Academic journal article Journal of Economic Cooperation & Development

Cointegration Analysis of Social Services Expenditure and Human Capital Development in Malaysia: A Bound Testing Approach

Academic journal article Journal of Economic Cooperation & Development

Cointegration Analysis of Social Services Expenditure and Human Capital Development in Malaysia: A Bound Testing Approach

Article excerpt

Government expenditure on social services is essential to the development of the economy. This fact also applies to Malaysia, a developing country that aspires to become a developed nation in a few years to come. As the Malaysian government plays a dominant role in financing public education and health services, an analysis on its investment in these areas, if made available, would be able to assist policymakers in generating a strategic plan to enhance human capital development and economic growth. Hence, the aim of this study is to investigate the long-run and short-run relationships between economic growth and social services expenditure with human capital indicators in Malaysia for the period of 1975-2011. The bound testing approach developed within the autoregressive distribution lag (ARDL) framework is employed. The empirical results show that there is a cointegrating relationship between economic growth and the explanatory variables i.e. investment, social services expenditure and human capital indicators. The results revealed that government expenditure in social services are important to human capital development and economic growth, and an increase in health and education capital can help generate better human capital and attain economic sustainability.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Health and education play an important role in the process of economic development and human capital accumulation. Human capital is a broad concept that identifies human characteristics which can be acquired and could increase the workers' income and productivity level. It is commonly include knowledge and skills of the workers that obtain partly through education, and also their physical capacities such as

strength and vitality, which are dependent on their health and nutrition. Schultz (1961), Denison (1967), Barro (1991) and Barro and Martin (1995) are among the earliest scholars that measures the important of education, nutrition and health as a factors that determine economic growth. Therefore, an increase in government spending in health and education is expected to result in better quality human capital and enhance the economic growth of the country. The contribution of human capital to productivity level and growth has been one of the main focuses in most growth models in recent years.

As for Malaysia, government expenditure on education and healthcare is prominent to the economic development especially as Malaysia aims to be high-income economy and developed nation by year 2020 (Tenth Malaysian Plan, 2010-2015). The path towards these visions will be filled with challenges and difficulties especially in producing a firstclass mentality society and productive human capital that is able to generate the economy above the value chain. In order to meet these challenges, policymakers will have to develop sound strategies for a rapid development of human capital. Greater attention should be given to the development of healthy, educated and well-trained manpower capable of high productivity; hence, a vibrant economy. Therefore, education and health are essential in these processes. The studies by Baldacci et al. (2003) and Gupta et al. (2002) found that government expenditure on social services can improve education and health capital such as education attainment and the health status of the society. Baldacci et al. (2008) also discovered that expenditure on education and health had a positive and significant impact on the accumulation of education and health capital as well as economic growth. Thus, an increase in government expenditure on health and education is expected to result in better quality human capital and enhance the economic growth of the country.

As highlighted in the Tenth Malaysia Plan (2011-2015), the government anticipates adopting an integrated human capital and talent development framework starting from early childhood education, basic education, tertiary education and all the way to adult working lives. …

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