Fiscal Decentralisation and Economic Growth in Malaysia: A Market Preserving Federalism Perspective

Judhiana Abd. Ghani (), Bhajan Grewal (), Abdullahi D. Ahmed () and Norashidah Mohamed Nor ()
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Judhiana Abd. Ghani: Department of Economics Faculty of Economics and Management University Putra Malaysia 43400 Serdang Selangor MALAYSIA
Bhajan Grewal: Victoria Institute for Strategic Economic Studies Victoria University, 300, Flinders St, Melbourne, 3000 Victoria AUSTRALIA
Abdullahi D. Ahmed: School of Accounting, College of Business, RMIT University. 445 Swanston St, Melbourne, 3000, Victoria AUSTRALIA
Norashidah Mohamed Nor: Department of Economics Faculty of Economics and Management, University Putra Malaysia 43400, Serdang, Selangor MALAYSIA

Jurnal Ekonomi Malaysia, 2019, vol. 53, issue 1, 153-170

Abstract: By using fiscal datasets from 1990 to 2010 in Malaysia, a panel Dynamic-OLS (DOLS) is employed to investigate the extent to which fiscal decentralisation can support state level economic growth as proposed in the Market preserving federalism (MPF) theory. Despite having a more centralised federalism system, the result strongly shows that a fiscal decentralisation variable, (i.e. a composite ratio of decentralisation) has significant coefficient and positive relationship with state economic growth. This implies that a certain degree of fiscal decentralisation in Malaysia is able to contribute to states’ economic performance by adopting fiscal decentralisation simultaneously on both dimensions of revenue and expenditure. This validates the view that decentralisation is a multi dimentional measure. The study shows that Malaysia also would be able to benefit from a system of federalism which empowers state governments to make policies for their jurisdictions and to compete with one another for better services and higher investment. Hence, competition is the mechanism that creates incentives that result from satisfying the MPF conditions and subsequently leading to the achievement of higher state economic performance.

Keywords: Market preserving federalism; federalism; fiscal decentralisation (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:53:y:2019:i:1:p:153-170

DOI: 10.17576/JEM-2019-5301-13

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