UNIVERSITI PUTRA MALAYSIA

AN ECONOMIC ANALYSIS OF GOVERNMENT FINANCING FOR DEVELOPMENT IN MALAYSIA

MARIAM ABDUL AZIZ

FEP 1993 4

AN ECONOMIC ANALYSIS OF GOVERNMENT FINANCING

FOR DEVELOPMENT IN MALAYSIA

By

MARIAM ABDUL AZIZ

Thesis Submitted in Fu l f i lment o f the Requ irements for the Degree of Doctor o f Philosophy in the Facu lty of Economics and Management , Unive r s it i Pertanian Ma l ay s i a

1 9 9 3

ACKNOWLEDGMENTS

l owe sUbstantial debt to colleagues who have helped me,

som(�times unwittingly, in the completion of this dissertation.

I am especially grateful to my main supervisor, Associate

Professor Dr. Mohammed Yusoff for the origin and completion of

this study. I have benefited tremendously from his painstaking

and p atient guidance in seeing me through my work. His

attention to detail saved me from several unwarranted errors

and the helpful comments proved valuable in the improvement of

the dissertation. My thanks also to associate professors

Dr. Ishak Haji Omar, Dr. Abdul Aziz Abdul Rahman and

Dr. Ahmad Zubaidi Baharomshah who made several suggestions for

improvement. Their helpful comments and constructive criticisms

are appreciated.

My gratitude also goes to the staff of the Malaysian

Agricultural Research and Development Institute in assisting me

with their computer facilities. My appreciation also goe� to

friends who provided several materials relevant to this study.

A note of gratitude also goes to Universiti Pertanian Malaysia

for giving me the opportunity to pursue my work till the end.

Last, but not least, a special thanks goes to my parents,

brothers and sisters for their support and encouragement which

ii

I really appreciated. To my husband and three children, I thank

them for putting up with my seemingly end less preoccupation

towards the completion of this study when I really s hould be

devoting my attention to them .

i ii

TABLE OF CONTENTS

Page

ACKNOWLEDGEMENTS ii

LIST OF TABLES ix

LIST OF FIGURES xii

ABSTRACT

ABSTRAK

CHAPTER

1

2

INTRODUCTION . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . .

The Rol e of Government in the Economy . . • . . . .

Background to the Malaysian Economy

The Malaysian Economy . . . • . . . . . . . . . . . . . •

Constitutional Framework . . . • • . . . . . . . . . •

Deve lopment Policies

Problem Statement

Obj ectives of the Study

Scope and Organisation of the study

Sources of Data

xiii

xvii

1

1

9

9

16

18

20

25

26

30

Sununary • • • . • • • . • . • • • . • . • . • . • . • • . • • . . . • . . . . . 31

GOVERNMENT EXPENDITURES IN MALAYSIA 32

Introduction 32

General Trends in Pub lic Expenditure 33

Current Expenditure . . . . . • . . • • • . . . . . . • . . 35

Development Expenditure . . . . • . . . . . . . . . . . 39

Government Expenditure: Theory and Evidence . . 51

Theories of Government Expenditure 51

iv

3

Page

Growth of Government Expenditure in Malaysia • . . . • . • • . . . . • . . . . • . . • . . . . . . . . . . . 55

Government Consumption Expenditure and Taxation • • • • . • • . • • • • . • . • • . . . . . . • . . . 63

Effects of Taxat ion on Savings and Expend itures in Malaysia • • . • . . . . . . . . . • . . 65

An Evaluation of Pub l ic Expend iture in Malays ia 68

Budgetary Trade-offs

General Administration

68

72

Expenditure Programmes for the Poor . . . . . . 73

Government Expenditure as a Stabil ising Measure • • . . • . � • . • . . • • • . • . . • . . . . . . . . . • . . . . 74

Scope for Expenditure Restraint and

control • . . . . . . . . • . . • . . • • . • • • . . • . . . . . . • . . . 78

Conc lus ions 82

THE FISCAL SYSTEM OF MALAYSIA: TAXATION 85

Introduction 85

The Tax System in Malaysia 85

General Trends in Tax Structure . . . . . . • . . • 85

The Buoyancy and Elastic ity of the Tax Structure . . . . • . . • • . . • • . • • . . • • • . . . . . • . . . . . 99

Appl ication of Buoyancy and Elast ic ity Analys i s to Malaysia . . . . • . . • . . . . . . . . . . . • . 102

An Evaluation of the Malaysian Tax System 109

Revenue Productivity ..................... 110

Administrative Feasib i l ity ............... 116

Equity . . . . • . • • • • • • • • . . • . • • . • . • • . . . . . . . . . . 118

Eff ic iency . . • . . . . . • . . . . • • • . . • • . . . . . . . . . . . 121

Stab i l ity . . . • . . . . • • . . . . . • . . . • • . . . . . . . . . . • 122

Income Red istribution . • . • • . • • • . . . . . • . . . • . 122

Conclusions 124

v

4

5

Page

THE FINANCIAL SYSTEM 127

Introduction 127

Flnanci�l Development and Economic Growth 127

Financial Intermediation 130

The Malaysian Financial System and

Monetary Policy ............................. 131

Financial System and Development

Finance • • • • . . • . . • • • • . . • . . . • • . . • • . . • • . . . . 1 3 1

The Malaysian Financial Institutions • . . . • 1 3 8

Monetary Policy and Economic

Development . , . . . . . . . ..... . . . . . . .. . . . ... . 151

Models of Finance and Economic Development 156

Financial Savings and Economic Growth 156

Financial Repression Model .............. 160

Market Forces vs. Regulation • . . . . . . . . . . . 169

Conclusions 172

EXTERNAL PUBLIC BORROWlNG AND ECONOMIC GROWTH .. 175

Introduction 1 7 5

Foreign Loans in Malaysia 175

composition of Foreign Loans . .. . . . . . . . . . .. 175

Debt Service Payments . . . . . . • . . • . . . . . . . . . • . 180

Factors Affecting the External Debt

situation • • . . . • . . . • . • . • • . . • . • • • . . • . . . . . • . • 182

External Borrowing, Savings and Growth 1 8 8

Review o f Previous Studies . . . . . . . • . . . . . . . • 188

The Empirical Evidence for Malaysia . • . . . • . 1 9 4

Measures t o Reduce the External Debt Problem 202

vi

Page

Trade versus Aid • . • • . • • • • . . • . . • . . . • . . . . . . . . . • . • 207

Background • • • • • • • • • • • • . • • . • • • • . . . . . . • • . • • • 208

The Theoretic al Debate . . . • • • • . • • . . . . . . . . • • 209

Net Foreign Borrowing, Exports and

Savings in Ma laysia . . • • • • . . • . . . . • . . . . . • • 211

Constraints of the Export-Led Growth

Strategy • • • • • . • • . • • • . • . • • . . • . • • • • . . . . . . . . . 214

Conclusions 215

6 THE MACRO MODEL: THEORETICAL FRAMEWORK AND

7

SPECIFICATION

Introduction

Theoretical Considerations

Previous Mal aysian Macroeconometric studies

Theoretica l Framework and Specification of the

Mode 1 • • • • • • • . • • . • • . . . • • . . . • . . . • . • . • . . . . . . . . . . .

An Overview of the Model Private Demand Sector Government sector • • • • • • . • • . . • • • • . . • . • • . • • •

External Sector . . . . • . . . . . • . • . . . . . . . . . • . • . •

Monetary Sector • . • . • . . . • . • . . . . • • . . . . . . . . . .

capacity utilisation, Prices, Wages, Unemployment and output . • . . • . • . • . . . . • . . . . .

THE MACRO MODEL: EMPIRICAL RESULTS

Estimation Procedure

Empirical Results

Summary of the Preferred Equations

Private Demand Sector Government Sector External Sector

vii

218

218

220

226

229

229

233

246

249

252

261

270

270

272

290

290

291

292

8

Page

Monetary Sector • • • • • • • • • • • • • • • • • • • • . . • • . • • • 292

Capacity Utilisation, Prices, Wages,

Unemployment and Output . . . . • . . . . . . . . . . . . . . 293

Validation of the Model as a System 294

Introduction 294

Historical Dynamic Simulation Tests . . . . . . • 398

Outside Sample Forecasting • • • • • . . . . . . • • . • . 302

Historical Policy Simulations • • . • . . . . . . • • • 306

Conclusions • • • • • • . • • • • • • . • . . • . • • . . . . . . . . . . . . . . . 313

CONCLUSIONS 3 16

Introduction 3 16

Summary of Findings 316

Policy Implications 320

Scope for Further Research 327

REFERENCES • • • • • • • • • • • • • • • • . • • • . . • . • . . • . . . . . • . . . . . . . . . . . 328

APPENDIX

A Dynamic Historical Simulation 350

B Dynamic Historical Simulation Results 360

C Ex-Post Forecasts 365

D Ex-Post Forecasts Results 375

E Relative Effectiveness of Alternative Policy

Change s • . • • • • • . • . . . • • . • . . . . • • • . . . • . . • . • . . . . . . . . . • • 379

F Within Sample Policy Simulations 385

VITA 392

viii

LIST OF TABLES

Table

1

2

3

4

5

6

7

8

9

central Government Expenditure as a Proportion of GDP • lit • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Various Indicators of the Public Sector

Federal Government Finance as a Proportion of Development Expenditure . . . • • . . . . . . . . . . • . . . . . . . . . . • •

Sources of Financing Overall Deficit

Ma jor Economic Indicators for Malaysia

Gros s Domestic Product by Sectoral Shares

I nvestment i n Malaysia

Current and Developme nt Expenditures in Malaysia . . . .

Federal Government Current Expenditure

10 Federal Government Development Expenditure

Page

3

4

7

8

10

11

15

34

36

40

11 Employment by Race and Sector • • . . . . . • • . . . • . . • . . . . . . . 42

12 GDP and Employment by Sector o f Origin . . • . . . • • . • . . . • 43

13 Buoyancies of Government Expendit ures and Tax Revenue in Re lation to GNP . . . . . . • • . . . . . . . . . . • . . . . . . . . . . . . . . 57

14 Buoyancy o f Total Revenue and Expenditure 58

15 Est imates of Displacement Ef fects in Malaysia 6 1

16 Est imates o f Ef fects o f Taxation on Savings and Public Expenditure in Malaysia . . . • . . . . . . . . . . . . . . . . . 6 6

1 7 Est imates of Trade-Offs Between De fence Expenditures and Economic and Soc ial Expenditures in Ma laysia . . . 70

18 Maj or component s of Federal Government Revenue as a Proport ion of Total Revenue • . . • . . • . . . . . . . . . . 87

ix

Table

19

20

21

Components of Income Tax as a Proportion of Total Income Tax • • • . • • • • . • . • • . . • . . . . . . . . • . • • . . . . . . . . . . . .

Components of Indirect Taxes as a Proportion of Total Indirect Taxes • . • . . . . . . . • . . . . . . . . . . . . . . . . . . .

Components of Export Duties as a Proportion of Total Export Duties • . • . • . . • . . . . . . . . . . . . . . . . . . . • . . .

22 Elasticity and Buoyancy of the Malaysian Tax

23

24

25

26

27

28

Structure

Comparisons of Estimates of Tax Elasticities and

Buoyanc ie s • • • • • • . • • . • • • • • • • . . • . . . . . . . . . . . . . . . . . . . .

Domestic Debt • • • • • • . • • . • • • • . • • . • . . • • . • • . . . . . . . . • . . •

Assets of the Financial System

Deposits of the Major Financial Institutions

Assets, Loans and Investment of Major Financial Insitutions . • • • . . . . . . . . . • . • . . • . • • • . . . . . . . . . . . . • . . .

Securities Held by Insurance Companies as a

Proportion of Total Assets . . • • . . • • . . . . . . . . . . . . . . .

29 Commercial Bank Lending as a Proportion of Total Bank Loans

30 Federal Government Net Foreign Loans

31 Composition of outstanding Market Loans

32 Composition of outstanding Project Loans

33 External Debt Servicing Ratios in Selected ASEAN Countr ies • • • • • . • . . • . • . . . . . . . . . . . . . . . . . . . . . . .

34 Public External Debt as a Proportion of GDP

x

Page

91

93

94

104

108

134

135

136

137

149

154

177

178

179

181

185

Table

35

36

37

38

Relationship betweeen Net Foreign Borrowing,

Government Expenditure and Taxation .............. .

Summary Measures of the Dynamic simulation Error

Summary Measures of the Dynamic Simulation Error

of Selected Models . . . • • • . • . . . . . • . . . . . . . . . . . . . . . . • . .

Range of Absolute Proportionate Changes in Wages

and Prices • • • • • • • • . . . . • . . . . . . . . . . . . • . . . . . • . . . . . . • • •

xi

Page

197

300

301

312

LIST OF FIGURES

Figure Page

1 A l locative E f f ect of Financial Intermediation 163

2 A Simplified General structure o f the Macroeconomic Mode l o f Malaysia • • • • • • • • • • . • • . . . • • . . • • • . . • . . . . . • . • 2 3 0

xli

Abstract of thesis submitted to the Senate of Universiti Pertanian Malaysia in fulfilment of the requirements for the degree of Doctor of Philosophy _

AN ECONOMIC ANALYSIS OF GOVERNMENT FINANCING

FOR DEVELOPMENT IN MALAYSIA

By

MARIAM ABDUL AZIZ

AprU 1993

supervisor : Associate Professor Dr. Mohammed Yusoff:

Faculty, Economics and Management

This study examines the ways and means of government

spend ing and the consequent impacts on the economy .

The scop e for enhanc in g the efficiency of government

s pending and the ut ilisation of the var ious sources

o f revenue a re identi f ied so as to maximise the net

benefit of government invol vement in the economy. The main

sources of financing government expenditure include taxes,

domestic and foreign borrowing and credit creation. Trends of

both the spending and financing aspects of the government

xi i i

budget are also discussed within the context of several related

theoretical and empirical debates. Initially, the level of

analysis is partial in nature , using single equation estimates ,

although cross references are made to link the various sources

of government financing and spending. A simple macroeconomic

model within the context of a simultaneous equation system

is later developed to ide ntify the impact of changes

in s everal source s of government f inance on main

macro variables such as GNP, employment, prices , wages and

private investment . This is done through several simulation

exercises involving changes in policy variables such as taxes ,

the supply of money and public borrowing.

The empirical evidence reveals the greater responsiveness

of changes in government spending compared to that of taxes, in

relation to changes in Gross National Product (GNP). Increase

in tax revenue is accompanied by a more than proportionate

increase in government spending . Discretionary efforts to raise

the revenue productivity of the tax system are outweighed by

non-revenue generating obj ectives which include equity and

administrative feasibility. Empirical estimates support the

hypothesis that increasing the deposit rate of interest will

attract more savings and thus facilitate a more effective role

for the financial intermediaries in mobilising scarce financial

xiv

resources from the surplus to deficit spenders for pr oductive

investment purposes. The negative impact of the growth in net

foreign borrowing on economic growth is reinforced by the

n egative relationship b e t w e e n n e t foreign borrowing a n d

savings.

The simultaneQus system appro ach of the macroecon omic

analysis of government spending reveals several trade-offs

b etween the different source s of governm ent financ e. A

sustained increase in net credit operations of the private

sector. leads to the greatest e xpansionary impact on GNP and

private investment which, however, are accompanied by greatest

inflationary pressures. At the other end of the spectrum, tax

and debt financing have the least expansionary impact on the

economy. Nevertheless, they are also the least inflationary

source of government finance.

Hence several issues which emerge from this study can be

summa rised. Firstly, it is impo rt ant to ensure e ffic ie nt

utili sation of governm e nt expenditures for achie ving the

objectives of development policie s e spe c ially within the

context of increasing resource constraints. Se condly, both the

benefits and costs of alternatives sources of finance must be

taken into account so as to minimise the costs to the economy.

xv

Finally, the increase in government deficit within some

reasonable limits need not be counterproductive or

inflationary.

x v i

Abstrak tesls yang dikemukakan kepada Senat Universlti

Pertanlan Malays i a ee baga i m e me n u h i s yarat u n t u k Ijazah

Kedoktoran Falsafah.

ANALISIS EKONOMI PEMBIAYAAN KERAJAAN BAGI PEMBANGUNAN

Dl MALAYSIA

Kajian ln i me n g a n al i s i s cara d a n s u m b e r p e r b e l a n j a a n

kerajaan serta k e s a n ber i kutannya ke atas ekonom i . Skop bagi

mellcinkan kecekapan p e r b e la n jaa n kerajaan s er t a kegu n a a n

beberapa punca hasil d ikenalpas t i bagi memaks imumkan faedah

bersih penglibatan kerajaaq.n dalam e konomL Punca-pu nca utama

bag! pembiayaan perbelanjaan kerajaan terma s u k cukai, p injaman

dalam dan luar nege r i , serta penc iptaan kred i t . Arah ali ran

kedua-dua a s pek perbelanjaan dan pemb iayaan bag i belanjawan

kerajaan juga d i b i n cangkan dalam kont eke b eberapa perbahasan

berteo r i dan emp i r i k yang berkai tan. Peringkat anal i s i s pad a

permulaan adalah s epara , dengan menggunakan anggaran persamaan

tunggal. 8eberapa r ujuk a n s ilang d i b u a t bagi m e nga i t kan

berbagai Bomber pemb i ayaan dan perbelanjaan kerajaan . Sebuah

model makroekonomi yang mudah d ib i na dalam konteks s i stem

persamaan serentak bagi menge nalpastl kesan perubahan bebe rapa

s umbe r kewangan kerajaan terhadap angkubah -angkubah makro yang

utama, termasuk Keluaran Negara Kaear ( KNK) , gu nate naga, harga-

harga, upah dan pelab uran swasta. Pengenalpast ian lni dllakukan

xv i i

melalui beberapa simulaai yang meliba tkan perubahan dalam

angkubah-angkubah dasar

pinjaman awam.

seperti cukai, penawaran wang dan

Bukti emp ir!k men yatakan gerak balaa yang lebih bag!

perbelanjaan kerajaan, berbanding dengan cukai, terhadap

perubahan dalam KNK. Pertambahan dalam hasil cukai diserta!

oleh pertambahan yang leb!h dar! se!mbang dalam perbelanjaan

kerajaan. Tindak an bud! biea ra bagi meningkatkan daya

pengeluaran hasil sistem eukai ditindih oleh objektif -objektif

lain seperti keadilan dan kebolehlaksanaan pentadbiran.

Anggaran empirik menyokong hipotesis bahawa pertambahan kadar

faedah depo sit akan men ggalakkan lebih tabungan. In! akan

memudahkan peranan yang leb!h berkeaan ba g! pengan taraan

kewangan dalam menggerakkan sumber kewangan yang kekurangan

dari pembelanja lebihan ke pembelanja defieit untuk pelaburan

yang berdaya keluaran. Kesan negatif pertumbuhan pinjaman asing

bersih keatas pertumbuhan ekonomi ditekankan oleh hubungan

negatif antara pinjaman asing bersih dengan tabungan.

Pendek atan sistem serentak analisis makroekonomi bag !

perbelanjaan kerajaan menyatakan beberapa "trade-off" antara

sumber-sumber kewangan keraj aan. Pertambahan terj amin dalam

operas! kredit bersih bagi sektor swasta membawa kepada kesan

x viii

p engembangan yang terbesar ke atas KNK dan pelaburan swasta .

In1 pu l a d1s ert a i oleh tekanan inflasi yang ter b e s ar

juga. Pemb iayaan melalui eukai dan hutang mempunyai kesan

pengembangan y ang keell terhadap ekonomi tetapi juga merupakan

punea kewangan kerajaan yang mempunyai tekanan inflasi yang

rendah.

8eberapa kes impu lan bo1eh dibuat dari isu-isu utama yang

timbu l dari kajian ini . Pertama, kegunaan perbelanjaan kerajaan

yang cekap per1u dipastikan bagi pencapaian objektif-objektif

dasar pembangunan, terutama dalam konteks kekangan sumber yang

b ertamb a h. Kedu a, faedah dan kos sumber-sumber kewangan

alternatif mesti diambil kira agar meminimumkam kos keatas

ekonomL Ahkir sekali, pertambahan defisit kerajaan dalam had

yang munas abah tidak semestinya mempunyai kesan daya keluaran

yang negatif dan juga tekanan inf1asi.

xix

CHAPTER 1

INTRODUCTION

The Role of Government in the Economy

Increase d government involvement in the economy today has

grown both in size and complexity to an unprecedented exte nt.

This is not s urpri sing since the increasingly comple x and

te chnologically advanced economy creates greater demands for

gove rnment interventi on to handle problems that did not e xist

in simpler time s. There are many justifications for gove rnme nt

involve me nt in the economy. Any review of the factors leading

to the growth of government involvement in an economy trace s

one or more of the following general roles of governme nt:

namely allocation, d istribution and stabilisation ( see Chapte rs

2 and 3). While market failures have been commonly used,

directly or indirectly, to justify such involvements, they do

not in themselve s justify all activities which governments

actually carry out and the manner in which they are performed

(Stiglitz, 1986; Tanzi, 1987). Governmental activite s, for

e xample , may be ne fit small groups at the expense of socie ty as

a whole , or that some government enterprises may be less

efficiently managed than private concerns (Bee Chapte rs 2

and 5).

1

The government wields cons iderab l e power i n inf luencing the

level and t ype of economic act i v it ies. The extent of the

government's i n f luence on economic growth depends on the s ize

and nature o f its pub lic expend iture . Howeve r , the amount t he

government can expend i s dependent on the revenue it can raise ,

the loans i t c an obt a i n , and the assets that it owns . Thu s , t he

way in which the funds are mob i l i sed and u sed w i l l a l so have an

impact o n t he growth pot�n t i a l o f the economy ( Khan and Knight ,

1 9 8 1 ) . cri t ics contend that the "heavy hand" o f government has

replaced the "inv i s ib l e hand" of market compet it ion in

a llocat i ng resources and determining prices and incomes . The

extent and form of government invo l vement have become hot ly

debated i s sues . The centra l quest ion i s not whether government

i nvolvement is good or bad , but whether the u l t imate gains from

such involvement outweigh t he cos t s impo sed upon society .

Thi s thesis dea l s with the var iou s ways and means o f

f inancing government expend itures and their consequences

wit h in the context of t he Malaysian economy during the 196 6-85

period . The scope o f ana l y s i s i s l imited to that of the Federal

Government. A compar ison of the proport io n o f central

government expenditure to Gro s s Dome s t ic Produ ct ( GOP ) with

other countries a s i n Tab le 1 revea l s that the f igure for

Malays i a is the h ighest among ASEAN count ries . I n fact , it

is comparabl� t o t he rat ios for deve loped countries .

2

3

Table 1

central Government E xpend iture as a Proportion of GDP

====:================================================�=======�

1970-75 1976-80 198 1 -85 - ------ ------- ----------------------------------- --- ---- -- ----

Malay s ia 34 35 4 0

Phi l ippines 1 1 1 0 9

Tha i l and 1 5 19 2 1

I ndonesia 20 22 2 3

Singapore 25 23 2 9

I ndustrial Countr ies 4 2 4 1 4 4

United states 35 34 3 7

United Kingdom 4 4 46 4 7

Federal Pepublic 43 48 5 0 of Germany

World 39 38 4 2

=======:====:====�============================================

Source: IMF , Government Finance Stat ist ics, various issues .

Several ind icators of the scope of the public sector are

i l lustrated in Table 2 where the variables are in nominal

terms Federal Government total revenue and expenditure

accounted for an increas ing proport ion of GNP dur ing the

1 9 66-85 per iod . This is because the growth of both

total revenue and expenditure at an average annu a l rate of 14.7

per cent have surpas sed the cor responding growt h rate of GNP of

1 1 . 8 per cent .

4

Tab l e 2

Various Indicato rs of the Pub l ic sector

=================�============================================

1 9 6 6 - 7 0 1 9 7 1-7 5 1 9 7 6-80 1 9 81-85 1 9 6 6-85

a Growth Rate o f GNP 5 . 8 1 4 . 0 1 9 . 0 7 . 1 11 . 8

Growth Rate o f Tot a l Revenue 9.6 1 7 . 1 2 2 . 3 8 . 8 14 . 7

Growth Rate o f Tax Revenue 1 0 . 9 18.9 2 3 . 1 7 . 2 15 . 2

Growth Rate o f Tota l Expenditure 6 . 3 2 0 . 1 2 5 . 2 5 . 7 14 . 7

Tax Revenue ------ ------- 1 5 . 5 18 . 3 2 2 . 3 2 4 . 1 2 0 . 1

GNP

Tot a l Expend iture ----------------- 2 4 . 4 28 . 9 34 . 1 43 . 0 32 . 6

GNP

Publ ic Sector Deficit 5 . 1 7 . 8 9 . 3 1 4 . 0 9 . 1 ---------------------

GNP

Pub l ic Gross Capital Format ion -------------------- 39 . 6 32 . 3 36 . 3 48 . 7 3 9.2 Tot a l Gross Capit a l Format ion ==============================================================

Source : Bank Negara Quarterly Bu l l et i n , various i s s u e s .

Notes : a

a l l f igures are in percentage s.

1966- 7 0 First Ma laysia P l a n.

19 71-85 Second Ma l aysia P l an.

19 76-80 Third Ma laysia Plan . 1981-85 Fourth Malay s i a P l a n.

The publ ic sector i s l i m i ted to the Federa l Gove rnment only .

The rapid growth of the public sector especially since the

1970 s was main ly the result of its expanded ro le in the

economy (Ma laysia, 1986). Specifically, the rapid growth of the

pub l ic sector in Malaysia reflects a shift from the limited use

of the fiscal system to provide a congenial framework for the

regulation and expansion of the government to the Use of the

fisca l system, or specifical ly the budget, as an instrument of

allocation, growth, distribution and stabilisation. In other

words, the ro le of the public sector, which in the 1960s

concentrated on providing basic services, had shifted towards

greater and more direct participation across most sectors of

the economy (Malaysia, 1981).

The proportion of Federal Government tota l expenditure to

GNP rose from 24.4 per cent (1966-70) to 43 per cent (1981-85).

Federal Government tax revenue as a proportion of GNP has a l so

increased, namely from 15.5 per cent (1966-70) to 24.1 per cent

(1981-85). Since 1980, and especially with the negative-GDP­

growth year, in 1985, steps have been taken to reduce the

predominance of the public sector through cuts in government

expenditure and through privatisation. Nevertheless, the public

sector still accounts for a very significant proportion of

total gross capita l formation ranging between a 5-year average

of 32.3 per cent to 48.7 per cent during the 1966-85 period.