Impact of investment and government expenditure on economic growth
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Date
2009
Authors
Hussin, Fauzi
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Abstract
Neo-classical growth theories attributed growth mainly to the availability of capital and labour (Balassa, 1978). The relationship between the two is summerised by the capital-labour ratio as is in the Harrod-Domar model. From the Keynesian macroeconomics perspective, government expenditure plays an important role determining the level of economic growth. Economists were pre-occupied with the role of these three variables – capital, labour and government expenditures – in determining the level of economic growth. Taking this into account, this study is intended to analyse the impact of capital and state government development expenditure (DEV) towards real gross domestic product (GDP) for the Malaysian states from 1980 to 2005. For this purpose, capital is divided into two categories, namely foreign direct investment (FDI) and domestic investment (DI).
In analysing the impact of the three explanatory variables on GDP, two approaches were taken. First, to analyse the impact of FDI, DI and DEV on real state gross domestic product (GDP) for each individual state. Secondly, to analyse the impact of the three explanatory variables on real GDP for the more developed and the less developed states following the classification made by the Economic Reports of the Ministry of Finance. The second approach is useful in explaining the effect of the three explanatory variables on the growth disparity between the two groups of states. The relationship is tested using the correlation analysis, regression analysis, Johansen cointegration test, and Granger causality test. Regression analysis for panel data estimation method used Fixed Effects Model and Random Effects Model.
The result showed that for the period under study, 1980 to 2005, Selangor recorded the highest nominal GDP among states. It contributes approximately 20.2% of the nominal GDP for the country, followed by Johor (11.1%), Sarawak (8.7%), Pulau Pinang (7.9%), Perak (7.89%), and Sabah (7.4%). Otherwise, Kelantan and Perlis were the lowest contributors of nominal GDP to the country when compared to the all other states. The statistical result also indicated that all the independent variables have a significantly positive relationship with real GDP growth for most of the developed states. However, FDI and DI did not have any significantly and positive relationship with economic growth for most of the less developed states. Multiple regression analysis for developed states showed that three independent variables had strong influences on the real GDP growth. Otherwise, low values of 2R for the less developed states showed that all three independent variables were unable to explain the variation in the real GDP growth, with the exception of Sarawak. The results of panel data analysis showed that the independent variables strongly influenced the real GDP growth of developed states compared to the less developed states.
Description
PhD
Keywords
Distance learning , Government expenditure , Malaysian states 1980 – 2005