Assessing the Impact of Institutional Quality on the Relationship Between Education Expenditure and Service Sector Growth: Evidence from Quantile Regression Models

This study investigates the role of institutional quality and its influence on the relationship between government expenditure on education and the growth of the service sector in Malaysia. Using time series data from 1984 to 2020, the study applies a quantile regression model at three quantiles: 25%, 50%, and 75%. The findings reveal that government spending on education (GXE) has a negative and statistically significant effect on service sector growth (SSG) across all quantiles, in both the interaction and non-interaction models. This suggests that inefficiencies in the allocation and targeting of government expenditure may be hindering sectoral growth. In contrast, the interaction between government spending on education and institutional quality (INTC GXE&IQI) consistently produces a positive effect on service sector growth across all quantiles. This positive interaction implies that the impact of education spending on service sector growth is contingent upon the quality of institutions. When government expenditure aligns with strong institutional frameworks, it can effectively stimulate growth within the service sector. This can be attributed to the role of well-functioning institutions in maximizing the efficiency of fund utilization for intended purposes. Therefore, policies focused on enhancing institutional quality—such as improving bureaucracy, increasing transparency, and combating corruption—could improve the effectiveness of education spending, ultimately supporting the sustainable long-term growth of the service sector.