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Advances in Social Sciences Research Journal – Vol. 11, No. 9
Publication Date: September 25, 2024
DOI:10.14738/assrj.119.17617.
Al-Hasnawi, M. H., Chin, L., Mazlan, N. S., & Ahmad, M. N. N. (2024). Evaluating the Role of Institutional Quality in the Relationship
Between Education Expenditure and Manufacturing Growth: Insights from Quantile Regression Models. Advances in Social Sciences
Research Journal, 11(9). 242-260.
Services for Science and Education – United Kingdom
Evaluating the Role of Institutional Quality in the Relationship
Between Education Expenditure and Manufacturing Growth:
Insights from Quantile Regression Models
Maytham Hameed Al-Hasnawi
School of Business and Economics, University Putra Malaysia and
Faculty of Administration and Economics, University of Thi-Qar, Iraq
Lee Chin
School of Business and Economics, University Putra Malaysia
Nur Syazwani Mazlan
School of Business and Economics, Monash University Malaysia
Mohd Naseem bin Niaz Ahmad
School of Business and Economics, University Putra Malaysia
ABSTRACT
This study aims to provide empirical insight into the role of institutional quality and
its impact on the relationship between expenditure on education and the growth of
manufacturing in Malaysia. The study employed time series data from 1984 to
2020, using a quantile regression model for three quantiles: 25%, 50%, and 75%.
The results showed that government spending on education (GXE) had a negative
and statistically significant effect on manufacturing sector growth (MSG) on all
quantiles in both interaction and non-interaction models. This may indicate a lack
of quality, allocation, and efficiency in government expenditure and its targeting.
However, the interaction effect between government spending on education and
institutional quality (INTC GXE&IQI) on manufacturing sector growth (MSG)
provided a consistently positive effect across all quantiles. This positive interaction
means that the effect of education spending on manufacturing sector growth is
conditional on the quality of institutions. The positive coefficients indicate that
when government spending aligns with robust institutional frameworks, it
effectively stimulates growth within the manufacturing sector. This phenomenon
may be attributed to effective institutions amplifying the impact of government
expenditure by ensuring efficient fund utilization for intended purposes. Policies
aimed at strengthening institutions' quality —such as improving bureaucracy,
enhancing transparency, and combating corruption—can enhance the efficacy of
education expenditure, which supports the long-term and sustainable growth of the
manufacturing sector.
Keywords: Government expenditure, Manufacturing sector, Quantile regression,
Institutional quality.
INTRODUCTION
The manufacturing sector's significance in the process of economic development and expansion
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Al-Hasnawi, M. H., Chin, L., Mazlan, N. S., & Ahmad, M. N. N. (2024). Evaluating the Role of Institutional Quality in the Relationship Between
Education Expenditure and Manufacturing Growth: Insights from Quantile Regression Models. Advances in Social Sciences Research Journal, 11(9).
242-260.
URL: http://dx.doi.org/10.14738/assrj.119.17617
cannot be overstated (Loto, 2012). Any nation that does not have a robust and dynamic
manufacturing sector will find it difficult, if not impossible, to see substantial economic growth.
According to development literature, the manufacturing sector is responsible for increasing
incomes, creating jobs, and producing goods and services (Sola et al., 2013).
The manufacturing sector could be conceived as any economic unit that processes or creates
new commodities by transforming raw materials or semi-finished goods (Richard, 2014). In
addition to providing a strong basis for the economy, the manufacturing sector also boosts
imports and makes a substantial tax revenue contribution to the government ( Aderibigbe,
2004). Since it appears to be the most significant tradable sector of the economy,
manufacturing is frequently the most competitive industry. Its importance derives from the fact
that it serves as a conduit for innovation, research, and development activities that eventually
affect other industries and raise productivity (Tkalec & Vizek, 2009).
In Malaysia, the manufacturing sector accounts for 81% of total exports. Consequently, it is
regarded as one of the economy's primary sources of foreign exchange (Abdullahi, 2022). The
manufacturing sector contributes 23% of the gross national product, making it the second- largest sector in the national output. Malaysia aims to achieve high-income status by 2024 and
has outlined the role of the manufacturing sector in its eleventh plan (11th MP—2016 to 2020)
as a key driver of economic development (Economic Planning Unit, 2020). The government
must create and implement appropriate and effective policies to achieve this. Fiscal policy is
one of the strategies that can be utilized. The industrial market is influenced by fiscal policy
through the strategic use of government revenue and expenditure. The market for
manufactured goods grows when the government follows an expansionary strategy, which
raises spending and the purchasing power of the economic units and vice versa. Furthermore,
according to endogenous growth theory, government expenditure on education can enhance
human capital, bolster workers' skills, and accelerate technological progress through research
and development activities. This is a crucial driver of long-term sustainable growth in the
manufacturing sector (Lucas, 1988; Ozatac et al., 2018; Romer, 1986).
However, despite the government’s emphasis on the manufacturing sector and the increase in
government spending on education, as shown in Figure 1, the sector has experienced a decline
in its growth rate. The share of the manufacturing sector in the Malaysian economy has dropped
from 31% in 2000 to 23% in 2019, as a result of a decrease in the growth rate of the sector from
18.3% in 1996 to 9% in 2007 to 6.4% in 2014 and to 3.8% in 2019, according to the (World
Bank, 2022). This trend is illustrated in Figure 1. The recent decline in sectoral growth within
the Malaysian economy, as highlighted by World Bank data, underscores the importance of
addressing key factors that influence economic performance. Notably, the quality of institutions
emerges as a crucial determinant affecting the trajectories of sectoral growth. In the past two
decades, there has been significant attention from governments, and international
organizations on the impact of institutions on economic performance (El Hamma, 2018; Rodrik
et al., 2004; W. & A. H. Saad, 2019).
Recent literature highlights institutions as one of the primary determinants of economic
development. Factor accumulation and technological progress are no longer viewed as the sole
drivers of economic growth. The primary role of institutions is to reduce uncertainty in
economic exchanges, protect property rights, facilitate contract enforcement, and minimize
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 11, Issue 9, September-2024
Services for Science and Education – United Kingdom
corruption and bureaucracy (North, 1990). Effective institutions provide parties involved in
exchanges with rules and procedures that lower uncertainty and risk. Conversely, weak
institutions result in higher transaction costs and greater uncertainty, hindering resource
specialization and negatively impacting economic activities(Borrmann et al., 2006; Lee et al.,
2008). A large body of recent literature has demonstrated the importance of institutional
quality for supporting economic development. Ali et al.(2020)showed that institutional quality
overcame international trade integration in explaining income variation across countries.
Shera et al.(2014) found a significant and positive relationship across countries between
economic growth and institutional quality, such as bureaucracy. Naseer (2019) also showed
that countries with high levels of corruption tend to have less level of growth. Corruption,
widely regarded as a key factor in institutional development, remains a significant issue in
Malaysia. According to the Corruption Perceptions Index released by Transparency
International, Malaysia's score fell below the 50-point threshold, reaching 47 points in 2021
(TIM, 2024) . This marks the second consecutive year of the country losing rank.
Figure 1: Manufacturing value added (%) and Government Expenditure on Education -
Malaysia:1990 - 2020.
(Source: Researcher's calculations using data from WDI, World Bank, 2020)
In contrast to the existing literature, this study focuses on the impact of institutional quality on
the relationship between government spending on education and growth in the manufacturing
sector. The National Development Plan and Vision (2020) of Malaysia emphasize the role of
education in developing the human capital needed to transform a middle-income country into
a high-income country. Developing human capital through education is a key component of
Malaysia's social and economic strategy. The contribution of this paper lies in its consideration
of education spending as the main driver of long-term sustainable growth in the manufacturing
sector in Malaysia, while emphasizing the role of institutional quality. Additionally, this study
aims to provide insights using a quantile regression model, which offers a clearer picture by
dividing the study sample into three periods, resulting in more accurate and reliable
information. By estimating different points within a conditional distribution, quantile
regression provides a more comprehensive view of the relationship between variables. This is
particularly useful when dealing with a non-normal distribution, as in this study, as it can
highlight important patterns that may be missed using mean regression alone. For example,
-20
-15
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-5
0
5
10
15
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25
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1985 1990 1995 2000 2005 2010 2015 2020 2025
MSG GXE