The Political Structures and Subnational Government's Fiscal Behavior in Malaysia

This paper examines the relationship between the political characteristics of the Malaysian government and the state government's fiscal behavior. In particular, we seek to analyze whether the incentives for the state governments to observe a prudent spending behavior have not been undermined by the fact that they have been able to influence relevant central government decisions regarding their finance. Our estimations results show that states that are overrepresented at the executive level tend to have higher spending and deficits. However, we don’t find any correlation between overrepresentation at the Parliament and states 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. The results also show that ideological belonging does not have any impact on the state governments’ level of expenditures and deficits. We do not find any significant correlation between the level of support obtained by the ruling party in state elections and the level of the state governments’ expenditures and deficits.