The optimal government size and economic growth: A comparative study between Malaysia and South Korea

Abstract

Inspired by the Look East Policy, Malaysia aims to learn from such a successful Asian country as South Korea in order to break through its upper-middle-income trap. Using the dynamic threshold nonlinear approach, this comparative study is therefore timely to compare and contrast the nonlinear correlation between economic growth and government spending between these two nations. When considering two different measures of government size as the threshold variable, namely government operating/real GDP (GS1) and government investment/real GDP (GS2), the practical findings of this research indicate the presence of a threshold effect between government size and economic growth in the contexts of Malaysia and South Korea. Specifically, the BARS curve exists in Malaysia and South Korea when GS1 is set as the threshold variable. However, a U-shaped curve of nonlinear relationship exists in both countries when GS2 serves as the threshold variable. Interestingly, the threshold two-regime regression results show that while government operating expenditures in both Malaysia and South Korea are not found to be overspent and are beneficial for economic growth, the Malaysian government's investment expenditure has not achieved the full potential of accelerating economic growth compared to South Korea.