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1 MINISTRY OF EDUCATIONAL & TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY _ NGUYEN PHUONG LIEN PUBLIC FINANCE, GOVERNANCE AND ECONOMIC GROWTH DOCTORAL DISSERTATION Ho Chi Minh City - 2018 MINISTRY OF EDUCATIONAL & TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY _ NGUYEN PHUONG LIEN PUBLIC FINANCE, GOVERNANCE AND ECONOMIC GROWTH Specialization: Finance-Banking(Public Finance) Specialization code: 9340201 DOCTORAL DISSERTATION SUPERVISOR: Prof SU DINH THANH Ho Chi Minh City - 2018 i COMMITMENT I commit that, throughout the whole process, I did this research based on ethical rules and laws for academic scientific research, including creating research ideas, conducting the literature review, collecting data, as well as the data analysis and research interpretation In addition, I commit that I conducted this study by myself The dissertation uses the data and analysis that I did by myself Committed by PhD student ii ACKNOWLEDGEMENTS First, I would like to express my deepest appreciation to my supervisor, Professor Sử Đình Thành, for his lectures as well as coaching me while I performed this research Without his instructions and persistent support, this dissertation would not have been possible Second, I would like to thank all UEH’s lecturers who instructed me in my research methods courses during my time as a Ph D student in the University of Economics, Ho Chi Minh City Dr Trần Thị Tuấn Anh’s expert guidance was especially valuable for completing my research with clear and logical interpretations of the methodology Third, I am also grateful to my parents, my young sisters, and my sons for their encouragement in my life I also wish to express my endless thanks to my love for his sacrifice and daily care of me Finally, last but by no means least, thank you to all my colleagues who shared with me their useful comments to help complete my publication iii TABLE OF CONTENT Table of Contents COMMITMENT i ACKNOWLEDGEMENTS ii TABLE OF CONTENT iii ABBREVIATIONS .vii LIST OF TABLES ix LIST OF FIGURES x Abstract: xi CHAPTER INTRODUCTION 1.1 Research background 1.1.1 An overview of the status of global economies in the period 1996–2016 1.1.2 The differences of public finance and growth between developed and developing countries 1.2 Research motivation 10 1.3 Research objectives and research questions 14 1.4 Research scope 15 1.5 Research methods 16 1.6 Research contribution 18 1.7 Structure of dissertation 20 CHAPTER 2: 23 LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT .23 2.1 Introduction 23 2.2 Some key concepts 24 2.2.1 Public finance 24 a) Tax revenue 25 b) Government expenditure 26 iv 2.2.2 Governance and corruption 27 2.3 Theoretical literature on the relationship between public finance and economic growth 33 2.3.1 Public choice theory 33 2.3.2 Cost-benefit theory of taxation 35 2.3.3 Governance theory 37 2.3.4 Economic growth theory: Exogenous and endogenous growth theory 39 2.4 Empirical literature on relationships among public finance, governance, and economic growth 41 2.4.1 Empirical literature on relationships between public finance, and economic growth 41 2.4.2 Relationship between tax revenue and government expenditures 45 2.5 Designing the analytical framework and building hypotheses .52 2.6 Summary 56 CHAPTER 58 METHODS AND RESEARCH DATA 58 3.1 Introduction 58 3.2 Research models 58 3.2.1 Long-term linkages between public finance, and economic growth .58 3.2 Tax revenue and expenditure relationship 61 3.3 Research data and its source 64 3.3.1 Determining appropriate variables and its sources 64 3.3.2 Collecting secondary data 67 Check balance and essential test 68 Choose appropriate analytical methods 68 3.7 Summary 77 CHAPTER 79 PUBLIC FINANCE, GOVERNANCE, AND ECONOMIC GROWTH: A LONG RUN ANALYSIS 79 4.1 Research data 79 v 4.2 Long-run relationship between public finance and economic growth 83 4.3 Linkage between tax revenue and government expenditure .85 4.4 Results of examining role of governance in modifying effect between public finance and economic growth 86 4.4.1 The role of governance in modifying effect between public finance and economic growth in developing countries 86 4.4.2 The role of governance in modifying effect between public finance and economic growth in developed countries 88 CHAPTER 5: 93 CONCLUSION, IMPLICATION AND LIMITATION 93 5.1 Conclusion 93 5.2 Suggestion to policy makers 95 5.3 Research limitation and future research 96 LIST OF AUTHOR’S PUBLICATION 96 REFERENCES 99 APPENDICIES Table Appendix A1 List of studied countries Table Appendix A2 Table Appendix A3 Table Appendix A4 14 Table Appendix A5 17 Table Appendix A6 18 Table Appendix A7 19 Table Appendix A8 20 Description of variables 21 Correlation matrix 21 HT and IPS unit root test results (normal variables) 22 Results of co-integration test 29 Granger test results 30 vi Results of verification of governance role in modifying economic growth by SUR model 31 Results of verification of governance role in modifying economic growth by SGMM 38 Robustness check with CPI 43 vii ABBREVIATIONS Words GDP Meanings Gross Domestic Products OECD Organization for Economic Co-operation and Development RGDP Real GDP per capita LRGD Logarithm of Real GDP per capita Gexp Government expenditure Taxrev Total Tax revenue RE Random-Effects FE Fixed Effects OLS Ordinary Least Square SGMM System Generalized Method of Moments GMM Generalized Method of Moments SUR Seemingly Unrelated Regression EC Error Correction GLS Generalized Least Square 2SLS Two-stage Least Square HT Harris-Tzavalis (1999) test IPS Im-Pesaran-Shin (2003) test UEH University of Economics Ho Chi minh City USA United States of America US United States UK United Kingdom BI Business International Corporation ICRG International Countries Risk Guide WB World Bank IMF International Moneytary Fund viii UNDP United Nations Development Programme WDI World Development Indicators WGI World Governance Indicator WEO World Economic Outlook HDI Human Development Index CCI Control of corruption indicator CPI Corruption perception index ECM Error correction mechanism model TI Transparency International 40 For 44 developing countries 41 42 43 Robustness check with CPI 8.1 CPI in developed countries (38 countries) 44 45 46 47 9.2 CPI in 44 developing countries 48 49 50 51 52 53 10 Results of VIF’s test: 54 11 Results of non-linear test - FDI – Lrgdp - INFL – Lrgdp - HDI – Lrgdp - TAXgdp – Lrdgp - GEXgdp – Lrgdp - CCI – Lrgdp - CPI – Lrgdp