Summary of PhD thesis: Public expenditure, governance and economic growth in developing countries

The scope of this study is the relationship between public expenditure, governance and economic growth, along with other variables such as investment, human capital and public debt in developing countries for the period 1998-2016

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY -TRAN TRUNG KIEN PUBLIC EXPENDITURE, GOVERNANCE AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES Major: Finance and Banking Code: 62460201 SUMMARY OF PHD THESIS Academic Advisors Prof Dr SU DINH THANH TP Hồ Chí Minh – năm 2018 CHAPTER 1: INTRODUCTION 1.1 The reason for study The reason for choosing the research topic comes from factual context and research gap The practical context shows that the impact of public expenditure on economic growth be extremely essential in developing countries Although the situation is different, the common denominator in developing countries is that along with high economic growth, these countries are facing with increasing public expenditure problems, large budget deficits and poor public governance Literature review shows that the impact of public expenditure on economic growth in developing countries remains controversial Interpretation of the results of the combined test for the economic impact of public expenditure, some studies point to factors affecting the impact of public expenditure on economic growth, including: expenditure structure, how public expenditure is financed, growth rates, threshold values and the quality of public governance (Afonso & Jalles, 2016; Gemmell et al., 2012; Halkos & Paizanos, 2016) Previous papers consider each of these factors individually, so it does not provide comprehensive empirical evidence on the impact of public expenditure on economic growth (Halkos & Paizanos, 2016) Governance is a multidimensional concept (Acemoglu, 2008, Quibria, 2014) Accordingly, the subject of the thesis is "Public Expenditure, Governance and Economic Growth in Developing Countries" The thesis examines the relationship between public expenditure and economic growth in budget constraints as well as the role of public governance in developing countries for the period between 1998 and 2016.Theo đó, đề tài mà luận án hướng đến “Chi tiêu công, quản trị công tăng trưởng kinh tế quốc gia phát triển” 1.2 The objectives and research questions The thesis addresses two main research objectives: (1) Evaluate the impacts of public expenditure to economic growth in the budget constraint and (2) evaluate the role of governance in the relationship between public expenditure and economic growth in developing countries The thesis aims to answer the specific research questions as follows: + What is the role of budget constraints in the relationship between public expenditure and economic growth in developing countries? + Is there a difference in the economic efficiency of public expenditure components between pre- and post-crisis period? For the second research objective, the research questions should be addressed as follows: + How does public governance work to adjust the impact of public expenditure components on economic growth in developing countries? + What is the role of political institutions in adjusting the impact of public expenditure components on economic growth in developing countries? 1.3 Research method Analysis and discussion are mainly based on GMM Approach In addition, the thesis finds threshold values by Hansen's method (1999) 1.4 Scope of the Study The scope of this study is the relationship between public expenditure, governance and economic growth, along with other variables such as investment, human capital and public debt in developing countries for the period 1998-2016 1.5 Result and new contributions For the first objective, the analysis which examines the role of budget constraints, public expenditure components, non-linear effect and economic crisis in the relationship between public expenditure and economic growth is an interesting point of the thesis For the second goal, the difference of the thesis is analyzing governance in many dimensions in the relationship between public expenditure and economic growth 1.6 Research strategy The thesis consists of the following main steps: (1) Outline the theories; (2) Identify objectives and research questions (3) Establish empirical models and data collection; (4) Result and analyze; (5) Conclusions and policy implications 1.7 Thesis’s Structure The thesis consists of main chapters Apart from chapter I, the thesis contents are structured as follows: Chapter II: Literature review; Chapter III: evaluating the impact of public expenditure structure on economic growth in budget constraints; Chapter IV: Evaluating the role of government in the relationship between public expenditure and economic growth ;Chapter V: Conclusions and Policy Implications CHAPTER 2: LITERATURE REVIEW 2.1 Related concepts 2.1.1 Economic growth Economic growth is an increase in the productivity of a country over time 2.1.2 Public expenditure 2.1.2.1 The concept Public expenditure is understood as the distribution and use of public financial resources of the government Public expenditure is also considered as an important financial tool of the state, helping the state intervene in economic activities to stabilize the macroeconomic environment (Su Dinh Thanh & Bui Thi Mai Hoai, 2009) 2.1.2.1 Productive and unproductive expenditure In endogenous growth models, according to Kneller & ctg (1999), the classification of productive expenditure or unproductive expenditure is based on whether the public expenditure is included in the production function or not In empirical research, it is difficult to distinguish between productive expenditure and unproductive expenditure (Devarajan et al., 1996; Gemmell et al., Knoss & ctg, 1999) The thesis classifies productive expenditure and unproductive expenditure components based on the study by Bayraktar & Moreno- Dodson (2015) In particular, the components of expenditure on education, health, communication and transport 2.1.3 Governance Governance is a multi-dimensional concept, consisting of three main aspects: political institutions; government effectiveness; and legal framework (Acemoglu, 2008; Quibria, 2014) 2.2 The relationship between public expenditure and economic growth 2.2.1 Relationship between public expenditure and economic growth The relationship between public expenditure and growth is interpreted by various theories 2.2.1.1 Wagner’s Law According to Wagner's Law, economic growth, due to industrialization, will lead to an increase in public expenditure 2.2.1.2 Keynesian Growth Model According to this theory, public expenditure is considered as a derivative of economic growth 2.2.1.3 Neo-classical growth theory In contrast, neoclassical theory makes the hypothesis of the "overriding" effect of public expenditure on private investment 2.2.1.4 Ricardian equivalence Ricardian equivalence states that fiscal policy does not have the effect of "boosting" and "overrunning" private capital (Barro, 1974; Zagler & Dürnecker, 2003) 2.2.1.5 Endogenous growth theory Endogenous growth models are expanded in different trends Some scholars have expanded, examining the role of government spending in endogenous growth models, which are typical of Barro (1990) and Devarajan & ctg (1996) 2.2.1.6 Armey curve The Armey curve shows that there is a nonlinear relationship between public expenditure and economic growth 2.2.2 Public expenditure composition and economic growth Devarajan et al (1996) based on Barro's model (1990) to model the study, examining the various components of public expenditure on economic growth Thus, the relationship between public expenditure and growth is interpreted by various theoretical foundations and developed in different trends Concluding from the above discussion, the thesis builds on the relationship between public expenditure and economic growth as the impact of public expenditure on economic growth depends on the structure of public expenditure and the way in which these expenditures are funded and the impact is different in each case 2.2.3 The relationship between public expenditure and economic growth in budget constraint Based on previous studies, the thesis extends Barro (1990) in order to analyze the role of budget constraints and public expenditure components in the relationship between public expenditure and economic growth:: 𝑘𝑡+1 −𝑘𝑡 𝑘𝑡 = −1 + 𝛼 (1 − 𝛼)𝜏]𝐴 𝑥 𝛽 1+𝛽 1−𝛼 𝛼 (1 − 𝜏)(1 − 𝛼)𝐴𝑧𝑡1−𝛼 𝑘𝑡𝛼−1 − [𝑔 + 𝑥 − − (1 + 𝛼𝐴𝛼 𝑥 1−𝛼 𝛼 𝑑 ) 𝑘𝑡 𝑡 With yt is the output, zt is productive expenditure, kt is investment Each individual has wages wt , real interest rate rt+1 and tax rate τ Assume that in the equilibrium of the economy, the ratio dt kt số Thus, the equation implies the effect of public expenditure on economic growth: β + In the first part of the right-hand equation (−1 + 1+β (1 − τ)(1 − α)Azt1−α k α−1 ), An increase in public expenditure (z) will t have a positive effect on economic growth However, this section CHAPTER 3: EVALUATE THE IMPACTS OF PUBLIC EXPENDITURE TO ECONOMIC GROWTH IN THE BUDGET CONSTRAINT 3.1 The context of public expenditure and economic growth in developing countries Despite the differences, the common denominator in developing countries is that, coupled with high economic growth, the scale of public expenditure is increasing in scale and at a high level The structure of public expenditure has also changed This is indeed a challenge for developing countries so solutions improving the economic impact of public expenditure Developed countries are very necessary and urgent 3.2 Empirical model 𝑙𝑛yit − lnyit−1 = β1 lnyit−1 + β2 lnk it + β3 lnhit + β4 lng it + β5 Zit + ηi + εit ηi ~ i.i.d (0, ση) ; εit ~ i.i.d (0, σε ) ; E(ηi εit ) = i and t are specified for the country and time dlny𝑖𝑡 = lnyit − lnyit−1 is the variable of economic growth; yt-1 is the initial GDP; kit is invesment; hit is human capital; gitis public expenditure; Zit includes openess (openit) and public debt (dit) 3.3 Research data Most of the variables were collected from: WEO from IMF, PWT 9.0 from Groningen university; SPEED from IFPRI 3.4 Empirical method Analysis and discussion are mainly based on GMM Approach In addition, the thesis finds threshold values by Hansen's method (1999) 11 3.5 Result 3.5.1 Public expenditure and growth The thesis examines the impact of public expenditure on economic growth in developing countries for the period 1998-2016 The thesis adds interactive variables between public expenditure and public debt, budget deficit: Table: Impact of public expenditure on economic growth Dependent variable: economic growth (dlnyit) Biến GDP (-1) (1) (2) (3) -0.6797*** -0.5991*** -0.679*** Investment 0.4766*** 0.4777*** 0.277*** Human Capital 5.1043*** 4.6285*** 4.310*** -0.7703*** -0.6902*** -0.0036 -0.0075 0.0007 -0.0748 -0.2164*** -0.078 -0.145*** Public Expenditure Openness Public debt Budget Deficit -0.019*** Public Expenditure * public debt Public Expenditure * Budget Deficit -0.0001* -0.0002* Hansen test 0.1441 0.1644 0.3153 Sargan test 0.4416 0.1513 0.9754 AR(2) test 0.6933 0.1839 0.1425 Instruments 36 37 33 Cross-sections 66 66 66 Note: *, **, *** respectively correspond to levels of significance of 10%, 5%, 1% 12 3.5.2 Public expenditure composition and economic growth The thesis separates public expenditures into productive expenditure, g1, and unproductive expenditure, g2 Similarly, the thesis added suitable interactive variables: Table: Impact of public expenditure components on economic growth Dependent variable: economic growth (dlnyit) Productive expenditure Biến GDP (-1) (1) (2) (3) -0.7002*** -0.6750*** -0.6502*** Investment 0.3999*** 0.2388*** 0.0348 Human Capital 4.9215*** 4.5301*** 3.5433*** -0.017 -0.010 -0.052 -0.1938*** -0.1308*** -0.1551*** 0.0742** 0.1032** 0.1256** -0.3973*** -0.3106*** -0.0516 Openness Public Debt Productive Expenditure Unproductive Expenditure Productive Expenditure* Public Debt -0.0002* Budget Deficit -0.0185** Productive Expenditure* Budget Deficit -0.0008** Hansen test 0.122 0.200 0.1245 Sargan test 0.348 0.572 0.859 AR(2) test Instruments 0.900 43 0.485 50 0.1949 42 66 66 66 Cross-sections 13 Unproductive expenditure Biến GDP (-1) (5) (6) -0.7185*** -0.6416*** Investment 0.2823*** 0.02 Human Capital 4.6553*** 3.4029*** Openness -0.0285** -0.0611 -0.0627* -0.1565*** 0.044 0.1045** -0.3149*** -0.0255 Public Debt ProductiveExpenditure UnproductiveExpenditure UnproductiveExpenditure* Public Debt Budget Deficit -0.0000** -0.0188** UnproductiveExpenditure* Budget Deficit -0.0002** Hansen test 0.185 0.124 Sargan test 0.401 0.494 AR(2) test 0.949 0.576 Instruments 50 50 Cross-sections 66 66 The impacts of productive and unproductive expenditures are as expected The interactive variables between public expenditure components and budget decifit, public debt have shown significant negative impacts on economic growth 3.5.3 Economic crisis and the growth effect of public expenditure The thesis uses dummy variables to analyze the impact of public expenditure components on economic growth before and after the economic crisis in 2008 14 Dummy variables are statistically significant This implies the impact of public expenditure components on economic growth before and after the crisis is different 3.5.4 Non-linear effect of public expenditure on economic growth Threshold values of productive expenditure and unproductive expenditure are respectively 2.838% GDP, 17.025% GDP The thesis adds interactive variables between public expenditure components and public debt, budget balance in each threshold regimes The results show that the negative impact of budget deficit and public debt on the economic impact of public expenditure components is only statistically significant when the components of public non-production expenditure exceed the level 17,025% of GDP CHAPTER 4: EVALUATE THE ROLE OF GOVERNANCE IN THE RELATIONSHIP BETWEEN PUBLIC EXPENDITURE AND ECONOMIC GROWTH 4.1 Governance indicator Governance indexes vary widely, with the WGI indicator set (2017) being most commonly used (Resnick & Birner, 2006) However, these public governance indicators still bear different criticisms of the accuracy and meaning of these indicators Accordingly, in addition to the WGI indicators (2017), the thesis uses the political regimes index from DPI to examine the differences in political institutions in this study 15 4.2 The context of governance in developing countries The governance in developing countries is still limited (WGI, 2017) The thesis analyzes the impact of public expenditure on economic growth in developing countries where the political system is parliamentary and not parliamentary Accordingly, public expenditure and economic growth in these countries are different 4.3 Empirical Model 𝑙𝑛yit − lnyit−1 = β1 𝑙𝑛yit−1 + β2 𝑙𝑛k it + β3 𝑙𝑛hit + β4 lng it + β5 govijt + β6 Zit + ηi + εit govijt is governance, measured by governance index j 4.4 Research Data Data collected from reliable sources is presented in the previous chapter The dissertation uses the WGI Indicators and dummy variables on political regimes, which are collected from DPI dataset 4.5 Result 4.3.1 The role of governance in the relationship between public expenditure and growth The thesis uses interactive variables to explore the interaction between public expenditure components and governance: Table: Impact of public governance, public expenditure components on economic growth Dependent variable: economic growth (dlnyit) Biến (1) (2) (3) -0.720*** -0.747*** -0.666*** Investment 0.283*** 0.240*** 0.411*** Human Capital 4.273*** 4.855*** 3.819*** Openness -0.032** -0.002 -0.049*** GDP(-1) 16 Public Debt ProductiveExpenditure UnproductiveExpenditure Governance -0.187*** -0.222*** -0.072*** 0.064*** 0.106*** 0.098** -0.314*** -0.357*** -0.502*** 0.303*** 0.111* 0.451*** ProductiveExpenditure* 0.040*** Governance Governance -0.007* Hansen test 0.46 0.818 0.477 Sargan test 0.141 0.387 0.14 AR(2) test 0.702 0.488 0.697 Instruments 50 58 51 Cross-sections 66 66 66 The large-scale of productive expenditure creates a positive effect, exacerbating the positive impact of governance on economic growth In contrast, the large-scale of unproductive expenditures reduces the positive effects of governance on economic growth 4.3.2 The role of political institutional differences in the relationship between public expenditure and growth The thesis uses appropriate interactive variables to explore the interaction between public expenditure components and public governance and political institutions: Table: Public governance of public expenditure and economic growth in developing countries have different political institutions Dependent variable: economic growth (dlnyit) 17 Biến GDP (-1) (1) (2) (3) -0.724*** - - Investment 0.276*** 0.688*** 0.243*** 0.700*** 0.202*** Human capital 4.283*** 4.005*** 3.808*** Openness -0.032** - - Public debt ProductiveExpenditure -0.188*** 0.060** 0.041***0.029 0.182*** 0.052***0.041* 0.160*** UnproductiveExpenditure -0.309*** - -0.107** 0.293*** 0.243*** 0.284*** 0.260*** 0.154* 0.055 1.207*** Governance Political institution ProductiveExpenditure* 0.02 Political Institution UnproductiveExpenditure* - Political Institution 0.043*** Hansen test Sargan test 0.477 0.14 0.583 0.205 0.89 0.202 AR(2) test 0.697 0.334 0.409 Instruments 51 59 59 Cross-sections 66 66 66 Dummy variables are statistically significant imply differences in the impact of variables on economic growth in developing country which are different political institutions The thesis draws the conclusion that, to improve the gowth effect of public expenditure, developing countries should combine public expenditure and governance strategies However, these policies need to be considered in detail in each case because of differences in the level of governance and political institutions 18 CHAPTER 5: CONCLUSION AND POLICY IMPLICATION 5.1 Conclusion 5.1.1 Theory respect For the first objective, the analysis which examines the role of budget constraints, public expenditure components, non-linear effect and economic crisis in the relationship between public expenditure and economic growth is an interesting point of the thesis For the second goal, the difference of the thesis is analyzing governance in many dimensions in the relationship between public expenditure and economic growth 5.1.2 Empirical respect The results show that the productive expenditure has positive impact on growth, while unproductive expenditure has negative impact on economic growth The thesis also implies the role of budget balance and public debt in the relationship between public expenditure and growth The threshold values of productive expenditure and unproductive expenditure are repectively 2.838% GDP, 17.025% GDP In addition, negative effects of budget decifit and public debt are only significant when productive expenditure exceeds 17.025% GDP Governance generally has positive effect on growth in developing countries Besides, difference in political institution plays an important role in the relationship between public expenditure and growth in developing ocuntries 19 5.2 Policy implication 5.2.1 Developing countries From the empirical results, the thesis proposes two main policy implications to improve the impact of public expenditure on economic growth in developing countries 5.2.2 Việt Nam The thesis proposes some more specific policy implications about public expenditure and governance in Vietnam 5.3 Limitations The main limitations of the thesis include: (1) the time of research data is not large enough; (2) does not show the interaction between two constraints and (3) does not adequately analyze the variety of ways public governance impacts economic growth by focusing on physical differences political regime 20 GENERAL CONCLUSION Through five chapters, the thesis focuses on the relationship between governance, public expenditure and economic growth in developing countries for the period 1998-2016 For the first objective, the analysis which examines the role of budget constraints, public expenditure components, non-linear effect and economic crisis in the relationship between public expenditure and economic growth is an interesting point of the thesis For the second goal, the difference of the thesis is analyzing governance in many dimensions in the relationship between public expenditure and economic growth Thus, the thesis draws conclusions about policy implications for improving the ecgrowth effect of public expenditure in developing countries However, these policies can not be applied rigidly because of different political institutions Completing the thesis is a great effort of mine However, the thesis certainly has many shortcomings and limitations I would like to thank you for your understanding and suggestions to help improve my thesis Reference Acemoglu, D (2008) Interactions between governance and growth Governance, growth and development decision-making (pp 1) The World Bank: The World Bank Afonso, A., & Jalles, J T (2016) Economic performance, government size, and institutional quality Empirica, 43(1), 83-109 Altunc, O F., & Aydın, C (2013) The relationship between optimal size of government and economic growth: Empirical evidence from Turkey, Romania and Bulgaria Procedia-Social and Behavioral Sciences, 92, 66-75 21 Barro, R J (1990) Government spending in a simple model of endogeneous growth Journal of political economy, 98(5, Part 2), S103-S125 Bayraktar, N., & Moreno‐Dodson, B (2015) How can public spending help you grow? An empirical analysis for developing countries Bulletin of Economic Research, 67(1), 30-64 Benos, N (2009) Fiscal policy and economic growth: empirical evidence from EU countries Retrieved from https://econpapers.repec.org/paper/pramprapa/19174.htm Brahmbhatt, M., & Canuto, O (2012) Fiscal Policy for Growth and Development Is Fiscal Policy the Answer?: A Developing Country Perspective, Brender, A., & Drazen, A (2013) Elections, leaders, and the composition of government spending Journal of Public Economics, 97, 18-31 Devarajan, S., Swaroop, V., & Zou, H.-f (1996) The composition of public expenditure and economic growth Journal of monetary economics, 37(2), 313344 Gemmell, N., Misch, F., & Moreno-Dodson, B (2012) Public spending and longrun growth in practice: concepts, tools, and evidence In B Moreno-Dodson (Ed.), Is Fiscal Policy the Answer?: A Developing Country Perspective (pp 69) Washington DC The World Bank Halkos, G E., & Paizanos, E Α (2016) Fiscal policy and economic performance: a review Journal of Reviews on Global Economics, 5, 1-15 Hansen, B E (1999) Threshold effects in non-dynamic panels: Estimation, testing, and inference Journal of econometrics, 93(2), 345-368 Herath, S (2012) Size of government and economic growth: A nonlinear analysis Economic annals, 57(194), 7-30 Kneller, R., Bleaney, M F., & Gemmell, N (1999) Fiscal policy and growth: evidence from OECD countries Journal of Public Economics, 171-190 22 Morozumi, A., Veiga, F J., & Veiga, L G (2014) Electoral effects on the composition of public spending and revenue: evidence from a large panel of countries NIPE working paper series, 23, 1-42 Mueller, D C (2015) Public choice, social choice, and political economy Public Choice, 163(3-4), 379-387 Quibria, M (2014) Governance and Developing Asia: Concepts, Measurements, Determinants, and Paradoxes Retrieved from https://www.econstor.eu/handle/10419/128522 Resnick, D., & Birner, R (2006) Does good governance contribute to pro-poor growth?: A review of the evidence from cross-country studies Retrieved from https://ideas.repec.org/p/fpr/dsgddp/30.html Teles, V., & Mussolini, C C (2014) Public debt and the limits of fiscal policy to increase economic growth European Economic Review, 66, 1-15 Thành, S Đ., & Hoài, B T M (2009) Lý thuyết Tài Chính Cơng TP.HCM: NXB Đại Học Quốc Gia TP.HCM Vergne, C (2009) Democracy, elections and allocation of public expenditures in developing countries European Journal of Political Economy, 25(1), 63-77 Zhuang, J., de Dios, E., & Martin, A L (2010) Governance and institutional quality and the links with economic growth and income inequality: With special reference to developing Asia 23 LIST OF AUTHOR’S PUBLICATION Papers Year Journal papers 1.Hiệu ứng ngưỡng chi tiêu 2015 công: Minh chứng thực nghiệm quốc gia phát triển Châu Á 1996-2013 2.Quản trị công, chi tiêu 2017 công tăng trưởng kinh tế quốc gia phát triển 3.Tác động kinh tế chi 2017 tiêu công quốc gia phát triển: Vai trò cán cân ngân sách Quản trị công tăng 2018 trưởng bền vững quốc gia phát triển giai đoạn 1998-2016 Author(s) Trần Kiên Journal Trung Tạp chí Phát triển Kinh tế, ISSN: 1859-1124 Trần Trung Tạp chí Phát triển Kiên Kinh tế, Số ISSN: Sử Đình Thành 1859-1124 Trần Kiên Trần Kiên Trung Tạp chí Nghiên cứu Kinh tế Kinh doanh Châu Á, ISSN: 26159104 Trung Tạp chí khoa học ngân hàng, ISSN:1859-011X Academic conferences 5.Vai trò quản trị cơng, 2016 chi tiêu cơng hội nhập kinh tế quốc gia kí kết TPP 6.Relationship betwwen 2017 public expenditures and economic growth in budget constraint 24 Trần Kiên Trung ICYREB conference 2016 Tran Kien Trung ICUEH conference 2017 Working papers Quy mô chi tiêu công 2015 tăng trưởng kinh tế: Minh chứng thực nghiệm quốc gia Châu Á Quản trị công tăng 2016 trưởng bền vững: Minh chứng thực nghiệm quốc gia Đông Nam Á giai đoạn 2002-2013 Chi tiêu công, quản trị 2017 công tăng trưởng kinh tế quốc gia phát triển giai đoạn 1998-2014 25 Trần Kiên Trung University of Economics Ho Chi Minh City, code: CS-2014-77 Trần Trung University of Kiên Economics Ho Chi Minh City, code: CS-2015-91 Trần Trung Kiên University of Economics Ho Chi Minh City, code: CS-2017-47 ... components on economic growth in developing countries? + What is the role of political institutions in adjusting the impact of public expenditure components on economic growth in developing countries? ... Accordingly, the subject of the thesis is "Public Expenditure, Governance and Economic Growth in Developing Countries" The thesis examines the relationship between public expenditure and economic growth. .. expenditure components and public governance and political institutions: Table: Public governance of public expenditure and economic growth in developing countries have different political institutions