Socio-economic Development and the Role of Fiscal Decentralisation in Malaysia

Malaysia is one of the countries in the world that has adopted a unique system of governance that involves monarchy, democracy and federal system. Nevertheless, all the thirteen states are governed by employing a federal governance structure headed by the Prime Minister. Given the federal structure of Malaysian economy, it is logical to expect the variations in the socio-economic development across the states. It is interesting and also important to understand the force behind the variations across the performance of the states. This thesis first identifies the significant factors that influence the variation in economic growth across the states, which is the core factor determining socio-economic development. Next, the thesis highlights the influence of the federal system on the development expenditure of the states, which is crucial for socio-economic development. Finally, the thesis examines the impact of decentralisation on transferring the Malaysian economy from the middle-income country to high-income country. The following paragraphs briefly explain how the above three main analyses have been carried out in this thesis. In Chapter 2, the study contributes to the aim of regional development policy in reducing regional disparities, by examining the spatial balance in socio-economic development across the states of Malaysia based on few selected socio-economic indicators. Besides, the study has attempted to understand the issues in the development gaps across the Malaysian states by evaluating the factors that explained the variation in economic growth. Though the pattern in the spatial socio-economic imbalance demonstrates a decreasing trend, the development index reveals that performance of less developed states remained behind that of the developed states for more than a decade. Based on three-stage least squares (3SLS) estimation technique, all independent variables in the main equation are significant to explain the development gaps within the states that covers the period between 2005 and 2015. The significant factors in explaining the variation in growth across the Malaysian states are relating to agriculture, manufacturing, human capital, population growth, Chinese ethnic, institutional factors and natural resources. In Chapter 3, the study examines whether there is convergence in development expenditure across Malaysian states and investigates the importance of decentralisation in affecting the pattern of development expenditure during the short run and long run. The convergence analysis involved the data of annual growth for the short run, and average three-year and five-year growth for the long run from 2000 to 2015. The study uses panel data approaches of pooled OLS, fixed effects and random effects estimation procedures. The findings provide empirical evidence on the development expenditure convergence within the states during both short run and long run. It is also found that all fiscal decentralisation indicators (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) are imperative in influencing the fiscal behaviour of state governments in Malaysia. The assistance from the federal government through transfer payment is needed to strengthen the expenditure capacity of Malaysian states. In Chapter 4, the study inspects the role of fiscal decentralisation as a solution for escaping from the middle-income trap. The study employed annual time series data from 1985 to 2015. The Autoregressive Distributed Lag (ARDL) bounds test reveals the presence of long run relationship between the levels of the dependent variable (economic growth) and the regressors (the participation of federal, state and local governments in the economy, labour force and net exports). The results of the study offer a possible solution that could help Malaysia to escape from the stagnant economic growth. It is found that fiscal decentralisation has a growth effect on Malaysian economy though the benefits of decentralisation are realised differently at different levels of government. The positive impact of revenue decentralisation is realised at the state but not the local level. In contrast, the opposite results are reported in the case of expenditure decentralisation. The benefits of expenditure decentralisation are accomplished at local but not the state level