This dissertation has some important implications for policy practice concerning Malaysian development. First, it contributes to regional development by presenting evidence of the spatial balance in socio-economic development within Malaysian states. Second, the study helps to understand the reasons on the gap between the less developed states and the developed states after many years by identifying the determinants of states’ economic growth in Malaysia. Third, the study highlights the role of decentralisation of state government in fostering equitable spatial development across states through the convergence in development expenditure. Finally, this research provides a possible solution for Malaysia to escape from the middle-income trap and stagnant economic growth by providing evidence in support of the positive growth effect of decentralisation.
This dissertation consisted of three essays. In the first essay, the study examined the factors that explain variation in growth and the disparity in socio-economic development across states in Malaysia. The study adopted the three-stage least squares (3SLS) estimation method in analysing the objectives of the study. Even though the study presented evidence of a declining trend in the disparity of socio-economic development, the development gaps between less developed states and developed states have been an issue over the years. From the analysis performed, this study found that the economic sectors of agriculture and manufacturing play a crucial role in explaining variation in growth across Malaysian states. However, the findings reveal that states with a comparative advantage in manufacturing does not have any impact on the growth in the agriculture sector. Meanwhile, the growth of the agriculture sector is important in affecting the growth of the manufacturing sector positively. These findings provide guidance for policymakers that not only manufacturing, but also agriculture is important to boost the growth of the states’ economies. Without too much reliance on manufacturing, the government plays a crucial role in supporting the agriculture sector through investments and research and training, so that the benefits of the sector can be utilised.
Since educational attainment is essential to explain the variations in the growth of GSDP and manufacturing across states, employers should offer learning and
development opportunities to motivate employees to continue developing their skills and knowledge. The findings also show a positive effect of population growth and state revenue on the changes in the growth of the states. The positive effect of state revenue implies that state economic growth depends on the institutional factors of commitment of both state and federal governments. The negative effect of forests on growth is worth exploring. Further research is necessary to understand the contribution of forests to growth and the factors that have undermined the significance of forests in the economy. The study also reports that the proportion of the Chinese ethnic is significant in explaining the disparity in economic growth within Malaysian states. By knowing these key determinants of growth, the potential areas to generate or maintain economic growth within Malaysian states is better understood.
The role of institutional factors in promoting a spatial balance in socio- economic development across states was further analysed in the second essay. The study analysed the pattern of development expenditure and the effect of the institutional factor of fiscal decentralisation on the changes in the fiscal behaviour of state governments. The results of fixed effect (FE) estimates reveal the presence of both unconditional and conditional convergences in development expenditure across states in Malaysia. The convergence implies that socio-economic development across states is pro-spatially equitable. However, accounting for the impact of other factors of decentralisation, initial per capita output, and state population growth has expedite the process of convergence in public finance. The findings report that states with a higher state per capita revenue or state-sourced per capita revenue or state-sourced revenue as a share of total revenue and state-sourced capacity as a share of the national average would have higher spending on development. Hence, how effective state governments are in collecting revenue and managing the distribution of resources is vital because it influences the process of development across states in Malaysia.
In addition, assistance from federal government through the transfer mechanism is important to strengthen the expenditure capacity of Malaysian states. As the performance of less developed states has been persistently below par comparative to the developed states, understanding the factors that affect the pattern of fiscal behaviour of the states might also reduce the gap in performance among the states. Therefore, the disparity in economic performance between less developed states and developed states could be reduced by maintaining less variation in the state per capita revenue, state- sourced per capita revenue, state-sourced revenue as a share of total revenue and state- sourced capacity as a share of the national average. In this regard, public finance
through the convergence in government spending should be performed effectively to attain equality in social welfare of the population. Due to non-availability of the data at the state level, the study could not examine the convergence of government spending on various types of government expenditure. However, since development expenditure includes spending on both social and economic sectors, the results of the study reveal the evidence of spatial balance in socio-economic development across states that occur through the pattern of government spending.
Lastly, the third essay of the thesis investigated the effect of fiscal decentralisation on the Malaysian economic growth. The study divided the group of government into three (federal, state and local governments) to measure the decentralised government in the economy. The Autoregressive Distributive Lag (ARDL) model was used in analysing annual time series data that covers the period from 1985 to 2015. The impact of fiscal decentralisation was examined based on two cases of revenue and expenditure decentralisation. The findings provide evidence in support of fiscal decentralisation as a key factor of economic growth. It is found that there is a positive significant effect of decentralised revenue at state government level but a negative insignificant effect at local government level on growth. In contrast, there is a negative insignificant impact of decentralised expenditure at the state level but a positive significant impact at the local level on economic growth. These results imply that state governments are more efficient in managing the revenue as compared to local governments while the situation is vice versa in the matters of expenditure. Hence, this study suggests that revenue assignments should be allocated to higher-level authorities of federal and state governments while responsibilities towards expenditure development should be distributed to local governments to stimulate economic growth of Malaysia. A mutual agreement among the three levels of governments is necessary to make this arrangement attainable.
More recently, the degree of decentralisation in the 2000s period shows a decreasing pattern. This is evidenced that a decline trend in the share of state governments in public finance is offset by an increase in the share of federal government. However, the findings indicate that the participation of state and local governments in public finance responsibilities should be fairly considered in order to promote economic growth. It is recommended for future study to quantify the optimal degree of decentralisation to avoid excessive imbalance between federal and subnational governments’ finances in the context of Malaysian public finance. Another variable of labour force and the net export influence growth performance adversely.
Since decline in net export would enhance the economic growth of Malaysia, trade liberalisation and economic policies with regards to the component of trade, either export or import, should be reviewed more precisely.