The impact of government debt on output growth, private investment and human capital in Malaysia

It is important for every country to evaluate the role of government debt on economic growth and macroeconomic factors, especially in developing economies. Some endogenous growth theories predict that if government debt at moderate level is spent on development expenditures such as public infrastructure and human capital – as is the case in Malaysia – it can crowd-in private investment, human capital and economic growth. This paper aims to examine the effect of government debt on output growth, private investment and human capital in Malaysia during the period of 1985-2016, employing Vector Error Correction modeling (VECM) and Generalized Impulse Response (GIR). The result shows that government debt generates positive response in GDP growth and human capital in the long run although not significant. Moreover, the effect on private investment is null. This finding supports prudent debt management in Malaysia. Accordingly, the policy implication would be to focus on more efficient usage and allocation of the government funds, based on the country’s priorities, while maintaining the debt within the dominant past range

Impacts of government debt on output growth, private consumption and productivity in ASEAN-4 countries

The macroeconomic effects of government debt are a long debated and recurring economic issue. Recently, as world government debt has reached unprecedented levels, the issue has been of particular focus among economists and policy makers. Although mainstream economics holds a negative view on the effects of high and increasing government debt, and the existing empirical panel studies tend to agree with that conclusion, the effect of moderate debt levels on emerging economies is rather ambiguous. Moreover, recent studies emphasize that the effect of government debt is country specific, yet extant empirical evidence is almost always based on large panel samples. This study attempts to empirically investigate the relationship between government debt and macroeconomic factors in four emerging ASEAN countries over the past three decades (1985-2014), namely Indonesia, Malaysia, the Philippines and Thailand (ASEAN-4). The first objective is to investigate the relationship between government debt and output growth. In order to do that, a reduced form model of endogenous growth using a VAR framework is employed. Utilising Generalized Impulse-Response (GIR) analysis, this study traced the responses of output growth index, growth factors such as private investment and human capital stock, and government debt itself to a shock to government debt. Conforming to causality result, the response of economic growth in Indonesia and Malaysia were insignificant, whereas in the Philippines and Thailand some evidence of positive and significant impact was found. For the second objective, the effect of government debt on private consumption in the long-run is analysed. Given the mostly insignificant results of the first objective, the question may arise of whether this is due to Ricardian implications, which state that debt does not have any effect on economic growth. The consumption model in the second objective tests Ricardian versus neoclassical hypotheses of consumer behaviour. The results strongly reject Ricardian (or tax-discounting) behaviour, and are in line with neoclassical theory. Finally, as the third objective the long term effect of government debt on total factor productivity (TFP) growth is investigated. On one hand, TFP is an increasingly important growth factor for ASEAN-4 economies. On the other hand, studies show that debt could affect TFP growth, which could have an impact on the ASEAN-4 countries. The results show that government debt has a positive effect on TFP growth, which is statistically significant in Indonesia and Malaysia but insignificant in Thailand. However, debt adversely affects TFP growth in the Philippines. In summary, the result of all three objectives are compatible with endogenous neoclassical growth models, which consider the positive economic effects of government debt if it is spent efficiently on productive projects. The policy implications based on the findings can be summarized as follows: in Indonesia and Malaysia, stronger positive results are plausible if improvement in current fiscal policy is continued within the same range of government debt. In the Philippines, given the economic conditions, the desirable policy is one which helps to reduce government debt. In Thailand, government debt can stimulate economic growth in the medium term while the government is able to reduce its debt at the same time

Does government investment crowd-in or crowd-out private investment in Malaysia?

Motivated by the concern of Malaysia’s government to increase private capital formation rate while the country has witnessed relatively low rate of private capital formation in the post-financial crisis area, this study aims to evaluate the long run relationship between private investment and government investment that is almost debt financed. Using a trivariate vector error correction model and time-series data covering last 44 years (from 1970 to 2013) this paper finds evidence of long-run complementary effect of government investment on private investment in Malaysia

The impact of government debt on output, private investment and human capital stock in Malaysia

This paper mainly aims to examine the effect of government debt on real output per capita in a successful developing economy of Malaysia during 1985-2014 period. Using Vector Error Correction modeling (VECM) and employing Generalized Impulse Response (GIR) tool, dynamic response of output per capita to a shock to government debt is obtained. Using the same model, the effect of government debt on economic growth factors, namely, private investment and human capital are also examined. The impulse response result based on VECM model shows that using this sample on average debt does not significantly influence output per capita and private investment although, the later shows negative response. However, human capital positively respond to a debt shock. Overall, this result did not find evidence for crowding out effect of government debt. In other words, the result provide some support for prudent debt management in Malaysia in the past. However, wisely use of government sources is always important. Moreover, excessive borrowing is not advised as it could negate positive effects and jeopardize debt sustainability

Government debt-economic growth nexus in Asean-4 countries

Given a background of controversial political and theoretical academic debate and diverse empirical result, as Checherita and Rother (2010) concluded government debt and economic growth relationship is a country specific issue. This paper aims to investigate the causal and dynamic effect of government debt on output growth in the context of developing economies with generally medium debt regime in ASEAN-4 countries. Namely, Indonesia, Malaysia, the Philippines and Thailand during 1985 to 2019 years. A robust multi-variable vector autoregressive (VAR) model at level is employed to capture the long run relations, and causality is addressed using Toda-Yamamoto (1995) approach. As a by-product of the analysis the effect of government debt on two essential factors of sustainable GDP growth, namely, private capital formation and human capital is examined. The findings of this paper which contrast with the general negative effect found in some empirical studies for developing countries, shows debt does not cause output growth in Indonesia, Malaysia and Thailand but the reverse is true. GDP response to debt shock is negative, positive and positive, respectively yet statistically insignificant. In other hand, in the Philippines the result shows the economy is debt-driven as debt positively cause GDP without improving private investment or human capital. Overall, the findings support well debt management. Given current debt regime, improvements on tax collection and government fund allocation in terms of priorities and efficiencies must be continued