Abstract
This article attempts to shed light on the political economy of the Malaysian state governments’ budgetary behaviour by tailoring hypotheses drawn from recent theoretical literature to the Malaysian institutional context and testing them empirically. The main objective here was to examine whether state governments’ fiscal behaviour can partly be explained by the political attributes and the institutional characteristics of the government, and of the legislature. In particular, the study analysed whether the incentives for the state governments to observe a prudent spending behaviour have not been undermined by the fact that they have been able to influence relevant central government decisions regarding their finance. The estimation results showed that states that are over-represented at the executive level tend to have higher spending and deficits. However, no correlation was found between over-representation at the parliament and state governments’ fiscal outcomes. This can be explained by the fact that in Malaysia, as is frequently the case in developing nations, the legislature is peripheral to the executive in terms of decision-making power.
Highlights
The first generation of economic theories of fiscal federalism generated much optimism about decentralisation in the form of better improvement in efficiency, accountability, and governance
The analysis began with the testing the first hypothesis by estimating the effect of over-representation at the parliament on the state government expenditure level
In order to test for the effects of ideological leaning on state government spending behaviour, the following variables we introduced in the estimations: the number of seats in the parliament won by the ruling party per capita, the percentage of state assembly seats won by the ruling party, and the number of votes obtained by the ruling party
Summary
The first generation of economic theories of fiscal federalism generated much optimism about decentralisation in the form of better improvement in efficiency, accountability, and governance. A major assumption underlying the new political economy literature is that politicians are primarily interested in maintaining and enhancing their political careers Most importantly, in these models, government decisions are viewed as bargains struck among self-interested politicians attempting to form winning coalitions, rather than reflections on the optimal provision of collective goods or the internalisation of externalities. The main objective here is to examine whether state governments’ fiscal behaviour can partly be explained by the political attributes and the institutional characteristics of the government and of the legislature It was analysed whether the incentives for the state governments to observe a prudent spending behaviour have not been undermined due to the fact that they have been able to influence relevant central government decisions regarding their finance.
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