Fiscal Efficiency of Malaysian State Governments: Effects of Inter-governmental Grants

The main objective of this paper is to examine the relationship between the fiscal performance of the state governments in Malaysia with the political and institutional environment within which they evolve. The focus of our analysis is the inter-governmental transfer system which constitutes an essential part of any inter-governmental and decentralised system. More particularly, we analysed the impact of federal grants on state governments’ fiscal efficiency. Indeed, the general observation of a continuous deterioration in the financial situation in Malaysia bring us to question if the state governments are making sufficient efforts to exploit all the revenue sources that are in their hands. And one may wonder if the inter-governmental grants system is one of the causes of state governments slackening in their tax efforts. Fiscal effort is measured by the amount of taxes collected by the state government and the impact of federal grants on fiscal efforts is assessed by using the stochastic frontier analysis methodology. The advantage of using this method is that it allows us to obtain estimates of both efficiency level as well as the determinants of the efficiency level.