrère, C., & de Melo, J. (2012). Fiscal Spending and Economic Growth: Some Stylized Facts. World Development, 40(9), 1750–1761. http://doi.org/10.1016/j.worlddev.2012.04.011

Chude, N. P., & Chude, D. I. (2013). Impact of Government Expenditure on Economic Growth in Nigeria. International Journal of Business and Management Review, 1(4), 64–71.

Ciccone, A., & Jarocinski, M. (2008). Determinants of Economic Growth, Will Data Tell? European Central Bank, Working Paper No. 852.

Devarajan, S., Swaroop, V., & Zou, H. (1996). The Composition of Public Expenditure and Economic Growth. Journal of Monetary Economics, 37(2), 313–344. http://doi.org/10.1016/S0304-3932(96)90039-2

Glass, A. (2009). Government Expenditure on Public Order and Safety, Economic Growth and Private Investment: Empirical Evidence from the United States. International Review of Law and Economics, 29(1), 29–37. http://doi.org/10.1016/j.irle.2008.07.006

Gregoriou, A., & Ghosh, S. (n.d.). The Impact of Government Expenditure on Growth: Empirical Evidence from a Heterogeneous Panel.

Gupta, H. (2013). Public Expenditure and Economic Growth : Econometric Models from Developing Countries.

Guseh, J. S. (1997). Government Size and Economic Growth in Developing Countries: A Political-Economy Framework. Journal of Macroeconomics, 19(1), 175–192.

Hamzah, K. S. (2011). The Association between Government Expenditure and Economic Growth in Malaysia.

Hsieh, E., & Lai, K. S. (1994). Government Spending and Economic Growth: The G-7 Experience. Journal of Applied Economics, 26, 535– 542.

Hur, S. (2014). Government Spending and Inclusive Growth in Developing Asia. ADB Economics Working Paper Series No. 415, (415).

Irmen, A., & Kuehnel, J. (2008). Productive Government Expenditure and Economic Growth Productive Government Expenditure and Economic Growth. University of Heidelberg Discussion Paper No.464.

Kareem, R. O., Bakare, H. A., Ademoyewa, G. R., Ologunla, S. E., & Arije, A. R. (2015). Nexus between Federal Government Spending on Agriculture, Agricultural Output Response and Economic Growth of Nigeria (1979-2013). American Journal of Business, Economics and Management, 3(6), 359–366.

Koeda, J., & Kramarenko, V. (2008). Impact of Government Expenditure on Growth: The Case of Azerbaijan. IMF Working Paper WP/08/115, 1–18. Retrieved from http://ovidsp.ovid.com/ovidweb.cgi?T=JS&CSC=Y&NEWS=N&PAGE=fulltext&D=econ&AN=0978260

Lahirushan, K. P. K. S., & Gunasekara, W. G. V. (2015). The Impact of Government Expenditure on Economic Growth and Development in Developing Countries: Nigeria as a Case Study. International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 9(9), 2984–2992.

Loizides, J. O. H. N. L., & Vamvoukas, G. E. V. (2005). Government Expenditure and Economic Growth: Evidence from Trivariate Causality Testing. Journal of Applied Economics, 8(1), 125–152.

Maku, O. E. (2009). Does Government Spending Spur Economic Growth in Nigeria? MPRA Paper No. 17941.

Mihaela, G. D. (n.d.). Impact of Fiscal Policy on Growth Economy.

Mitchell, D. J. (2005). The Impact of Government Spending on Economic Growth. The Heritage Foundation, (1831). http://doi.org/10.1080/10430719008404677

Mura, P. (2014). How Growth-Friendly are Productive Public Expenditures ? An Empirical Analysis for Eastern Europe. Journal of Theoretical and Applied Economics, 21(10), 7–20.

Nurudeen, A., & Usman, A. (2010). Government Expenditure and Economic Growth in Nigeria, 1970-2008: A Disaggregated Analysis. Business and Economics Journal, 1–11.

Ogundipe, A. A., & Oluwatobi, S. (n.d.). Government Spending and Economic Growth in Nigeria: Evidence from Disaggregated Analysis.

Pascual, M., & Alvarez-García, S. (2007). Government Spending and Economic Growth in the European Union Countries: An Empirical Approach. SSRN Working Paper Series, (October). http://doi.org/http://dx.doi.org/10.2139/ssrn.914104

Romp, W. E., & de Haan, J. (2005). Public Capital and Economic Growth: A Critical Survey. EIB Papers, 10(1), 41–70.

Shafuda, C. P. P. (2015). An Examination of the Relationship between Government Spending and Economic Growth in Namibia.

Solow, R. M. (1956). A Contribution to the Theory of Economic Growth Author. The Quarterly Journal of Economics, 70(1), 65–94. http://doi.org/http://www.jstor.org/stable/1884513

Sinha, D. (1998). Government Expenditure and Economic Growth in Malaysia. Journal of Economic Development, 23(2), 71–80. http://doi.org/10.1109/ICCASM.2010.5622654

Tang, T. C. (2009). Wagner’s Law versus Keynesian Hypothesis in Malaysia : An Impressionistic View. Discussion Paper 21/09, Department of Economics, Monash University, 1–10.

Tang, T. C. (2001). Government Expenditure and National Income in Malaysia. Journal Analisis, 8, 37–51.

Wahab, M. (2011). Asymmetric Output Growth Effects of Government Spending: Cross-Sectional and Panel Data Evidence. International Review of Economics & Finance, 20(4), 574–590. http://doi.org/10.1016/j.iref.2010.10.005

Wei, W. S. (2010). The Study Relationship of Government Spending and Economic Growth in Malaysia: Evidence Based on Development Expenditure.

Wu, S.-Y., Tang, J.-H., & Lin, E. S. (2010). The Impact of Government Expenditure on Economic Growth: How Sensitive to the Level of Development? Journal of Policy Modeling, 32(6), 804–817. http://doi.org/10.1016/j.jpolmod.2010.05.011

Yasin, M. (2000). Public Spending and Economic Growth: Empirical Investigation of Sub-Saharan Africa. Southwestern Economic Review, 4(1), 59–68.

Zhang, T., & Zou, H. (1998). Fiscal Decentralization, Public Spending, and Economic Growth in China. Journal of Public Economics, 67(2), 221–240. http://doi.org/10.1016/S0047-2727(97)00057-1