Research Paper GOVERNMENT EXPENDITURE ON

International Journal of Accounting & Business Management Vol. 6 (No.1), April, 2018 ISSN: 2289-4519 DOI:10.24924/ijabm/2018.04/v6.iss1/95.112 This work is licensed under a Creative Commons Attribution 4.0 International License.

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Research Paper GOVERNMENT EXPENDITURE ON EDUCATION AND HEALTHCARE TO THE EFFECT ON GDP VALUE: A CASE OF MALAYSIA Adhwa Zulhilmi Zulkofli ADA Capital Consultant [email protected] Kauthar Nasiruddin Department of Marketing and Management, Faculty of Economics and Management, Universiti Putra Malaysia [email protected] Farah Raihana Ismail Department of Marketing and Management, Faculty of Economics and Management, Universiti Putra Malaysia [email protected]

Abstract: Higher Government expenditure on human capital is not merely an expenditure but also an investment on stimulation towards economic values. The purpose of this paper is to see the existence of long run relationship and short run causality by priority of Malaysia Government on spending for education and healthcare towards the effects of GDP on nominal values. The data used were gross domestic product on nominal value and Malaysia Government spending on education and healthcare annually with inclusion of inflation rate from 1971 to 2010. The method of Autoregressive-Distributed Lag (ARDL), Johansen Cointegration and Granger causality were employed. The results revealed that in the long run, higher Government expenditure on human capital was co integrated with increasing nominal GDP values. In the short run the relationship of both healthcare and education in pair with nominal GDP were significantly bidirectional, except for inflation rate which both directions were insignificant. Government should really invest on basic needs such as healthcare and education. Furthermore, both sectors should not be commercialised for profits and continuously being such burden to the citizens. Lastly, the unnecessary things such as luxury consumptions should be priced more to offset the loss of the hefty human capital expenditures. Keywords: Human capital, Government Spending, Nominal GDP, Education and Healthcare 1. Introduction The increase standard of living in the past time cannot be separated from the economic growth of the nation since the current growth reflected most at annual GDP value (Stevens and Weale, 2003). There are many factors to the GDP causality, nevertheless the researchers are looking at how government expenditure increases on the instruments of the public ISSN: 2289-4519

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expenditure, and how it reflects to the co-integration and causality effect on nominal GDP value. The researchers are looking at the effect on nominal GDP value by a scope of education and health expenditure in context of Malaysia. Both sectors fall under human capital and, the significance of human capital has been explained by Adam Smith, (1776); The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do them likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.” The importance of human capital has also been emphasized by Mankiw, Romer and Weil, (1992) originated from Solow Growth Model where measurement of income of nation by factor of physical capital and effective of labour. The Solow effective of labour is different from Mankiw et al., (1992), which during that time it was likely interpreted more as quantitative rather than a qualitative character of labour. This is because Nelson and Phelps, (I966) felt that the idea and the imitation of products or coping with the technological leader can be easier because of the cost of advantage. The claim was almost accurate at that moment because the technology has not been intensified as how it is today. For instance, Kendrick, (1976) estimated that over half of the total US capital stock in 1969 was human capital where mass production followed by lower cost of per labour was an advantage for the producer and the country. Since technology has evolved, in calculating productivity, Mankiw et al., (1992) used Cobb Douglas method instead of human capital. It literally means he focused more on the endogenous method rather than the exogenous. Healthcare and education sector expenditure could be an investment in the long run and short run. Good investment is measured by the payoff in certain period. The researchers wonder on whether human capital is indeed a good investment in Malaysia and attempted to find the kind of guide to translate the result of this decision in Malaysia. Furthermore, the researchers intended to investigate on how expenditure can be offset and whether it can be done through taxes or merely based on the economic growth in the form of GDP. The causality and integration between these variables will be measured by the time series of Government expenditure and how the nominal GDP value react annually. The allocation of expenditure by government to an associated ministry from the researchers’ view is too general since it was implied generally because of the increasing population. This does not reflect to the effectiveness on solving the problem of the human capital in terms of cost inflation for both sectors. As both sectors in general was strongly tied by the contribution of government funds, the subject of Governance on policy making towards human capital is crucial to be discussed. Government governance consists of the bureaucracy and political priority based on many factors which includes races, religions and socio economics (McCarty, 1993). This definition met the Malaysia history especially in the aspect of tertiary education, since 13 May racial riot. The riot was the attempt to converge Bumiputra socio economics with dominantly Chinese. Human capital largely influenced by political decision, therefore it is important to understand on how the bureaucracy system, policy making and the implementation phase are executed in Malaysia. Besides that, association with Malaysia’s nominal growth economic value has also been explored.

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Malaysia Healthcare Three types of ownership to distinguish healthcare providers are public hospitals, private owned hospitals and non-profit private hospitals. Ever since Independence Day, Malaysians have been enjoying a wide variety and accessible healthcare services through public hospitals and non-profit private hospitals. Right after Independence Day, the major provider for healthcare was public hospital as it was more equipped than the non-profit hospitals. The concept of public hospital was to carry all types of treatment either free or subsidized rates and to reach everyone’s needs regardless of their class status (Rachlis, 2007). According to Rasiah et al., (2011), the development of healthcare services in Malaysia is to meet social objectives and profits allocation. The social objective is to increase the accessibility for healthcare services as in 1960 as for every 638 000 rural dwellers there was only one main health centre. In 1965, one midwifery clinic for every 121 000 patients and one health sub centre for every 319 000 (MMA, 1980). Government’s fund was tied since all the medicines and treatments at the hospitals for Malaysian citizens were free of charge or paid at nominal prices. It is based on the 1951 Fees Act. This law made government hospitals seems to be the sole provider for healthcare services before 1980. The New Economic Policy (NEP) was implemented between 1970 to 1980. At that time, people suffered extensive public expenditures on health care services. In the early 1980s, people have also witnessed the shift of government plan to enhance the participation of the private sector. Government attempted to offset the cost of earlier mass development and tried their best to have sustainable expenses in this sector (Rasiah et al., 2011). According to Leng and Barraclough, (2007), in 1980, the private hospital beds made of 5% of total acute beds and in 2002 it reached to 25%. The same time government confronted the issue of inefficiency of civil service management, such support services and waste disposal were handled inefficiently. Government was urged to be the non-interventionist and the effort has been indeed evolved since 2012. They have set up National Health Welfare Fund on the purpose to receive public donations on behalf of the needy patients who need to go through applications and vetting processes by the Ministry of Health (Leng and Barraclough, 2007). Earlier in 2003, the health ministry has received a treasury order that there will be no increment in its finance allocation for 2004 and the worst part was their inability to pay approximately RM210 millions of staff salaries (Malaysiakini, 2004). Both situations revealed that the government is not putting health sector seriously as one of their priorities. The priority for the government was trying to find ways on how this burden can be partially shared or transfer the burden to the citizens and private sectors. One of the government effort is the proposal of 1Care by Ministry of Health. Ministry of Health (MOH) outlined the principal component to implement the financial restructuring plan, governance restructuring and overlook the impact of service delivery for patients. The scheme is able to aid the government in the government expenditure reduction and private hospitals will be the one of the healthcare centres to provide the services. The rationale of this scheme is to be able to deliver well the principles of equity, solidarity and fairness, greater efficiency and autonomy, as well as aligning the standard to be higher and responding well to any unsustainable rise in the cost per capita of healthcare (Anna, 2012). The new proposal is more towards the comprehensive insurance, as Malaysia has been recognised as one of the countries which provide public hospitals with fair fees on the medical treatments. It has been suggested in the report by WHO, (2002) that Malaysia should proceed with limited reform especially in improving the management, create better working condition and to enhance the responsiveness to patient needs but not to set up the universal ISSN: 2289-4519

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health insurances. This report also said that insurance may lead to various problems such as fees manipulation for variety of services. In general, Malaysia is slowly heading to universal health insurance nation but the political groups feel insecure for this drastic change. The private sector evolved from minority to a major part of healthcare system by the support of government to shift the financial burden to private sector or citizens.

Malaysia Education In pushing the human capital to higher level, the establishment of university started with Malaya University and then followed by University Kebangsaan Malaysia as linguistically Malay as the medium for lessons. Both universities are the foundation to create human capitals in recognizing bright student without much concentration of socio economic issues in very direct way. Table 1 listed the enrolment to university and the comparison of the number of population in 1970, 1980 and 1985. Type of Tertiary Institution Degree Level Inst. Overseas Total

19701 Bumiputera 40.2 40.2

Degree Level Inst. Overseas Total

19801 62.0 28.6 45.4

Degree Level Inst. Overseas Total

19851 63.0 26.6 49.4

Chinese 18.9 48.9

Indian 7.3 7.3

Others 3.6 3.6

Total 7,677 7,677

31.2 59.1 44.3

5.7 13.7 9.5

1.1 0.5 0.8

21,944 19,510 41,454

29.7 59.1 40.7

6.5 13.7 9.2

0.7 0.6 0.7

37,838 22,684 60,522

Table 1: University Enrolment of Malaysian by race in 1970, 1980 and 1985 Source from: Singh, (1989) According to Treasury, (2012) Malaysia population in 1970 was 10,881,535 and apparently only 0.07 % of them entered university. In the early 1970, Malaysia built new tertiary institutions with different functions. These tertiary institutions have different requirements than other public universities and provided for particular communities (Rudner, 1977). Mara Institute of Technology and Polytechnic of Ungku Omar are two of the tertiary institutions. After the riot in 1970, the stochastic of bias occurred where more privileges were given to Bumiputras and Malays. A lot of development funds went to them in the assumption to solve socio economic problems and thus to make it in par with the other races especially Chinese. Based on the NEP (New Economic Policy), it is revealed that the number of enrolment jumped to 440% mainly by the participation of Bumiputeras. Tertiary institution in Malaysia is heavily dependent on government funds, unlike United States or Britain where some of the universities are self-initiated. Universities in Malaysia required the prospect students to apply their admission via the Central Admission Unit (Unit Pusat Universiti – UPU) under the Ministry of Higher Education. Even though this imposition restricts the autonomy of the university and prevent them the right to choose their ISSN: 2289-4519

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future students, there is no major complaints have been from neither academic nor administrators of the universities. This is undoubtedly a trade-off for Malaysian universities to garner more financial support and increase student’ enrolment, which will positively increase their revenues from the government. Malaysian public universities received up to 90% of funds from the government, with the remainder from student fees, and to this effect the Ministry of Higher Education has this message to Malaysia universities: “Being owned and funded by the Government, public higher education institutions must ensure that their strategic objectives are in line with those of the Ministry’s (Action Plan, 2007). According to Rudner, (1977), the rate of expenditure in Malaysia significantly depends on political priorities and as politics are not a part of urgency, the enrolment was higher than the money spent. This implies that education is only a part of the government economic development strategy. The majority voters in 2012 were younger generation. In order to give good impression to the younger generation, the opposition raised the idea of free education. Unlike the idea of giving completely free education for everyone, government fulfilled their promise for the education debt to be converted to scholarship if the students are able to achieve First Class Honours (The Star, 2012). Since 2004, Malaysia education system has been divided into Ministry of Higher Education and Ministry of Education. Both ministry is built to set up strategies to improve the quality of education. The national educational sector usually involves four tier flows of instruction:

Federal State District School

Figure 1: Malaysia Organization Structure in National Educational Sector Source: Malaysia Ministry of Education, (2004) Referring to Figure 1, according to MOE, (2004) the decision making is going through committee system and the EPC (Education Planning Committee) which is chaired by Minister is the top decision maker in education. The outcome of the education planning later goes to the cabinet. In any changes making, the ramification of Parliament is needed, therefore the analysis of the proposal includes the budget will go this way before instruction is given to all states educational departments:

Cabinet

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National Development Planning committee

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EPU

Parliament

Figure 2: Flow of Budget and Law Ramification

One of the most important steps taken by the government to increase the accessibility to tertiary education was the establishment of PTPTN National Higher Education Loan Fund. The body under MOHE is to lend the fund to student who cannot afford for their current study expenses or not qualified to enrol in public universities. This plan gives opportunity for people to further their studies in private institution by borrowing. Currently as privatization is intensified by government, the tertiary education has also not missed to be part of the ship. Education started being commercialized with more private institutions born; the growth is not just driven by privates but also the state arm investment such as UNISEL in Selangor. After UNISEL, there were more education institutions were built in every single state in Malaysia. Most fees in their operational capacity are quite high compared to public university even though it is owned by state government. Some of the college or university owned by States Government and Government Agency are: Selangor Industrial University (UNISEL) College University Islam Sultan Azlan Shah (KISDAR) College University Insaniah (KUIN) Polytech Mara College (KPTM)

Selangor Government Perak Government Kedah Government Majlis Amanah Rakyat (MARA)

Table 2: College or University owned by States Government and Government Agency As of August 31 2012, RM 45.41 billion has been lent. (Malaysiakini, 2012). This amount of money shows significant number of enrolments in tertiary education. With a minimum of three credits, students are able to enrol in private institutions and then end up with debt around RM 30 000 if they continue up to degree level. This is the expected costs for students from mostly social sciences courses. For the critical courses, it may cost up to RM 500 000 or more in private institutions. Crisis might occur when private education is solely a profitoriented institution and unable to deliver desirable outcome. As mentioned by (Rasiah, Deputy Secretary General of Party Socialist Malaysia, 2009): “The reality of private education is that it has churned out more private education businesses than an educated population. Standards have been sacrificed - entry qualifications, teaching competency, practical training, accommodation – in the fierce competition for the easy PTPTN loans, the new cash cow for the well-connected companies operating colleges and universities. The last sitting of Parliament singled out a couple of private colleges as among the worst offenders, turning out substandard graduates whom hospitals are reluctant to employ”

2. Literature Review Education and healthcare expenditure of government is associated on the subject of public expenditure. The public expenditure acts as a supply side economic which creates market distortion and the service price were not accurately driven by the market price. This was caused by the subsidy through selective public expenditures which education and healthcare are analysed in this literature. The spending in government purportedly to have returned to another instrument, and in this case most researchers look after GDP as return for stimulation of the education and healthcare spending. Thorough study on the subject can be divided by two ways of analyses. The first analysis covers both sectors for contribution on GDP and the second one is seen to be the effect on GDP. ISSN: 2289-4519

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The combination of education and healthcare had being mention direct or indirectly by (Bose et al., 2003; Le and Suruga, 2005; Mitchell, 2005; Poterba, 1996; Fan et al., 2006; Fan and Rao 2003; Saad and Kalakech, 2009; Baldacci, Siu and Mello 2003; Siraj 2012; Grigoli and Ley, 2012; Fan and Saurkar 2008; Yu, Fan and Saurkar, 2009; Gupta et al., 1997; Folster and Henrekson, 2000; Wang and Yao, 2002; Loizides and Vamvoukas, 2005, Craigwell et al., 2012; Sanz and Velazquez, 2007; Barnett and Brooks, 2010). In their researches, both factors are tested on GDP and explored on the actual specific ways in affecting the GDP. Both sectors in the research have been assumed as human capital or social capital and called by Barro, (2013) in his paper on “Human capital as determinant of growth”. The significance of human capital was explained by Romer, (1990) that quality human capital could increase productivity with the progress of technology, thus countries with greater initial stocks of human capital experience a more rapid rate of introduction of new goods and thereby tend to grow faster with increased quality of life. The increase of public spending especially on healthcare and education is closely related on subsidy and the increase of subsidy on both sectors can be harmful but would be an advantage on the view of the researcher. According to Mitchell, (2005) in the context of behavioural subsidy cost; government spending encourages destructive choices. Welfare programs encourage people to choose leisure over work. Furthermore, by this statement he claims that when individuals use other people money, they become less concerned about price. It was quite contradictory as Keynes proposition was also been used in his paper. Keynes mentioned that government spending in terms of deficit is needed in providing short term stimulus but when economy is recovering, there is a need to reduce spending back to normal. In contrary to Mitchell and Odior, (2011), in case of Nigeria, Mitchell stated that the factor of total factor of productivity, factor of accumulation, good education and healthcare help the poor lead more productive lives, increasing return to investment as well as creates sustainability of economic growth in given country and through a more productive labour force help to stimulate development of the private sector. From theoretical view of Wagner Law, (1912), it was suggested that during the process of economic development there was a tendency to expand public expenditure in national income. The reasons are varied: a) public functions to substitute for private activities, b) the development results in an expansion of expenditure on culture and welfare, public intervention might be necessary to manage natural monopolies. Therefore, the expansion of public spending can be seen as a product of economic development and supporting the expansion of Government spending which indirectly supporting subsidy and the market distortion with assumption there will be payoff in some period of time. Besides the difference scope of the research, the indicator used the difference in measuring the impact of variables and the literature will analyse in precedent combined instrument of education and healthcare expenditure on GDP before going to the research of the second way. Bose, Haque and Osborn, (2003) divided the panel of thirty developing countries into two empirical findings which principal found that merely education significant with economic growth. This research also recognized that budget constraint occurred in the research and suggested that the sector should be the driver for economic growth which implied that the allocation of expenditure also goes with it. Contradict to Gupta et al., (1997), not everything is about budget increase, the factor of efficiency as dominant factor in third world country became focus in their research. As the improvement of budget increases over time, the efficiency has been seen failed to keep pace with other regions, and their finding also showed that private spending does not affected by this problem. Both researches can be seen as complementary. For instance, as human ISSN: 2289-4519

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capital funding goes up there will be question on how has been allocated, either to the workforce of the sector or to the citizen. While in the context of Bose et al., (2003), in the sense of efficiency, the growth is possible as the fund will go much to the citizens, unlike the African context by Gupta et al., (1997), where workforce is lack followed by poor infrastructure, much of the fund possibly goes to improvement of workforce, therefore the increased fund does not produce appropriate results. Since their medical facilities were considered as poor facilities nationwide, the people doubt on why they want to keep their money from spending on self-consumption like this in Africa. Gupta et al., (1997) was using total factor of production (TFP) with economic growth and Wang and Yao, (2002) used the same method in relation of China economics growth in the study of China. They claimed that the omission of human capital might put the analysis in error, taking the flow number of graduates to reflect human capital stock, the increasing schooling period and followed by other welfare will played positive role in GDP growth in reform period but negative in pre-reform period. As also claimed by Gupta et al., (1997), in terms of the inefficiency in China, researcher emphasized the importance of efficiency through even distribution on education funding to address the problem of inequality in urban and rural area. The problem of third world country with deliverance of service is also significant in Caribbean region by Craigwell, Lowe and Bynoe, (2012) which in the analysis of both sectors, using data set country in the region. Followed by OLS panels, only health expenditure shows significance positive effect however it was different with education which insignificance in terms of enrolment in primary and secondary school. The different relationship shows the complexity in management of educational sector even with less population country in Caribbean even with the increasing budget. In assessing the effectiveness of public spending on healthcare and education, Baldacci, Siu and Mello, (2003) was using a covariance structure model. Their findings did not reflect directly on GDP but they were looking for social indicator on income and consumer spending affecting by the higher public spending, and higher public spending yield positive impact on social outcome. In terms of the effectiveness of public spending, Le and Suruga, (2005) have identified that the factor of spending was significant on economic growth. The researchers also recognized the relationship with tax which will offset to other spending increase. They have raised a question on the endogenous factor on growth and also emphasized on FDI in relation with growth, as the public spending is common in filling the gap in private necessity spending. The researchers’ finding found that if government incur excessive public spending, the benefit of FDI will be gone. In conclusion, their research of FDI should be the main instrument of economic growth as it will create positive externality to another instrument. The higher public spending means the increase size of government, in relative size of government by Loizides and Vamvoukas, (2005) in different countries such Greece, UK and Ireland, the results were varied from each other in regards to economic growth. The researchers used Granger method and measured based on different period of causality. It has been shown by Granger that government size causes economic growth in all countries of the sample in the short run and in the long run for Ireland and UK. Their analysis generally rejected that public expansion harm economic growth in these countries, because there is positive relationship especially in case of Greece which practitioner of Wagner law. The Wagner advocating return by huge spending, can be said as social welfare. In the topic of the separation of social welfare and human capital by Tang, (2012), it has been shown that the analysis in Hong Kong for 30 years interpret human capital as an effort of having return in the future except for social welfare for merely transfer payment. Thus, both ISSN: 2289-4519

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instruments in associating economic performance shows that positive impact of human capital empowerment through education and healthcare to Hong Kong economic performance, but for social welfare resulted as not important determinant. The reason for the insignificance is the resources diversion to unproductive purposes, in terms of social welfare and human capital, and thus both are quite similar. The government should understand well on the productivity issue. The researchers wonder on whether the healthcare expenditure increase can be segregated between old and young generation. Therefore, it is crucial that both healthcare and education act as complementary and from that the human capital which are considered as old can still produce something for the economy with knowledge and good health. In terms of social welfare or human capital, improvement is quite vague because it is understood as closely associated. The role of ageing on social welfare has been discussed by Sanz and Velazquez (2007), in OECD country as expenditure share on GDP increase. The researcher found that the ageing generation will cause the expansion of public spending because the preference of security. Due to this the institutional reform should be done to reduce cost per capita advocated by researcher. Sanz and Velazquez (2007) mentioned that the expansion of social welfare cost is unproductive and costly. Folster and Henrekson (2000) mentioned that how allocation of public spending on healthcare and education is different, in terms of growth effects of government expenditure and taxation in rich countries, there was a negative relationship between government size and economic growth. The research was made likely to address econometric issues without looking further on the reasons to the results. Their result was briefly reflected the predictions in economic theory that negative relationship should exist primarily for rich countries with large public sectors. 3. Methodology The data used for the research was time series for annual period of 40 years from 1971 to 2010 and specific on Malaysia’s environment. The variables involved were nominal Gross Domestic Product value at the market prices (GDP), annual Government expenditure on Education (E), Government expenditure on Healthcare (H) and the annual inflation rates (I). All the data was collected from three different sources which Malaysia department of statistics, Malaysia treasury and Bank Negara Malaysia publications. The characteristic of data, most data was in value of Ringgit Malaysia from hundred million to a billion except for inflation rate which in percentage. Government expenditure on human capital development through education and healthcare also can be translated as public expenditure. According to Heald and Mcleod, (2002) public expenditure is denoted as the dispensation by the state, on non-market criteria, of economic resources that it has acquired from firms and households. The allocation happens within government bodies or ministry which can be said as effectively controlled by central government which rely on it for most of their funding. This is generally classified as part of central government. In this context, the data on education and healthcare expenditure was specific on the allocation on government bodies called ministry which act as implementer from the funds received in the effort of this paper seeking on the substitution of human capital development provider from privates to government. According to Badescu and Loi, (2012) public spending on education can be defined as a percentage of GDP as it often seen as the commitment which governments make to the provision of education. Expenditure on education, as a percentage of government expenditure, indicates the extent to which governments prioritise education in relation to other areas of investment. While expenditure on healthcare covers any spending on healthcare irrespective of who is paying for or providing the healthcare, with general aim to preventing disease, curing illness and care for chronic illness (Qaiser, 2011). As both sectors ISSN: 2289-4519

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were priced by the combination of private and government in Malaysia, the price of services might be influenced by inflation rate, in brief the inflation rates according to report of the world bank, the annual percentage increase of the cost of living as measured by the consumer price index. Consumer price indices are based on a representative basket of goods and services purchased by consumers in an economy. Composition and relative weights of the basket are reviewed periodically. Furthermore, high inflation is a sign of macroeconomic imbalances. It often reduces economic growth and future growth prospects, thereby reducing the means of implementation available for achieving sustainable development goals. In this paper, from the three objectives stated there are two objectives which were empirically tested. As the data was time series, and the major test in this study were co integration and causality which separately by two different objectives in context of time frame of short run and long run. On application of time series, in attempt to answer the first and second objectives of long run co integration through Autoregressive Distributed Lag (ARDL) and short run causality through Granger, the attention for data was not to be biased and nonsense was important, it is said that the test of unit root even though not implied to answering objective, it do ensure the test of ARDL and Granger is not biased and creating exaggerates result. The flow of empirical test in this paper from unit root test to Granger causality was to reflect the sequence of stated objectives which second is the long run and third short run. The stage where unit root and lag selection criteria has been shown as it acts as pre-requirement that ensure the result would not be biased and then invalid in attempt to achieve the research objectives.

4. Result and Discussion Long Run Relationship The result can be divided by two, long run and short run. The long run relationship represented by co integration of ARDL and Johansen. In general, the result produced was in line with theory of human capital. As this research does not really looking into inflation factor, the inflation result will be discussed here in association with nominal GDP. According to the result of long run, the co-integration exists for inflation in affecting nominal GDP, through coefficient estimates by normalizing nominal GDP the signal toward GDP was negative in the context of Malaysia. The assumption made in this research was that the exaggeration of nominal GDP value might be caused by inflation rates, the coefficient reflected by negative 1080.22. The elasticity of coefficient signal that every increase of 1% of inflation, the nominal GDP market value will decline by more than one billion in value, the exaggeration of the value in the long run might be caused by the choice the data of this research. The relationship between inflation and GDP as cited by Munir and Mansur, (2009), was supported by Fischer, (1993) result in examine the non-linearity of inflation and economic growth suggest that negative relationship. According to Ismail et al., (2005) the factor affecting inflation was because of the instrument within money supply policy from Bank Negara. This implies that inflation was driven by the transaction or sudden shock were translated by action through monetary policy with no concern on GDP besides price of good. The shock of economy with influential on GDP was clarified by Munir and Mansur, (2009) related to the Malaysia economic environment in 1973 and 1974. As the world move to inflation by oil crisis, it spread to Malaysia and caused inflation almost reached to 18% with thus gave impacts on GDP declining growth rate from estimated 8% to only 0.8% growth.

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From the result of their research on Malaysia, they concluded that inflation for below 3.89%, each 1% increase annually it gave positive effect on GDP around 1.77%, and if inflation is more than average 3.89% the economic relationship will be negative. This explained on why the result was negative in the long run. In the short run dynamics, the inflation may affect the GDP in the short run but not in the long run in Malaysia (Fizari et al., 2011). The result was not in line with this research, because the Granger causality p-values of inflation was more than 0.05% for both direction, which means there is no short run causality toward each other. With the result of inflation only suggested that the long run effect of inflation, this research claims that inflation rate in Malaysia in the long run could increase the cost of human capital which education and healthcare in Malaysia. This is followed by the increase of the expenditure of human capital over time but not in pace with increasing of inflation rate and also GDP market value rates.

Figure 5: Graph of Inflation rate (I), Education (E) and Healthcare (H) expenditure

60,000

50,000

40,000

30,000

20,000

10,000

0 1975

1980

1985

1990 H

1995

2000

2005

2010

E

Figure 6: Graph of Inflation rate (I), Education (E) and Healthcare (H) expenditure From the graph, we can see that the priority of expenditure for education and healthcare increases but experienced some shock, and obviously it shows that education was bigger priority compared to healthcare, it is because major subsidies still goes to education ISSN: 2289-4519

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especially through primary and secondary sector. Jimenez et al., (2012) stated that the effect shows that the enrolment in school for secondary was reaching 76% and added by Said et al., (2011) in 2003 primary education had been made compulsory by the government, and with that combination, Malaysia is reaching the universalization of education below tertiary level. According to Said et al., (2011), this happened because at tertiary’s level of education, enrolment rate is increased only at 32.11% in 2007 as compared to only 3.91% in 1978. From the left graph we can see the sharp volatility of inflation rate with over or estimated around 4% rate, and as mentioned by Munir and Mansur, (2009) if over 3.8% rate, the GDP will react negatively, and it certified the relationship created by equation of normalization long run relationship coefficient of inflation. The increase of inflation rate also caused to the rise of the cost of education and healthcare expenditure by the government. The two factors existed because of the expenditure of sustaining the current expenditure and they planned the development of specified time. The relationship of E and H were explained by existence of co integration using ARDL and Johansen, and the long run coefficient shows the higher elasticity of healthcare expenditure and the sign was consistent with theory of human capital, unlike healthcare the sign for education was not consistent with human capital theory. The higher elasticity of the H might be influence by factor commercialization of the sector as Malaysia’s Government encouragement for more private healthcare provision along with stimulation of Healthcare tourism, according Malaysia Transformation Programme, (2012) the sector already was contributing RM 15 billion in GNI annually and with the future target of 1 million health travellers in generation of RM35 billion incremental of GNI. As the privatization was rapid direct or indirectly endorsed by government as new way of development led by privates (Hamzah, 2005) unlike education, the education business does not greatly produce outcome similar to healthcare. As the primary and secondary can be considered fully subsidized by the government, the way education is being commercialized for business is only through tertiary sector. As the business produce results which can be contributing factors of GDP value, it is expected that the government to have privatization policy in increasing the access to higher education. As majority of government education institution can be assumed to incur loss in operation which obliged to be sustain through federal expenditure, the way education can straight away contribute to GDP can be influenced by two factors. First is the income education institution corporation and second is by the productivity of educated skilled labour which realistically uncertain. Thus, it explained on the reasons for the coefficient to have negative relationship in the long run as the payoff of outcome for creation human capital in education is uncertain even though there are co integration in the long run. Short Run Relationship In the short run Granger causality both education and healthcare show significant causality toward GDP in bi-direction. The strength of the p-value was preceded by Healthcare toward GDP and followed by another direction of Healthcare. As increase of GDP usually followed by increase of Government revenue, the trend of the series also shows that increasing of allocation. Furthermore increase standard of living and preference of better healthcare give rise to personal expenditure on private healthcare which profit oriented as shown by WHO (2006-2010) in table 1 of Private Share of Healthcare Expenditure, 2000-2007 Periodically (%) which is 56%, furthermore according to Maybank, (2011) analysis for KPJ the largest provider of private healthcare gives the prospect of growth in profit for (8-19)% in duration of 3 years (2011-2013), because of high expenditure of personal services there is strong probability of contribution to higher GDP. ISSN: 2289-4519

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This effect is divided by two which generally related to the increase of standard of living in Malaysia. Specifically, the first effect was the pressure for government to provide good healthcare and the second effect was the increase of business for private providers. Increasing GDP value was as sign of economic growth, the growth of economic implies higher productivity of the nation produce by a business. The increase capacity of output give raises the increase demand for skilled human capital. To meet the demand, government encouragement attempt to increase flow to tertiary education can be seen through considerable government subsidies in the form of cheap student loans as well as scholarships especially in the period 1996 to 2010 (Foong, 2008).

5. Conclusion The researchers examined the co integration and causality for long run and short run of expenditure allocation of government, towards education and healthcare sector and also inflation rate for contribution on GDP value from period 1971 to 2010 specifically in Malaysia. This study found that in the long run, increasing government expenditure towards these sectors over time may create mixed relationships. In general, using ARDL bound test and Johansen test, both instrument showed that the co-integration existed among variables. As ARDL test being normalized for GDP as dependant variable, the education and inflation showed negative relationship in the long run, unless healthcare which shows positive relationship in the long run. In the short run, using causality test from three variables, only two was significant in causality toward GDP which are education and healthcare, for inflation both directions shows insignificant for short period of time. The process of allocation has been explained thoroughly in the introductory chapter which it reflected to the process of allocation which was bureaucratic and inconsistent over the year especially in the aspect of increment percentage. As the nature of allocation was decided by economic environment and complemented by long term policy of less intervention by the government, the increasing fund is more likely to cope with the increasing population, furthermore to match the supply the demand for skilled workforce especially in sector of education. The significance of education and healthcare expenditure toward economic values only being identified through the short-term instrument which Granger causality, in general both sectors showed the causality in the short run for being significant. At the same time the result also showed that the relationship was bi-directional, which literally means that there is big probability that if the economic is in good condition within the short run, government will increase the allocation of ministry expenditure. References Action Plan, (2007). National Higher Education Plan 2007-2011. Retrieved from http://www.mohe.gov.my/transformasi/images/1_bi.pdf Aghion , P., Boustan, L., Hoxby, C., & Vandenbussche , J. (2009). The causal impact of education on economic growth: Evidence from US. Retrieved from http://scholar.harvard.edu/files/aghion/files/causal_impact_of_education.pdf Ang, E. (2010, 9, 18). The Rising Cost of Education. The Star. Retrieved from http://biz.thestar.com.my/news/story.asp?file=/2010/9/18/business/7048908&s ec=business Asari , F. F. A. H., Hayati , N., Rahman, A., Razak, E. A. A., Ahmad, B. A. S., Harun, N. F. A., & Jusoff, K. (2011). A time series analysis of the relationship between total area planted, palm oil price and production of Malaysian palm oil. World Applied Sciences Journal , 34-40.

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