The benefits of government education spending in Malaysia

1.0 Introduction.

Schools / education institutions were traditionally a place for professionals to conduct their activities and a place for them to spend their leisure time. Then it gain respect and trust from the public it evolve as a place to learn knowledge and gain information. In recent years, government across nation and continent has increase or at least putting a certain amount of their spending in education sector. Malaysia in particular has taken measures to increase its spending on education substantially. It is believed that education work as a tool to improve one’s income and promote economic growth as a whole. Quality education has to be provided to people from all walks of live especially those who can not afford taking private education Jallade (1976). One way or another, school is assigned to take on the hard intellectual work of educating students which in return benefits the society in many ways mainly in improving income distribution.

On the other hand, spending in education has take into account from various sub sectors not only by building physical assets such as school, college or university. Spending include providing sufficient teaching materials as in book and notes, teaching equipment as in projectors and computers. Those are just to name a few, besides that, research and development of a better education system is another major part in education spending. Everything has its value and cost so does education. Hence, there will be no free way to educate people.

While fore-seeing education is able to increase one’s earning and improve income inequality, there must be a definite amount of money has to be invested in the education sector. Even investing in education has been done, to improve and ensure the less fortunate groups of people is able to be to retain benefits from it, government spending on public education has to be emphasized.

1.1 Background of Study

Malaysia as a developing nation which work hard on increasing its production and improve its income distribution at the same time is putting big effort to ensure the goal is within reach. Therefore in order to achieve the objective, Malaysia has adopted policy to increase its spending on education. For decades education is believed to be a catalyst in increasing one’s income. Besides that, education also makes social mobility possible. As social mobility is made possible, better income distribution among household is no longer beyond reach. Income distribution in Malaysia has not reach the ideal level. Meanwhile, there is as well room for increase in production which in turn leads to economic growth as a whole.

Even though Malaysia stands a good reputation among countries in South-East Asia with respect of its economic wise but in term of its education quality, income as well income distribution it is far behind from its neighbouring country such as Singapore. Realizing education has an important role in promoting not only income and income distribution, Malaysia has increases its spending over the years. On top of increase its expenditure on education, Malaysia also adopting policies of better education distribution which in turn promote income equality among Malaysians.

Stylized Fact

Figure 1.1 Government Education Spending (RM Millions) from 1976 to 2008

Sources: World Bank Data

Figure 1 shows Malaysia government education expenditure in RM/ million from year 1976 to 2008. From the graph above, it display a continuity increase in education spending from 1976 to 2002. A significant increase in the expenditure is recorded in 1999 (RM 3856mil) to 2002 (RM 12436mil) where RM 8571mil increment took place in 4 years time.

The significant increase in the spending is due to government policy to emphasize on human capital development under the ruling of Tun Abdullah Ahmad Badawi. After the major increase, education spending seems to drop a little for the coming few years. However, the spending is considered increase consistently over the years from 1976 to 2002.

Figure 1.2 GDP Per Capita (Constant 2000 USD) from 1976 to 2008

Sources: World Bank Data

Figure 1.2 demonstrates GDP per capita at constant 2000 USD from the year 1976 to 2008. Base on the graph above, it display a steady increase in GDP per capita from 1976 to 1984. However, there is a slight decrease recorded during 1985 due to economy downturn in the 1980s. A steady increase is continued to take place from 1986 to 1997.

As Asia financial crisis occur in 1997, it has lead to a decrease in GDP per capita at the following year. It has drop from $4044 USD for 1997 to $3654 USD for 1998. After the crisis took place, Malaysia economy is recovering and again GDP per capita shows a positive increase from 1999 to 2008. GDP per capita increase has a similar pattern with the increase in government education spending. Therefore it is believe there is a positive relationship between the two variables.

1.3 Problem statement.

Government education expenditure is mainly invested in public education system as to enable people from all walks of life to receive its benefits. In order to achieve the objective, government expenditure has to be fairly distributed. Uneven education distribution will result in a wider gap of income inequality among household who participate in different economy sectors. As the poor is unable to equip themselves with necessary knowledge and skills to increase productivity, they are trapped in a situation where they work with low productivity and low income. Without proper education, whichever sector a person participates in, it would not allows them to earn higher income. While particularly for those who work in primary sector, insufficient education make impossible for them to shift to other sector.

At this moment, if government education fund is not properly channeled there will be a problem where those who has potential in upgrading their knowledge and skills but can not afford to study in private education will be such a waste. Recently launched New Economic Model (NEM) has stated a plan to turn Malaysia to a high income nation. Therefore failing in utilize government public education spending will have a significant effect in producing high productivity and skillful individual resulting Malaysia unable to achieve high income nation.

More over, is the education spending is unable to reached targeted groups there will be a situation of the less wealthy continuously trap in their initial social status. It happen so as they are unable to close income inequality gap thus the rich is richer and the poor remain poor.

Thus, the study of how significant is the effect of government public education spending on income distribution and income growth is conducted. On the other hand, this study will also identify the significance of income distribution and income growth in Malaysia.

1.4 Objective of Study

The general objective in this study is to discover if Malaysia government spending in education is enjoy by every citizen particularly those who are less wealthy and unable to gain access to private education. Besides that, this study is to carry out observation whether income is fairly distributed among Malaysian as economy growing.

The specific objective in this study is to examine the effect of government education spending towards income distribution and income per capita in Malaysia.

1.5 Significance of the Study.

Government spending on education is recorded in an increasing trend for the past decades. Therefore it is crucial to identify if the spending has a strong positive effect on income growth and income equality. Implementation of proper policies according to current situation are acquired in order government spending is used efficiently.

1.6 Organization of the Study.

Through out the study from the beginning towards the end, it is divided to 5 chapters. Chapter 1 in this study consists of introduction, background study, stylized fact, problem statement, objective, significance of study and as well as organization of study. As for chapter 2 it only compromise literature review. While chapter 3 covers methodology, source of data as well as reference. Chapter 4 includes hypothesis, analysis of test and also review on the result obtained. Finally, chapter 5 concludes upon the conducted study.

Chapter 2

2.0 Literature Review

Income Inequality

In recent years, there has been an increasing amount of literature on the effects of government social and education spending on income distribution. Most people will preferred a less skewed income distribution to a highly skewed income distribution. (Sylwester, 2002). As income inequality will do more harm than good to a nation’s economic. For an instance uneven income distribution will affect political stability in a country. Giving many undesirable outcomes from income inequality on economic and political environment, its better to understand how policies are made to affect the income distribution. A common opinion is that education play a vital role in decreasing income inequality. Therefore producing human capital as a way to overcome income inequality and gain support over public education. Countries with more human capital tend to have less income inequality. (Sylwester, 2002). Under this circumstance, public education plays a very important role to lower income inequality as public education can be enjoyed by people from all walks of life especially the poor. (Jallade, 1976). As a result public education will decreases income imbalance subsequently.

On the other hand, Slywester (2002) comes up with a model where income inequality can be lowered provided one has sufficient wealth to give up income and attend school. However, if one is too poor, the income inequality will worsen as the poor are taxed over revenue but fail to enjoy public education. On top of that, many of the public education expenditure do not reach the poor, so it does not rectify income imbalance. As a result, there is no guarantee on lower income imbalance while there is more budget with respect of GDP on education spending. (Sylwester, 2002). Although countries with high human capital has lower level of income imbalance, but subsequently they will have hard time to further reduce income inequality. Countries that commit a bigger portion of budget with respect of GDP on education have lower income imbalance in subsequent years. (Sylwester, 2002). Spending on education is vital in producing human capital and in return reduced income inequality and promotes economic growth. (Sylwester, 2002). Seeing that as a way to promote economic growth, countries with relatively high level of income inequality will spend more on education hoping to achieve reasonable level of income imbalance.

More generally, spending on education will increase only if the spending produced a less skewed than the initial income distribution. (Jallade, 1976). Spending on education in well developed countries have a faster pace of reducing income imbalance as to compare with less developed countries that slowly reduce the inequality. (Sylwester, 2002). Level of income inequality is less effective measured in well developed country as the rate is based on samples and not represent the country as a whole. (Jallade, 1976)

Recent literature consist a study on education to improve productivity in farming industry hence increase income and lower income imbalance. Tao (2004) has mentioned in his report an agricultural based province with schooling will encourage farmers to invest more labor and capital to nonfarm production rather than farm production. Transformation across sector has contributed an increase in income for the participants. On the other hand, advancement of technology compatible with the transformation enable productivity efficiency in return generates higher income for households. Education is the engine to facilitate resources allocation as they expend the nonfarm production. (Tao, 2004). Besides transformation, education as well enable enhancement of human capital to think critically and respond correctly on market changes. In particular improve farm allocation and farmers’ skills.

Education has a greater effect during technical change period as it will facilitate the use of market inputs. On the other hand, education has a bigger effect in modern and dynamic environment as schooling during transition of market and political environment in China’s policy reforms. (Tao, 2004). However, return from education can be still exploited whenever there is chance of increasing its return.

Schooling plays a vital role in educating people to allocate scarce resources in critical field which increase one’s income. For the period of modern day, education is not only used in improving technical efficiency but as a path to obtain managing skills. Managing skills mentioned is not farm managing skills but skills on transforming agricultural products to nonagricultural products. (Tao, 2004). Persons who obtained those skills will likely be chosen as decision maker in the family. Based on Tao (2004) finding, there is an obvious increase in income of household during the period of policy reform. There is a positive relation between education level and sustainable income growth. Positive relation between education level and sustainable income growth is very crucial for policy makers to ascertain spending on education to strengthen the system.

Meanwhile, having more physical capital and human capital in nonfarm sector is another form of positive relation with education. Where by skills and knowledge attained from education is utilized in controlling capital assets. (Tao, 2004). Therefore, family with the highest education tends to put in more human capital in nonfarm production to increase their income proportionally. Moreover, schooling works as a catalyst in household to respond quickly to the environment and market changes (farm to nonfarm production) in return generates income growth especially in suburban area.

Education works as a stepping stone for individuals to shift up in the social ladder. (Jallade, 1976). However, an effect of education on income distribution is actually smaller than expected and we can not depend greatly on education to equalize income distribution. Socio-economic groups at large still depend highly on education as social mobility even though the effect is no significant. Similar cases happen relatively higher in many developing countries where middle class household trying their best to secure a place in university in hope to have a social mobility in future but it is still an open question. (Jallade, 1976).

In the sense of private education, unequal income lead to unequal consumption in education is a fact. There fore, government has to play its part to provide public education for the society. From the other point of view, spending on education has to take into account that to what extent does educational development has towards schooling distribution, not only consider development in education towards income inequality. (Jallade, 1976). Thus, the poor has to be compensated for their not-so-high investment in education. As the poor increase their involvement in higher education, chances to improve education level as a whole is higher, it will indirectly decrease income inequality among household.

There are debates over the quality of private education able to provide as to compare with public education. (Jallade, 1976). In order to ensure there is a balance between private and public education, (namely higher education) government not only required to regulate policies for public education but also required to invest more resources in it. One way is subsidization. Government subsidization in education encourages somehow a competition to private education. In order to compete with public education, private education must at least offer a fair schooling fee for students where in return more people is educated and decreases income imbalance. (Jallade, 1976). On few levels of education, primary education has the strongest and positive effect on income distribution. (Jallade, 1976).

Better income equality is made possible if education subsidizes and taxes on educated individual are fairly distributed among social groups. (Jallade, 1976). Again, government involvement is needed in order to ensure the fair distribution of income is work. Else, the poor is unable to enjoy the benefits which are created for them.

Education act as an instrument to encourage economic growth and income distribution. (Holanda et al, 2008). Imperfect credit markets an others market limitation unable to provide the amount of education that society required. For that reason, government has to intervene either indirectly or directly to enable those who can not afford private education will at least able to obtain public education. Problem is that there is a significant quality difference between public and private education. (Holanda et al , 2008). Private education is believed to be able regulate itself through competition where as public education has to be regulated in order to achieve a least quality requirement.

The case of State of Ceara (Brazil) introduced 2 public education regulatory namely public voucher system and system based on teacher incentives. (Holanda et al , 2008). Public voucher system will give out incentives to public school to enhance their efficiency at the same time will penalize the least efficient school. While system based on teacher incentive is teacher or principal with excellent performance will receive a sort of incentive to further increase their efficiency. Both system acquired government to spend on education to stimulate a healthy competition among public school. (Holanda et al , 2008). Besides spending, government should as well put regulatory system in public education to impose competition among them thus will improve the education system as a whole.

A study conducted by Ram (1989) has indicated a large portion of education spending is taken up by teacher’s salary. Thus, real spending on education is assumed to be expended at the same degree. Many countries particularly developing nation has put a heavy priority on increasing education expenditure. (Ram, 1989). Government across the world believed education make productivity increase possible hence increasing income and promote economic growth as a whole. Meanwhile, expansion in education also enables literacy to increase and a better economic opportunity for all, a factor which is very much needed in countries with high income inequality.

Above all the studies that have been conducted, World Bank as well find that investment in education not affecting present generation’s income but also affecting future generation’s income distribution and unemployment in long run. As we can see, there is an obvious “chain of reaction” in spending on education where today’s spending determines future’s distribution. Ram (1989) pointed a different opinion regarding the extension in education is actually will lead to distribution among workers-to-be where else it change nothing in income distribution between current worker. In this sense it will create a circumstances where fresh graduates has great opportunity to get job while those who did not benefits from additional education has a worsen opportunity to get a better job.

As a result, increase in education is not sufficient to improve income equality in the bigger picture. Increase in education spending has to be move along with policies of better access to education for public through out the nation. Outcome of schooling depends greatly on the better education receiver. (Ram, 1989).

Another study conducted by Ning (2010), stated that increasing education expenses without adequate changes in education structure and providing a conducive industry, it actually did not improve much income inequality. Less wealthy background children tend to has more desire to attend school as to improve their family source of income. In contrast, poor family is unable to provide their children better education, this reflects initial income inequality will additional deteriorate income distribution in time to come. (Ning, 2010). Again the poor will trap in the “chain reaction”. Therefore government spending with a proper policy is able to provide education to the needed accordingly unless everyone is able to invest in education sufficiently.

On the other hand, Uplh (1977) as well mentioned education distribution is affected by wealth and income. For that reason, government is required to implement better income equality policies and fairer education distribution simultaneously with increase in education spending to obtain the best result in reducing income inequality. Higher average of education turn out to be income equality enhancer however higher mean of education with bigger education inequality turn out to be income disequalizer. (Ram, 1983). Ram (1983) pointed that higher average of schooling promotes income equality nevertheless revealed there is no observable relation between greater schooling variance generates larger income inequality.

Income growth

One hand of low education and another hand of relatively high household income are factors that contribute deterioration of income distribution thus decreases national income growth rate as a whole. (Borsu, 1991). Klasen (2008) discovered that there is a causality relation between education and income distribution, which initially the rich can afford better education and turn out to be rich as well in the future. In contrast the poor who can not afford education at the first place facing difficulties to get rid of poverty. Hence, the poor will trap in poverty and this situation will go on for years. Government intervention is acquired to regulate education spending in order to provide fairer education distribution.

Besides focusing on education spending, government who intend to improve income inequality has to implement policies emphasizing on encourage higher enrollment rate in public financed school. (Chen, 2003). Meanwhile on the other hand, liberalization on credit market offer loan in favor of those who take on private education enables more people to gain access in schooling. (Chen, 2003). Both way most likely turn out to be a major contributor in promoting economic growth as well as fairer income distribution.

Few ways of government channeling fund to education are namely highly-subsidized public education, direct subsidize private schools and direct subsidize to household who attend private schools. Chen (2003) ascertained besides how much expenditure is spent on education, how education spending is channeled through proper system is an important determinant of income equality and economic growth. Under public education system, Chen (2003) observed a lower income inequality since every person’s investment in education is about the same and vice versa under private education. Towards the middle of Chen (2003) study, a crucial finding is obtained saying high income nation generally has a greater rate of enrollment in schooling proving that education is vital in affecting income growth. In turn to attain the objective, compulsory schooling system has to be enforced.

Government has to raise fund in order to sustain an increase in education spending. Fund is raised through tax imposed to adult and then using it to finance education. An increase in tax rate will result an increase in public schools expenditure per capita as well increase subsidy in private schools. (Chen, 2003). Eventually, it provides better education for all hence perk up income growth and income inequality.

Based on a study conducted by Croix et al (2007), he come across a situation where education level can not solely be a determinant of salary. In his studies, he pointed the existence of low education worker with high experience is earning more than those who has high education but low working experience. Through this study, it shown that there is other determinant instead of education level in determining income growth and income distribution.

In case of China, Goh et al (2009) observed during economy restructuring in 1990s seeing potential companies laying off less educational qualified worker while increasing salary for those who are more educational qualified (skilled). Under this circumstances, household income indicator implies that education make possible in favor of household who wish to shift their employment from primary to secondary sector or from secondary sector to tertiary sector. (Goh et al, 2009). In contrast, return towards education persist to facilitate the educated, the less educated will left far behind in term of income distribution and income growth.

During pre-sector evolution era, education level play a less important role determining income earned. Ever since pre-sector evolution, education level has turn out to be a key factor in determining income earned. (Goh et al, 2009). Therefore it is obvious education is pretty crucial in preserving income increase. Towards the end of Goh et al (2009) studies, he pointed the largest changes in household income is attributed by higher return on education as economy reforming and technology deepening. More over, balancing in demand and supply of skill occurs as labor market performs efficiently, every individual acquire a job and even less skilled labor able to demand a better pay. Thus, education churns out to be a bridge getting better income for society.

Study conducted by Lakshmi (1992) declared public spending on education is shown to be more effective improving living standard rather than improving income growth itself. Over the years, many economists have different view of developing nation should adopt growth-oriented system or equity-oriented system with respect of income inequality, income growth or living standard as a whole. (Lakshmi, 1992). A nation with sufficient education in the sense that its labor is skilled, the nation is eligible to implement growth-oriented or equity-oriented policy. Without adequate education or fairly distributed education, implementing any of the policy will result in worsening income distribution.

Growth-oriented policy provides an increase in growth rate per capita for a nation. As income rise, household are relatively richer than they used to. Hence, they demand more on health care and so on. Firms started to supply those services and gain profit, thus economy as a whole is improving. (Lakshmi, 1992). While equity-oriented system may work as a tool to channel fund such as education and medical care towards targeted groups by subsidy. Out come from this system is a fairer distribution to all.

Although schools and higher education institutions are open for all, as to poor parents they are unable to send their children to obtain proper education. In other word, poor parents’ ability to educate their children is relatively low as to compare wealthy parents. Therefore, poor families rely heavily on government subsidy on education to have their children educated and enable them to have upward social mobility and be paid a better wage in the future. (Lakshmi, 1992).

As mentioned by Jamison et al (2007) national income growth rate can be increase by better level of education quality which is strongly supported by Solmon (!985). Besides education quality, a nation with prosper education is able to produce better human capital to enhance income growth. (Judson, 1998). Blankenau (2003) once stated government, is responsible to fund human capital production through education.

Chapter 3

3.0 Methodology

Increase in GDP per capita or in other words growth for GDP per capita is affected by few factors mainly education spending. In order to ensure validity of the effect, a model is developed as part of the study to show how GDP per capita growth is affected by few variables. Time series data is used in regression.

The simple function of this study is written as;

Y ~ F (ES, K, L, EX)

After the variables in the study being substituted into the function and the logarithm function is as follows;

lnY = β0 + β1 lnES + β2 lnK + β3 lnL + β4 lnEX + εt

Where:

Y = GDP per capita

ES = Education spending

K = Capital

L = Labor

EX = Export

ε = Error term

From the function above, GDP per capita is the dependent variable while the independent variable is education spending while capital, labor, export as well error term work as control variables. Dependent and independent variable used in function are needed in determining the significance of the study. Spending on education or more specifically government spending on education has a positive effect on GDP per capita growth and as well income growth. It is expected to have a positive relation, increase on GDP per capita jointly with the increase of spending on education, so β1 is expected to be positive. Besides that, capital/physical capital is directly affecting GDP per capita. An increase in physical capital is believed to increase GDP per capita as well income for household simultaneously.

Based on a study conducted by Croix et al (2007), he come across a situation where education level can not solely be a determinant of salary Therefore β2 is expected to be positive as well. On the other hand, labor is forecasted to be positively related with GDP per capita. Bigger labor force causes more income contribution to the country but it does not lift the number of population. While dividing country’s income, it will increase income per capita as a whole. Thus, β3 is expected to be positive too. As for β4, export in national account is a source of income for a country. Higher export value in turn generates higher GDP in the sense of countries across the world are purchasing goods from the country.

On the other hand, education spending is believed to be able improve income equality as well. In order to prove the finding whether government education spending has a significant effect in improving income equality a model is developed to carry out the testing. Gini coefficient data is used to carry out the study. Few others control variables are identified mainly education spending and use in the model to ensures validity of the result. Time series data is used in regression.

The simple function of this study is written as;

Y~ F (ES, GDPPC, E, INF)

After the variables in the study being substituted into the function and the logarithm function is as follows;

lnY1 = β0 + β1 lnES + β2 lnGDPPC + β3 lnE + β4 lnINF + εt

Where:

Y1 = Gini coefficient

ES = Education spending

GDPPC = GDP per capita

E = Employment

INF = Inflation

ε = Error term

From the model above, Gini coefficients turn to be dependent variable while the independent variable is education spending while other variables work as control variables. All variables are selected upon the purpose of the study which is, is there a positive relationship between government spending on education and income equality. Government education spending is believed to have positive relation with income equality. An increase in government education spending there will be an improvement in income inequality. Thus, β1 is expected to be positive.

Besides that GDP per capita has a certain level of influence on income distribution as higher GDP per capita in general showing a better income earned by households. Therefore β2 is expected to be positive as well. Employment rate on the other hand contribute better income distribution to some extent. Higher employment rate attribute better numbers in income earner thus enhance income distribution in a way. As for this reason, β3 is presumed to be positive. Meanwhile, inflation churns out to be disequalizer in income distribution. Greater inflation leads to worsen income equality. Low income earner will badly affected as if compare to the poor. Increase in inflation lower their real income hence wider income distribution gap. Consequently β4 is expected to be negative.

3.1 Multiple Regressions

Multiple regressions model is used to explain whether dependent variable Y has relation with independent variables X1, X2, …… , Xn and error term, ε.

Y = β0 + β1X1 + β2X2 + ….. βnXn + ε

Multiple regressions model shows how mean value of Y is related to X1, X2, ……, Xn

E(Y) = β0 + β1X1 + β2X2 + …… + βnXn

Estimated multiple regression model says that a simple random sample is used to calculate sample statistic b0, b1, b2, …, bn that use as point estimator for parameter β0, β1, β2, …, βn. In the mean time, b1 stand for an estimate of changing in Y corresponding to a 1 unit increase or decrease in X1 when all independent variables held constant.

Ŷ = b0 + b1 X1 + b2X2 + … … + bnXn

Least Square Method

Least square method is a popular way to compute numerical parameters estimation and as well include data. More over, characteristic of statistical properties is able to be projected through this way. Ordinary Least Square (OLS) and Weighted Least Square (WLS) are two of least square method. As to compare both methods, OLS is the better way to use in computing numerical parameters estimation due to its simplicity.

Ordinary Least Square (OLS)

OLS used to forecast the unknown parameters in linear regression model. Ordinary least square method utilizes the following equation:

First use sample regression function (SRF) corresponding to the population regression function (PRF). represent residual term where sample counter part of stochastic disturbance term.

..

3.1.3 T-Test: Regression on each independent variables

T-Test is used to check if each and every independent variable is significant. Each and every independent variable is compute upon T-Test to ensure its significance.

Partial coefficient hypothesis testing:

H0 : β1 = 0

H1 : β1 ≠ 0

Formula for T-Test is:

t =

If t-value > critical value, reject H0

If t-value < critical value, do not reject H0

If result rejecting H0, it means there is a positive relation between dependent and independent variables.

3.1.4 F-Test: Overall significance of estimated multiple regression

F-test used to test if there is existence of significance relation between all independent variables upon dependent variable. Hypothesis for F-test :

H0 : β2 = β3 = .. = βk = 0

H1 : Not all slopes coefficient are simultaneously zero

Formula for F-Test is:

Where,

ESS = estimate sum of square

RSS = regression sum of square

If F-value > critical value then reject H0

If F-value < critical value then do not reject H0

If result is rejecting H0 it means there is a positive relation between all independent variables and dependent variable.

R²: Multiple coefficient of determination

R² is a coefficient of determinants. It is used to compute the goodness of fit in a model. Higher value of R² indicates greater F-Test value with better goodness of fit.

Formula for R² is:

R² = or R² = 1 –

Where,

ESS = Explained sum of squares

TSS = Total sum of squares

RSS = Residual sum of squares

R² lies between 0 and 1. When R² = 0, it indicates the model can not be explained. When R² = 1, it indicates there is a total variation in Y that can be explained by X. When R² is close to 1 then it indicates the model is fit.

Autocorrelation : First order = Durbin Watson d-test

Durbin Watson d-test is used to test whether residuals are independent of time. While testing, there is assumption of lagged variable is not included in dependent variable and data set is complete. Durbin Watson d-test hypothesis is:

H0 = no first order autocorrelation, P = 0

H1 = first order autocorrelation, P not equal 0

Formula for R² is:

Where,

et = residual in observation

D-value usually lies between 0 to 4. When d-value is smaller than 2 then it means there is a positive correlated in error term. When d-value is larger than 2 then it means there is a negative correlated in error term.

Multicollinearity

Multicollinearity stands for the present of a perfect linear relation on some or all explanatory variables in a regression model. Exact linear relationship is say to be exist when Y1X1 + Y2X2 … … + YnXn = 0 is fit. New version of multicollinearity stated in a wider coverage and includes perfect multicollinearity. On the other hand it also covers the situation when X variables are intercorrelated but not perfectly intercorrelated which Vi is stochastic. Y1X1 + Y2X2 … … + YnXn + Vi = 0

Data

Time series data is used through out this study to compute correlation between dependent and independent variables. To ensure validity of testing conducted, time series data of minimum 20 – 30 years is used in regression. Data are selected from 1970s to 2000s. Types of data used are namely GDP per capita, Gini coefficient, government education spending, employment, inflation and capital as well labor in Malaysia. Above mentioned data is retrieved mainly from World Bank Data, Bank Negara Malaysia, Department of Statistic Malaysia lastly Economy Planning Unit Malaysia.