ARDL approach: The determinants of government size in Malaysia

Abstract

The government size is determined through the ratio between the government expenditure which including the operation and development with the Gross Domestic Product (GDP). This study with the intention to examine the long-run relationship between the determinants with the government size of Malaysia during the periods of year 1980 to year 2018. The determinants including the trade openness, country size, foreign direct investment openness, portfolio investment openness and the economic growth. The annual data are achieved from the World Bank and the Department Statistic of Malaysia (DOSM). Moreover, we adopted the Autoregressive Distributed Lag (ARDL) model, which proposed by Pesaran et al. (2001), to examine the long-run relationship. The result revealed that there are long-run negative relationship significantly between the determinants including the trade openness, country size, foreign direct investment openness and portfolio investment openness with the government size. On the other hands, the economic growth has a significant positive long-run relationship with the government size in Malaysia. Both trade openness and economic growth variables have the Granger Causality effects towards the government size variable. Therefore, it is essential for the government to maintain a balanced allocation of both operating and development expenditures, taking into account key influencing factors, to support sustainable long-term economic growth in Malaysia.