Institution, external debts, and fiscal policy an empirical investigation in asia pacific countries

528 | Policies and Sustainable Economic Development Institution, External Debts, and Fiscal Policy: An Empirical Investigation in Asia Pacific Countries NGUYEN TRUNG THONG University of Economics Ho Chi Minh City thongnt@ueh.edu.vn NGUYEN PHUC CANH University of Economics Ho Chi Minh City canhnguyen@ueh.edu.vn Abstract Fiscal policy attracts attentions from public, in which the quality and the responses of fiscal policy are seen as the determined factors of its efficiency This paper investigates the impacts of external debts and governance quality on fiscal policy through the taxation and government expenditures in Asia Pacific countries from 2002 to 2013 Through the panel data estimations, we find that both institution and long-term external debts have negative impacts while short-term debts have no effect on fiscal policy This paper has significant contribution to the practice by the useful implications for international financial organization such as IMF, Worldbank in arranging their agreements with governments to implement the conservative fiscal policies in the long-run Keywords: institution; external debt; fiscal policy; Asia Pacific Introduction In last decade, Asia Pacific area is the most dynamic economic region in the world, especially in the the period of 2002 – 2007 (see figure 1) In along with the high economic growth, their ratios of external debts have decreased slightly in the period of 2002 – 2007, then increased significantly in the period of 2008 – 2013 (see figure 2) Asia Pacific, US and the World economic growths 20.0 15.0 10.0 5.0 0.0 20022003 -5.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10.0 US China Japan World East Asia and Pacific countries Korea Australia India Pacific Islands Figure Economic growth in Asia Pacific, US, and the world Source: World Bank External debts in some Asia Pacific countries 120.0 100.0 80.0 60.0 40.0 20.0 0.0 2002 2003 Australia 2004 China 2005 India 2006 2007 Japan 200820092010 Korea 2011 Thailand 2012 Vietnam Figure External debt in some Asia Pacific countries Source: ADB Apparently, the recent debt crisis of European, especially in Greek case, caused a lot of harmful impacts and chaos in their economies (Arghyrou & Tsoukalas, 2011; Featherstone, 2011; Lane, 2012; Overbeek, 2012) This fact repoints the role of fiscal policy in the creating of external debts and then 530 | Policies and Sustainable Economic Development external debts impact on the behaviors of governments in conducting fiscal policy In fact, the fiscal policy through government expenditures is the main cause of external debt (Barro, 1979; Buiatti et al., 2014), then the high level of external debt increases the burden of fiscal policy and the probability of default that, in return, put more challenges on fiscal policy (Alt & Lassen, 2006; Elgin & Uras, 2013; Teles & Mussolini, 2014) A notable study of Afonso and Jalles (2013) with a wide range of sample from 155 countries to assess the links between growth, productivity and government debts, they find a negative effect of the debt ratio An exception for the countries in OECD, the higher the debt maturity the higher the economic growth and financial crisis is detrimental for growth; while, fiscal consolidation promotes growth and higher debt ratios are beneficial for total-factor productivity (TFP) growth Therefore, understanding the impacts of external debt on government behaviors in conducting fiscal policy not only contributes to the literature of macroeconomic policies, especially fiscal policy in particular, but also contributes to policy makers of international organizations such as IMF in implementing suitable agreements with local goverments for substainable development Besides the fiscal policy, the institutional quality is recently got more attention from researchers in explaining the difference in economic developments and other macroeconomic factors across countries (Chen et al., 2014; Helland & Sørensen, 2015) The institution is defined as the “rule of game” in the society to adjust the behaviors of agencies in the economies that includes the government, hence it is argued to have impacts on the government’s behaviors in general, and the fiscal policy in particular More precisely, since the institution has impacts on the government’s behavior thus it must have impacts on the effects of external debt on fiscal policy, but the impacts of institution and the association between institution with the external debts on the government’s behaviors in fiscal policy are scare Therefore, this study provides arguments and empirical evidences shedding light on the question of how the institution impacts on the government’s behaviors in implementing fiscal policy In particular, this study examines the effects of external debts and its associations with the institution on the fiscal policy of governemts At least to our existing knowledge, this is the first study which examines the impacts of institution and its effects on the impacts of external debt on fiscal policy In order to conduct this study, we use five governance quality indicators from World Bank Worldwide Governance Indicators dataset including the Government effectiveness, the Regulatory quality, the Rule of law, the Control of corruption, and the Political and voice in the period of 2002 – 2013 for 28 Asia Pacific countries We believe that these governance quality indicators are the best proxy for the institution in present, which are measured and provided by the Worlbank, a reliable source In addition, this study is significant contribution to previous works by using four indicators including total tax revenue, total expenditure, current expenditure, and capital expenditure of government to proxy for the fiscal policy With this strategy, we believe that this study has significant contribution to both literature and practice First, this study has contribution to the literature of the institution economics by defining its impacts on the government’s behaviors in fiscal policy implementing The empirical evidence from the panel data estimator shows that both institution and long-term external debts have negative impacts on fiscal policy Second, this study has significant contribution to the practice by the useful implications for internation financial organization such as IMF, Worldbank in arranging their agreements with governments to implement the safely fiscal policies in long-run Third, our paper has a policy implication about countries that need more investments and debts from World Bank and IMF may improve their institutions and control the external debts more effectively The paper is organized as following structure Section reviews the literature related to the impacts of external debt on fiscal policy and our arguments on the effects of institution on the fiscal policy Section presents the methodology and data Section provides the results and discussions The final section remarks some main findings Literarure review In this section, we review the economic literature on the impacts of external debts on fiscal policy, in which we discuss the impacts of institution and its association with the external debts on the fiscal policy The accumulated external debt increases in both developed, developing countries, especially in low-income countries (Bua et a., 2014; Richter, 2015), which withdraws many works in both theories and empirical investigations from the Keynesian theory to Neo-classical theory (Alesina & Perotti, 1994; Leachman et al., 2007) In fact, government conducts fiscal policy in the line with monetary policy of central bank to smooth the economic cycles through the crisis or the hot growth However, government faces to a very difficult puzzle For instance, the overall economy is downturned in the period of crisis, it then decreases the government’s revenue where the the tax revenue is the main source While, the government must expand the fiscal policy to push the economy throughing the difficult period, which then creates a heavily fiscal deficit in fiscal budget, and therefore external debt (Teles & Mussolini, 2014) Even though, the fiscal deficit sometimes emerges when there are no reasons for intertemporal smoothing, and in the long run government debt tends to be excessively high (Velasco, 2000) Then, the external debt leads to more challenges for the fiscal policy conducting since the higher debt services and also the higher borrowing rate if government wants to borrow more This situation is also riskier in the country with with am incompleted tax bases in along with the uncontrolling fiscal policy, since it leads to a more frecency and a higher rate of fiscal deficit, then the external debt status, in turn, is higher and more severe in the impacts on the economy (Elgin & Uras, 2013; Mitze & Matz, 2015) More severely, the higher external debt increases the probability of government’s 532 | Policies and Sustainable Economic Development default, which then induces government into riskier and more difficulty in fiscal policy conducting (Alt & Lassen, 2006; Antelo & Peón, 2014) In fact, tremendous studies have investigated roles of external debts on the macroecnomic factors, especially in the fiscal policy in both scholar and practice For example, Kameda (2014) finds that a percentage point increase in both the projected/current deficit-to-GDP ratio and projected/current primary-deficit-to-GDP ratios of Japan raises real 10year interest rates by 26–34 basis points He also finds that the real budget deficit in 2008 causes an approximately 2–3% increase in the JGB yields, which depresses the real GDP of Japan by 0.39–0.63 percentage points in 2008 Richter (2015) finds that the growing government transfers of US cause more severe and more persistent stagflation in their economy than in representative agent models, while a longer average duration of US government debt pushes the financing of government liabilities into the future and reduces the short- run impacts of explosive transfers Meanwhile, the study of Adam and Bevan (2005) examine the the relation between fiscal deficits and growth for a panel of 45 developing countries and find a threshold effect at a level of the deficit around 1.5% of GDP, where there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction, and the magnitude of this payoff necessarily depends on how changes in the deficit are financed through changes in borrowing or seigniorage and on how the change in the deficit is accommodated elsewhere in the budget They also find evidence of interaction effects between deficits and debt stocks, with high debt stocks exacerbating the adverse consequences of high deficits Apparently, the fiscal deficit causes the external debts, but the external debts, in return, lead to a very difficulty challenges in fiscal policy implementing Doi, Hoshi, and Okimoto (2011), for instance, find that the government revenue to GDP ratio of Japan must rise permanently to 40– 47% (from the current 33%) to stabilize their debt to GDP ratio, which pushs burden on the overall Japanese economy In which, the primary surplus to GDP ratio fails to respond positively to their debt, and as the most important finding the current fiscal situation for the Japanese government is not sustainable Similarly, Koczan (2015) finds that large capital inflows into emerging European economies during the mid2000s resulted, in one hand, in rapid economic growth and convergence to EU income levels, it also resulted, in other hand, in improved fiscal positions of most countries, on the back of strong revenue performance However, many countries have struggled to adjust to the new situation of lower external financing and lower growth due to the 2008 global economic crisis More precisely, Teles and Mussolini (2014) argue that level of the public debt-to-gross domestic product (GDP) ratio should negatively impact the effect of fiscal policy on growth, since government indebtedness extracts a portion of young people's savings to pay interest on the debts; therefore, the payment of debt interest requires an all ocation exchange system across generations that is similar to a pay-as-you-go pension system, which results in changes in the savings rate of the economy In addition, Georgescu (2014) finds that a sharp deterioration of Romanian fiscal Policies and Sustainable Economic Development | 533 period, the during post-crisis framework strength has been observed public debt-to-GDP ratio currently reaching around 40%, thus doubling as compared to 2008, while the main drivers of excessive public indebtedness and the increase in refinancing (rollover) risk on short term, which is supposed to overlap with the exchange rate and interest rate risks on medium and long term This study concludes that its situation requires appropriate policies focusing on economic growth recovery, fiscal consolidation ongoing, increasing capacity of generating budgetary revenues, public debt management improvement Thus, the behaviors of government in conducting fiscal policy following the manner of their external debts decide the long-term substainibility of the economy The application of business thinking to the public sector has meant conceptualising the sovereign debt management function as a corporate-style controller function as an innovation in public finance in recent years, where accruals-based appropriations and outcomesfocused strategy statements weaken a legislature’s power of control over the executive government and divert attention from the control of public finance, which increasingly appears to be delegated to the executive government and that facilitated by increasing government participation in capital markets (Newberry, 2015) Even though, Newberry (2015) finds that the financial control and accountability is not achieved by relying on strategy statements, objectives and ex post review in New Zealand, which shows an extent of government participation in capital market activities involving large amounts of public money and leveraging of public assets Furthermore, de Mendonỗa and Pessanha (2014) denote that there was a reduction in the fiscal vulnerability, but the public debt management was not effective in increasing fiscal insurance in Brazil In this context, the institution must have some crucial roles For example, González-Fernández and González-Velasco (2014) find that corruption also shows a direct and significant relationship with public debt in the Spanish autonomous communities, although its impact is lower than that of the shadow economy More precisely, Heinemann, Osterloh, and Kalb (2014) find that a country’s past stability performance, government characteristics and survey results related to general trust affect sovereign bond spreads and dampen the measurable impact of fiscal rules in European area, and the interaction of stability preferences and rules points to a particular potential of fiscal rules to restore market confidence in countries with a historical lack of stability culture The institution of a country which is defined as the rules of the game in a society (North, 1990), includes three features: (i) “humanly devised” which contrasts with other economic fundamentals; (ii) “the rules of the game” to set “constraints” on human behavior; and (iii) their major effect will be through incentives (see North, 1981; Acemoglu & Robinson 2008) Several works have studies the effects of institution, which is named as the new institutional economics, but the effects of institution on fiscal policy are still ignored Therefore, we argue that if the institution of a country is higher, the government is stimulated to apply a more conservative fiscal policy, thus growth of expenditures is lower This paper measures the institutional quality by using the Worldwide Governance Indicators include Control of Corruption, Government Effectiveness, Political Stability, Regulatory Quality and Rule of Law Thus this paper goes to investigate the impacts of external debt and governance quality on fiscal policy through the empirical study at Asia Pacific countries1 in 2002 – 2013 period Next section presents the methods and data which are used in this study Methodology and data 3.1 Methodology In on order to policy, investigate debt fiscal we the impacts of governance quality and external denote agency variables as Y is output, T is total tax revenue, � is average tax rate (0 is enough to pay for external debt thus (T2 – G2 – p1) > 0, it means that the increase in tax revenue (�Y1g) has to be bigger than the annual debt payment, this depends on the output growth (g) or the increase in tax rate (�) or the cut off in expenditure (G2), or government can both of them However, the budget balance in year is not enough to pay for annual external debt payment, or the budget balance is continued deficit, the new external debt in year will be: The countries in our sample include: Australia, Azerbaijan, Bangladesh, Bhutan, Cambodia, China, Fiji, Georgia, India, Indonesia, Japan, Kazakhstan, Korea, Kyrgyz, Malaysia, Mongolia, Nepal, New Zealand, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Tajikistan, Thailand, Tonga, Uzbekistan, Vanuatu, Vietnam Law Reguquality Political Govereffect Corruption shortdebt Longdebt Totaldebt Gdpg Capexpeng Currexpeng expeng taxg Correlation Law -0.404*** -0.384***-0.376***-0.102 -0.307***0.250***-0.024 0.667***0.932***0.915*** 0.677***0.844***1.000 0.000 0.000 0.000 0.093 0.000 0.000 0.672 0.000 0.000 0.000 0.000 0.000 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Results and discussion The panel data estimations from OLS to Fixed effects (FEM) and Random effects (REM) are recruited Due to the limitations of OLS in panel data estimations such as heteroskadesticity and endogeneity (Kiviet, 1995), thus FEM and REM are used to solve individual effect of panel data (Ahn & Schmidt, 1995) Next sections present the estimation results 4.1 Governance quality, external debt, and tax First of all, we estimate the impacts of governance quality and external debt on fiscal policy, the results are presented in Table The significant positive effects of GDP growth rate on tax revenue show the sense theory, higher output growth higher tax revenue Table Governance quality, total external debt, and tax Tax g Gdpg(-1) Corruption Govereffect Political Reguquality Law Constant R2-ad/R2-between R2-overall F-test/Wall-chi2 No of countries Hausman test (REM ) (REM ) 0.423*** 0.428*** 0.405*** Debt(-1) 0.021** 0.015 -1.782*** -2.108*** (REM ) 0.453*** 0.026** 0.027*** (REM ) (REM ) 0.430*** 0.019* -1.195*** -2.338*** -2.051*** 1.790** 2.360*** 2.310*** R /R2-within 0.061 0.745 0.795 0.250 0.263 85.24*** 98.66*** 99.40*** N 280 280 28 28 3.15 3.86 2.195*** 0.052 0.049 0.633 0.216 56.38*** 280 1.793*** 0.052 0.787 0.270 101.97*** 280 0.799 0.265 28 5.72 28 3.70 28 2.97 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively 0.057 280 While the significant positive effects of total external debt ratitos on tax revenue growth rate indicate that Asia Countries with higher ratio of external debt will raise their tax revenue to offsore Policies and Sustainable Economic Development | 546 the burdent in debt That means Asia Pacific governments use taxations as a tool to solve the higher external debt that may reduce the disposibal income and may harm the economic growth Meanwhile, the governance quality of governments through all indicators including the corruption control, the political stability, the governance effective, the regulatory quality and the law quality have significant negative effects on tax revenue growth This result indicates that the government with higher governance quality will raise their taxes lower than the lower one, which also highlights the effective of government in taxation policy that reduces the tax shocks for the economy In total external debt, we divide into long-term external debt and shortterm external debt and estimate the impacts of these on the tax revenue, results are presented in Tables and Table Governance quality, long-term external debt, and tax Taxg Gdpg(-1) 1.557*** Govereffect Political Reguquality Law Constant 2 R -ad/R -between R2-overall F-test/Wall-chi2 No of countries Hausman test (REM ) (REM ) 0.421*** 0.425*** 0.403*** LongDebt(-1) 0.024** 0.029** (REM ) 0.457*** 0.029** (REM ) 0.425*** 0.030** 0.023* Corruption - -1.916*** -1.143*** -2.051*** -1.878*** 1.976*** 2.470*** 2.421*** R /R2-within 0.051 0.055 0.746 0.792 0.250 0.263 85.22*** 98.23*** 98.98*** N 280 280 28 3.15 28 3.75 1.868** 0.060 0.672 0.225 63.19*** 280 2.072*** 0.051 0.049 0.777 0.266 100.16*** 280 28 6.35 28 3.82 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table 10 (REM ) 0.797 0.264 280 28 2.94 Governance quality, short-term external debt, and tax Taxg Gdpg(-1) Corruption Govereffect Political Reguquality Law Constant 2 R -ad/R -between R2-overall F-test/Wall-chi2 No of countries Hausman test 11 12 (REM (REM ) ) 0.414*** 0.428*** 0.402*** ShortDebt(-1) -0.022 0.080** -1.967*** -2.347*** 13 (REM ) 0.429*** 14 (REM ) 0.434*** 0.051 0.043 15 (REM ) 0.045 -0.997*** -2.887*** -2.282*** 2.459*** 2.835*** 2.734*** R /R2-within 0.053 0.055 0.701 0.772 0.239 0.257 71.71*** 95.65*** 96.84*** N 280 280 28 28 2.92 4.15 3.344*** 0.064 0.609 0.210 52.35*** 280 2.077*** 0.054 0.050 0.772 0.265 99.73*** 280 28 5.10 28 3.93 0.782 0.260 280 28 3.43 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively The estimation results show the interesting results, while both kinds of external debts have positive effects on tax revenue growth rate, only long-term external debts have significant statistical evidences These results show that only long-term debts have significant effects on taxation policy of Asia Pacific countries, which means that Asia Pacific governments pay more attention to long-term external debts in fiscal policy conducting than short-term external debts However, short-term external debts are the short-term liabilities of governments, if they can repay at the maturity, they may face to pressure of compulsory default which is very danger for their national financial securities So, it is clear that Asia Pacific governments have attention to external debt in planning fiscal policies, especially the long-term external debts They are also difference in taxation policies due to the difference in their governance qualities Next section presents the impacts of external debt and governance quality on government’s expenditures 4.2 Governance quality, external debt, and total government expenditure As the same evidences of tax, the results in Table show that the government at country with higher growth rate of output will spend more, it makes sense due to the higher tax revenue will allow the government has more fund to spend and simulate their economy 542 | Policies and Sustainable Economic Development Table Governance quality, total external debt and total government expenditure Expe ng Gdpg(-1) Debt(-1) Corruption Govereffect Political Reguquality Law Constant 2 R -ad/R -between R2-overall F-test/Wall-chi2 No of countries Hausman test 16 (FE M) 0.494*** -0.056*** -0.696 17 (FE M) 0.492*** -0.057*** 18 (FE M) 0.514*** -0.062*** 19 (FE M) 20 (FEM ) 0.498*** -0.056*** 0.493*** -0.053*** -4.188** -2.376** -2.372* -1.976 5.562*** 5.487*** 5.251*** R2/R2-within 0.189 0.189 0.305 0.431 0.208 0.238 16.96*** 19.33*** 17.41*** N 280 280 280 5.036*** 5.285*** 0.170 0.178 0.240 0.170 19.34*** 280 0.353 0.219 18.00*** 280 28 28 28 28 16.04*** 18.42*** 18.01*** 16.60*** 0.173 0.426 0.249 28 13.16*** Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Meanwhile, the significant negative effects of total external debt ratio on total expenditure of government indicate that higher external debt will limit the government in expendituring or in fiscal policy expansion Besides, the significant negative effects of government effective, political stability and regulatory quality on total government’s expenditures are the evidences of the higher governance quality the lower government’s expenditures That means the government with higher quality will control their expenditures better We continue estimate the impacts of external debts on government’s expenditures through long- term external debt and short-term external debt that show the same evidences as in tax revenue models (Tables and 9) Table Governance quality, long-term external debt, and total government expenditure Expeng Gdpg(-1) LongDebt(-1) 0.068** Corruption Govereffect Political Reguquality 21 (FE M) 0.489*** 0.489** -0.072*** 22 (FEM) 0.488*** 23 (FE M) 0.509*** 24 (FE M) 0.494*** -0.072*** -0.076*** -0.070*** -0.607 -4.079** -2.244** -2.205 25 (FE M) - * * Law Const ant R2/R2-within 2 R -ad/R -between R -overall F-test/Wall-chi2 N No of countries Hausman test 5.626*** 0.174 0.238 0.189 17.51*** 28 28 15.50*** 5.473*** 0.19 0.434 0.24 19.79*** 280 28 17.53*** 4.992*** 0.19 0.20 0.16 19.67*** 28 28 20.29*** 1.78 0.177 5.300*** 0.18 0.33 0.22 18.42*** 0.399 0.247 17.88*** 280 280 28 28 15.73*** 12.88*** Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table Governance quality, short-term external debt, and total government expenditure Expe ng Gdpg(-1) Corruption Govereffect Political Reguquality Law Constant 2 R -ad/R -between R2-overall F-test/Wall-chi2 No of countries Hausman test 26 (REM ) 27 (FE M) 0.568*** 0.510*** 0.550*** ShortDebt(-1) -0.011 -0.061 -1.932*** -4.284** 28 (REM ) 0.571*** 29 (FE M) 0.517*** 0.071* 0.058* 30 (REM ) -0.061 -0.873** -2.654* -2.138*** 1.438** 3.330*** 1.815*** R /R2-within 0.165 0.153 0.734 0.539 0.341 0.270 108.53*** 16.39*** 113.99*** N 280 280 280 28 28 6.04 8.02** 2.520*** 3.149*** 0.138 0.156 0.570 0.296 78.61*** 280 0.508 0.268 15.29*** 28 5.81 28 8.08** 0.144 0.743 0.351 280 28 4.49 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively These results in Tables and show that long-term external debts have significant effects on total government’s expenditures, while we cannot find the statistical evidences of the impacts of short-term external debts It once again remarks the important of long-term external debt in fiscal policy conductiong at Asia Pacific countries 4.3 Governance quality, external debt, and current government expenditure We then test the impacts of governance quality and external debt on current expenditures and capital expenditures of Asia Pacific countries This section presents the impacts on current expenditures in Tables 10, 11 and 12 The results in Table 10 show that current expenditure of Asia Pacific countries are significant negative effects by the total external debt These evidences are same as above with the total expenditure of governments While the governance quality such as government effective, political stability and regulatory quality explain the differences in expenditure growth rates between Asia Pacific countries Higher governance quality lower expenditure growth rate, it means the more regulated fiscal policy Table 10 Governance quality, total external debt, and current expenditure Currexp eng Gdpg(-1) Debt(-1) Corruption Govereffect Political Reguquality Law Constant R2-ad/R2-between R2-overall F-test/Wall-chi2 No of countries Hausman test 31 (FE M) 0.407*** -0.047** -0.687 32 (FE M) 0.402*** -0.044** 33 (FE M) 0.433*** -0.051** 34 (FE M) 0.410*** -0.046** 35 (FEM ) 0.405*** -0.044** -4.138** -3.289*** -2.341* -1.853 5.761*** 5.567*** 5.554*** R /R2-within 0.169 0.189 0.268 0.384 0.186 0.215 12.58*** 14.94*** 13.00*** N 249 249 5.031*** 5.540*** 0.146 0.157 0.233 0.159 17.20*** 249 0.297 0.190 13.70*** 249 25 25 25 25 13.25*** 14.45*** 18.98*** 12.89*** 0.150 0.404 0.235 249 25 10.21** *, **, *** are significance levels at 10%, 5% and 1% respectively Meanwhile, the results in Tables 11 and 12 remark the more important role of long-term external debt in fiscal policy conducting than short-term external debt Table 11 Governance quality, long-term external debt and current government expenditure Currexpeng Gdpg(-1) LongDebt(-1) 0.056** Corruption Govereffect Political Reguquality 36 (FE M) 0.403*** 0.402*** -0.060** 37 (FEM) 38 (FEM) 39 (FEM) 0.400*** 0.431*** 0.407*** -0.055** -0.060** -0.057** -0.624 -4.030** -3.159*** -2.201 40 (FE M) - Law 1.696 - Currexp eng Constant 2 R -ad/R -between R2-overall F-test/Wall-chi2 No of countries Hausman test 36 37 (FEM (FEM ) ) 5.779*** 5.531*** 5.569*** R2/R2-within 0.171 0.189 0.195 0.379 0.161 0.219 12.92*** 15.17*** 13.27*** N 249 249 38 (FEM ) 4.878*** 39 (FEM ) 5.501*** 0.149 0.159 0.209 0.153 17.21*** 249 0.276 0.190 13.91*** 249 25 25 25 25 13.25*** 14.82*** 20.96*** 40 (FEM ) 0.153 0.373 0.229 249 25 13.04*** Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table 12 Governance quality, short-term external debt, and current expenditure Currexp eng Gdpg(-1) Corruption Govereffect Political Reguquality Law Constant R2-ad/R2-between R2-overall F-test/Wall-chi2 No of countries Hausman test 41 42 (REM (FE ) M) 0.473*** 0.416*** 0.457*** ShortDebt(-1) -0.073 -1.813*** -4.467*** 43 (FE M) 0.450*** 0.044 44 (REM ) 0.473*** 0.054 0.046 45 (REM ) -0.041 -3.377*** -2.036*** -2.101*** 2.283*** 3.804*** 2.612*** R2/R2-within 0.153 0.171 0.692 0.482 0.328 0.247 79.76*** 13.34*** 86.20*** N 249 249 25 25 4.77 6.48* 3.248*** 2.552*** 0.122 0.132 0.347 0.201 15.21*** 249 0.625 0.309 71.03*** 249 25 9.18** 25 5.81 0.128 0.710 0.341 249 25 3.48 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively 4.4 Governance quality, external debt, and capital government expenditure As last part of this study, we test the impacts of external debt and governance quality on capital expenditure of Asia Pacific countries Results are presented in Tables 13, 14, 15 Table 13 Governance quality, total external debt, and capital expenditure Caprexpeng Gdpg(-1) Debt(-1) Corruptio n Govereffe ct Political Reguquali ty Law Constant R2/R2within R2-ad/R2-between R2-overall 46 (REM ) 0.918*** 47 (REM) 48 (REM) 0.974*** 49 (REM ) 0.931*** 0.896*** -0.005 -0.004 50 (REM) 0.919*** -0.018 -0.007 -0.011 1.05 -0.954 -1.025 -1.657 0.14 0.686 0.027 0.374 0.048 12.24*** 249 0.91 0.02 1.32 0.02 0.83 0.02 1.09 0.02 0.41 0.05 0.34 0.046 0.37 0.04 0.36 0.04 12.84*** 249 11.71** * 249 12.07*** 12.10*** 249 249 25 25 25 25 F-test/Wall0.99 0.71 0.25 0.35 chi2 N No of countries Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively 25 0.66 Table 14 Governance quality, long-term external debt, and capital expenditure Caprexpeng Gdpg(-1) LongDebt (-1) Corruptio n Govereffe ct Political Reguquali ty Law Constant R2/R2within R2-ad/R2-between R2-overall F-test/Wallchi2 N 51 (REM ) 0.920*** -0.013 52 (REM) 54 (REM) 55 (REM) 0.898*** 53 (REM ) 0.983*** 0.934*** 0.920*** -0.016 -0.016 -0.015 -0.018 1.12 -1.060 -1.052 1.69 0.920 0.028 0.372 0.048 12.28*** 0.04 1.32 0.02 0.99 0.02 1.01 0.02 1.24 0.02 0.41 0.05 0.34 0.04 0.37 0.047 0.36 0.04 12.92*** 11.63*** 12.12*** 12.15*** 249 249 249 249 249 25 25 25 25 25 4.39 0.56 0.25 0.24 0.56 No of countries Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table 15 Governance quality, short-term external debt, and capital expenditure Caprexp eng Gdpg(-1) Corruption Govereffect Political Reguquality Law Constant R2/R2-within R2-ad/R2-between R2-overall F-test/Wall-chi2 No of countries Hausman test 56 57 (REM (REM ) ) 0.923*** 0.908*** 0.921*** ShortDebt(-1) 0.065 -0.050 0.009 -1.469 -2.316 58 (REM ) 0.955*** 59 (REM ) 0.937*** 0.043 0.034 60 (REM ) 0.249 -1.547 -0.140 0.027 0.383 0.048 12.31*** 12.05*** N 249 25 0.92 -0.069 0.027 0.435 0.051 13.06*** 249 1.129 0.026 0.353 0.046 11.74*** 249 0.025 0.026 0.385 0.047 12.09*** 249 25 0.69 25 0.09 25 0.34 -1.116 0.445 0.027 0.370 0.047 249 25 0.65 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively It is surprising that total external debts have unsignificant negative effects on capital expenditure, while the growth in output has strong significant positive effects This defines the significant impacts of the economy situation on government fiscal policy in capital expenditure, while they are not care too much on external debt Besides that, the differences in governance quality also don’t significant negative effects on capital expenditure growth rate This show the differenves in capital expenditure between Asia Pacific ountries may not due to differences in their governance quality The results in Tables 14 and 15 have the same ideas Conclusion This study examines the impacts of external debts and institution on fiscal policy through the taxation and government expenditures at Asia Pacific countries in 2002-2013 period Using the panel data 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China Japan World East Asia and Pacific countries Korea Australia India Pacific Islands Figure Economic growth in Asia Pacific, US, and the world Source: World Bank External debts in some Asia. .. thus we incorpeate the governance quality of government into function of tax and expenditure in equations (11) and (12) to define the responses of fiscal policy to external debt and governance quality... significance levels at 10%, 5% and 1% respectively Meanwhile, the results in Tables 11 and 12 remark the more important role of long-term external debt in fiscal policy conducting than short-term external