RESUMEN
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.
RESUMEN
This paper discovers the asymmetric relation between government size and economic growth in Malaysia, an emerging Asian economy, by utilising a dynamic threshold nonlinear approach. The study finds empiric evidence that the threshold effect linking government size to economic growth in Malaysia exists when two different proxies of government size are set as the threshold variable. On closer inspection, it is found that an inverted U-shaped Armey curve is present when allowing for endogenous government size threshold proxied by government operating/real GDP. However, a U-shaped curve of nonlinear relationship exists instead when the government investment/real GDP serves as the threshold variable. In general, this paper gives policymakers a real insight into the optimal government size in Malaysia especially when designing an effectual fiscal policy to advance sustainable economic growth to materialise its Shared Prosperity Vision by the year 2030.