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 Policies and Sustainable Economic Development | 529 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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -5.0 -10.0 US World Australia China East Asia and Pacific countries India Japan Korea 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 2008 2009 Korea 2010 Thailand 2011 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 Policies and Sustainable Economic Development | 531 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 10-year 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 shortrun 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 mid-2000s 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 framework strength has been observed during post-crisis period, the public debt-to-GDP ratio currently reaching around 40%, thus doubling as compared to 2008, while the main drivers of excessive public indebtedness Policies and Sustainable Economic Development | 533 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 outcomes-focused 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 534 | Policies and Sustainable Economic Development 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 order to investigate the impacts of governance quality and external debt on fiscal policy, we denote agency variables as Y is output, T is total tax revenue, 𝚪 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 (𝚪Y1g) has to be bigger than the annual debt payment, this depends on the output growth (g) or the increase in tax rate (𝚪) 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 Policies and Sustainable Economic Development | 535 D2 = G2 + p1 - T2 (5) We assume the new external debt has same borrowing rate and term as the external debt in year 1, total accumulated external debt at the end of year is: D2 + D1 – pp1 (6) Where pp1 is the principle payment in year for exnternal debt D1 Similarly, the new external debt will have same payment term as old debt (p2), therefore total external debt payments in year including principle and interest are: 𝑝1 + 𝑝2 = 𝐷1 ∗𝑖 1+ (1+𝑖)−𝑛 + 𝐷2 ∗𝑖 1+ (1+𝑖)−𝑛 (7) Therefore, the government has to manage fiscal policy in year to balance between total tax revenue, expenditure and external debt payment: T3 – G3 – p1 – p2 (8) We the same progress, at the end of year t the government has to decide their actions in fiscal policy to balance between tax, expenditure and external debt: Tt – Gt – p1 – p2 – … – pt-1 (9) In which, total tax revenue is a function of output and tax rate as defined in equation (2): Tt = 𝚪Yt = [Yt-1*(1+gt)] (10) Meanwhile, total external debt payment depends on the accumulated external debt in previous year, the borrowing rate, the term of debt as defined in equation (7) As assumption, the borrowing rate and the term of external debts are constant in short-term thus the total external debt payment will depend on the accumulated external debt in previous year In addition, the tax and the expenditure decisions of government in fiscal policy are depend on the total external debt payment, thus function of total tax revenue is: f(T) = f(Y,𝚪, g,debt) (11) in which: debt is the accumulated external debt While the government expenditure has the function as: f(G) = f(T, Govde, debt) = f(Y, 𝚪, g, Govde, debt) (12) in which: govde is the government demand of expenditure However, some recent studies investigate the effects of governance quality of government on economic growth and other aspects and find that this factor is important determinants of differences in cross countries (Chen et al., 2014; Helland & Sørensen, 2015) Therefore, the governance quality of government has strong impacts on fiscal policy conducting of government, 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 536 | Policies and Sustainable Economic Development With the empirical methodologies, we recruit the models in Koczan (2015) with variables including tax revenue growth rate, total expenditure growth rate, current expenditure growth rate and capital expenditure growth rate in equations: Taxgit = Debtit-1 + GDPgit-1 + Govquat + ɛit (13) Expengit = Debtit-1 + GDPgit-1 + Govquat + vit (14) Currexpengit = Debtit-1 + GDPgit-1 + Govquat + uit (15) Capexpengit = Debtit-1 + GDPgit-1 + Govquat + zit (16) where: Taxgit is total tax revenue growth rate of country i in year t; Expengit, Currexpengit, Caprxpengit are total expenditure, current expenditure and capital expenditure growth rates of country i in year t; Debtit-1 is vector of ratio of external debt (totaldebt), long-term external debt (longdebt) and short-term debt (shortdebt) on GNI of country i in year t-1, this variable is used to investigate the impacts of external debt on fiscal policy; GDPgit-1 is GDP growth rate of country i in year t-1, this variable is used to present for the output growth rate; the vector of variables in Govquat are Corruption (which indicate the efficience of corruption controlling of country, higher value higher effective), govereffect (which indicate the efficience of government in economic management, higher value higher effective government), reguquality (which indicate the efficience of regulation, higher value higher effective), law (which indicate the efficience of law system, higher value higher effective), political (which indicate the political stability, higher value higher suitability), all these variables are calculated and provided by worldbank in World governance index; ɛ, v, u, z are residuals As an innovation in our papers, we use both current expenditure and capital expenditure to investigate the impacts of external debt and governance quality on fiscal policy due to the difference characteristics of these expenditures in total expenditure (Landau, 1983; Li & Lin, 2011; Nieh & Ho, 2006; Payne, 1998; Ramey, 2009; Şen & Kaya, 2014), thus the response of government in changing these expenditures In which, the current expenditures are more nessessary then the capital expenditures in social security and welfate therefore government is harder to cut off than capital expenditures Next section presents the data in this paper 3.2 Data All data of variables including tax revenue, total expenditure, current expenditure, capital expenditure, GDP growth rate, external debt ratio are collected from Key indicators reports of Asia Development Bank, while the governance quality indicators are collected from the World Bank Worldwide Governance Indicators (Table 1) Policies and Sustainable Economic Development | 537 Table Variable definitions and sources Variables Definitions Sources Taxg Tax revenue growth rate Calculated from reports of ADB Expeng Total expenditure growth rate Calculated from reports of ADB Currexpeng Current expenditure growth rate Calculated from reports of ADB Capexpeng Capital expenditure growth rate Calculated from reports of ADB Gdpg GDP growth rate Calculated from reports of ADB Debt Ratio of external debt on GNI Calculated from reports of ADB Longdebt Ratio of long external debt on GNI Calculated from reports of ADB Shortdebt Ratio of short external debt on GNI Calculated from reports of ADB Corruption Corruption controlling index World Bank Goveffect Governance quality index World Bank Reguquality Regulatory quality index World Bank Law Law system efficiency index World Bank Political Political stability index World Bank The data description in Table shows that the everage ratios of total external debt in Asia Pacific countries is over 46%, meanwhile the long-term external debt is the main debt of these countries While the governance qualities are lower than the zero level that indicate the lower quality in these countries The average economic growth rates are relative high (over 5%) in the line with high growth rate in tax and expenditure of governments However, the standard deviations of capital expenditure growth rates are much higher than current expenditure growth rates that indicate the more volatile in capital expenditure of Asia Pacific countries It also means that Asia Pacific governments change their capital expenditure much more than the changes in current expenditures Table Data description Variables Obs Mean Std Min Max Taxg 308 5.881 5.253 -11.800 23.900 Expeng 308 5.879 5.274 -10.000 29.400 Currexpeng 273 5.708 4.906 -9.800 21.500 Capexpeng 273 5.533 19.390 -94.500 118.400 Gdpg 308 5.644 4.167 -5.500 34.500 Totaldebt 308 46.892 29.266 0.000 153.900 Longdebt 308 36.550 23.419 0.000 150.800 Shortdebt 308 10.344 11.806 0.000 69.100 Corruption 308 -0.311 0.932 -1.490 2.460 Goveffect 308 -0.096 0.819 -1.260 2.040 Political 307 -0.375 1.008 -2.810 1.470 538 | Policies and Sustainable Economic Development Variables Obs Mean Std Min Max Reguquality 308 -0.210 0.780 -1.640 1.970 Law 308 -0.213 0.857 -1.440 1.940 The significant negative of correlations between tax revenue growth rates and current expenditures (Table 3) show that the external debts have negative relationship with tax revenue, meanwhile the significant negative of correlations between tax revenue growth rates with governance quality indicators define that the higher governance qualities the lower tax increase in Asia Pacific countries While both total and current expenditure growth rates have significant negative correlations with both short-term debt and governance quality indicators that indicate the negative effects of short-term debt and governance quality on current expenditure The correlations show that there are correlations between external debt and governance quality with fiscal policy in tax policy and current expenditure Table taxg 1.000 expeng 0.658*** 1.000 0.000 currexpeng 0.537*** 0.817*** 1.000 0.000 0.000 capexpeng 0.307*** 0.550*** 0.114* 0.000 gdpg 0.000 1.000 0.060 0.575*** 0.469*** 0.421*** 0.244***1.000 0.000 Totaldebt -0.076 0.000 0.000 0.000 -0.097* -0.048 -0.085 -0.131** 1.000 0.183 0.089 0.428 0.163 0.021 Longdebt 0.027 -0.016 0.064 -0.061 -0.040 0.923*** 1.000 0.637 0.782 0.294 0.318 0.490 0.000 Shortdebt -0.242*** -0.210*** -0.236*** -0.087 -0.248***0.648***0.305***1.000 0.000 0.000 0.000 0.154 0.000 0.000 0.000 Corruption -0.352*** -0.346***-0.346*** -0.098 -0.269***0.376*** 0.092 0.000 0.000 0.000 0.107 0.000 0.000 0.109 0.751*** 1.000 0.000 Goveffect -0.382*** -0.378*** -0.356*** -0.113* -0.250*** 0.267*** -0.004 0.669***0.909***1.000 0.000 Political 0.000 0.000 0.063 0.000 0.000 0.951 0.000 0.000 -0.255*** -0.216*** -0.252*** -0.034 -0.173*** 0.280***0.119** 0.459*** 0.655*** 0.558*** 1.000 0.000 0.002 0.000 0.000 0.573 0.000 0.038 Reguquality-0.386*** -0.328***-0.298***-0.079 -0.252*** 0.352*** 0.066 0.000 0.000 0.000 0.196 0.000 0.000 0.245 0.000 0.000 0.000 0.741*** 0.829***0.903***0.481***1.000 0.000 0.000 0.000 0.000 Law Reguquality Political Govereffect Corruption shortdebt Longdebt Totaldebt Gdpg Capexpeng Currexpeng expeng taxg Correlation Correlations Law Law Reguquality Political Govereffect Corruption shortdebt Longdebt Totaldebt Gdpg Capexpeng Currexpeng expeng taxg Correlation Policies and Sustainable Economic Development | 539 -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 0.000 0.000 0.093 0.000 0.672 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 (REM) (REM) (REM) (REM) (REM) Gdpg(-1) 0.423*** 0.428*** 0.453*** 0.430*** 0.405*** Debt(-1) 0.026** 0.021** 0.015 0.027*** 0.019* Corruption -1.782*** Taxg Govereffect -2.108*** Political -1.195*** Reguquality -2.338*** Law -2.051*** Constant 1.790** 2.360*** 2.195*** 1.793*** 2.310*** 0.052 0.052 0.057 0.061 0.049 0.745 0.795 0.633 0.787 0.799 0.250 0.263 0.216 0.270 0.265 85.24*** 98.66*** 56.38*** 101.97*** 99.40*** N 280 280 280 280 280 No of countries 28 28 28 28 28 Hausman test 3.15 3.86 5.72 3.70 2.97 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively 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 540 | Policies and Sustainable Economic Development 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 short-term 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 (REM) (REM) (REM) (REM) 10 (REM) Gdpg(-1) 0.421*** 0.425*** 0.457*** 0.425*** 0.403*** LongDebt(-1) 0.030** 0.024** 0.029** 0.029** 0.023* Corruption -1.557*** Taxg Govereffect -1.916*** Political -1.143*** Reguquality -2.051*** Law -1.878*** Constant 1.976*** 2.470*** 1.868** 2.072*** 2.421*** 0.051 0.051 0.055 0.060 0.049 0.746 0.792 0.672 0.777 0.797 0.250 0.263 0.225 0.266 0.264 85.22*** 98.23*** 63.19*** 100.16*** 98.98*** N 280 280 280 280 280 No of countries 28 28 28 28 28 Hausman test 3.15 3.75 6.35 3.82 2.94 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table Policies and Sustainable Economic Development | 541 Governance quality, short-term external debt, and tax Taxg Gdpg(-1) ShortDebt(-1) Corruption 11 (REM) 12 (REM) 13 (REM) 14 (REM) 15 (REM) 0.414*** 0.428*** 0.429*** 0.434*** 0.402*** 0.051 0.045 -0.022 0.080** 0.043 -1.967*** Govereffect -2.347*** Political -0.997*** Reguquality -2.887*** Law -2.282*** Constant 2.459*** 2.835*** 3.344*** 2.077*** 2.734*** 0.054 0.053 0.055 0.064 0.050 0.701 0.772 0.609 0.772 0.782 0.239 0.257 0.210 0.265 0.260 71.71*** 95.65*** 52.35*** 99.73*** 96.84*** N 280 280 280 280 280 No of countries 28 28 28 28 28 2.92 4.15 5.10 3.93 3.43 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test 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 16 (FEM) 17 (FEM) 18 (FEM) 19 (FEM) 20 (FEM) Gdpg(-1) 0.494*** 0.492*** 0.514*** 0.498*** 0.493*** Debt(-1) -0.056*** -0.057*** -0.062*** -0.056*** -0.053*** Expeng Corruption -0.696 Govereffect -4.188** Political -2.376** Reguquality -2.372* Law -1.976 Constant 5.562*** 5.487*** 5.036*** 5.285*** 5.251*** 0.170 0.189 0.189 0.178 0.173 0.305 0.431 0.240 0.353 0.426 0.208 0.238 0.170 0.219 0.249 16.96*** 19.33*** 19.34*** 18.00*** 17.41*** N 280 280 280 280 280 No of countries 28 28 28 28 28 16.04*** 18.42*** 18.01*** 16.60*** 13.16*** 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test 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 longterm 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 21 (FEM) 22 (FEM) 23 (FEM) 24 (FEM) 25 (FEM) Gdpg(-1) 0.489*** 0.488*** 0.509*** 0.494*** 0.489*** LongDebt(-1) -0.072*** -0.072*** -0.076*** -0.070*** -0.068*** Expeng Corruption Govereffect Political Reguquality -0.607 -4.079** -2.244** -2.205 Policies and Sustainable Economic Development | 543 Law -1.782 Constant 5.626*** 5.473*** 4.992*** 5.300*** 5.321*** 0.174 0.193 0.192 0.182 0.177 0.238 0.434 0.208 0.335 0.399 0.189 0.248 0.165 0.221 0.247 17.51*** 19.79*** 19.67*** 18.42*** 17.88*** N 280 280 280 280 280 No of countries 28 28 28 28 28 15.50*** 17.53*** 20.29*** 15.73*** 12.88*** 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table Governance quality, short-term external debt, and total government expenditure Expeng Gdpg(-1) ShortDebt(-1) Corruption 26 (REM) 27 (FEM) 28 (REM) 29 (FEM) 30 (REM) 0.568*** 0.510*** 0.571*** 0.517*** 0.550*** 0.071* -0.061 -0.011 -0.061 0.058* -1.932*** Govereffect -4.284** Political -0.873** Reguquality -2.654* Law -2.138*** Constant 1.438** 3.330*** 2.520*** 3.149*** 1.815*** 0.138 0.165 0.153 0.156 0.144 0.734 0.539 0.570 0.508 0.743 0.341 0.270 0.296 0.268 0.351 108.53*** 16.39*** 78.61*** 15.29*** 113.99*** N 280 280 280 280 280 No of countries 28 28 28 28 28 6.04 8.02** 5.81 8.08** 4.49 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test 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 544 | Policies and Sustainable Economic Development 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 31 (FEM) 32 (FEM) 33 (FEM) 34 (FEM) 35 (FEM) Gdpg(-1) 0.407*** 0.402*** 0.433*** 0.410*** 0.405*** Debt(-1) -0.047** -0.044** -0.051** -0.046** -0.044** Currexpeng Corruption -0.687 Govereffect -4.138** Political -3.289*** Reguquality -2.341* Law -1.853 Constant 5.761*** 5.567*** 5.031*** 5.540*** 5.554*** 0.146 0.169 0.189 0.157 0.150 0.268 0.384 0.233 0.297 0.404 0.186 0.215 0.159 0.190 0.235 12.58*** 14.94*** 17.20*** 13.70*** 13.00*** N 249 249 249 249 249 No of countries 25 25 25 25 25 13.25*** 14.45*** 18.98*** 12.89*** 10.21** R2/R2-within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test *, **, *** 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 36 (FEM) 37 (FEM) 38 (FEM) 39 (FEM) 40 (FEM) Gdpg(-1) 0.403*** 0.400*** 0.431*** 0.407*** 0.402*** LongDebt(-1) -0.060** -0.055** -0.060** -0.057** -0.056** Currexpeng Corruption Govereffect Political Reguquality Law -0.624 -4.030** -3.159*** -2.201 -1.696 Policies and Sustainable Economic Development | 545 36 (FEM) 37 (FEM) 38 (FEM) 39 (FEM) 40 (FEM) 5.779*** 5.531*** 4.878*** 5.501*** 5.569*** 0.149 0.171 0.189 0.159 0.153 0.195 0.379 0.209 0.276 0.373 0.161 0.219 0.153 0.190 0.229 12.92*** 15.17*** 17.21*** 13.91*** 13.27*** N 249 249 249 249 249 No of countries 25 25 25 25 25 13.25*** 14.82*** 20.96*** 13.04*** Currexpeng Constant 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table 12 Governance quality, short-term external debt, and current expenditure Currexpeng Gdpg(-1) ShortDebt(-1) Corruption 41 (REM) 42 (FEM) 43 (FEM) 44 (REM) 45 (REM) 0.473*** 0.416*** 0.450*** 0.473*** 0.457*** 0.054 -0.041 -0.073 0.044 0.046 -1.813*** Govereffect -4.467*** Political -3.377*** Reguquality -2.036*** Law -2.101*** Constant 2.283*** 3.804*** 3.248*** 2.552*** 2.612*** 0.122 0.153 0.171 0.132 0.128 0.692 0.482 0.347 0.625 0.710 0.328 0.247 0.201 0.309 0.341 79.76*** 13.34*** 15.21*** 71.03*** 86.20*** N 249 249 249 249 249 No of countries 25 25 25 25 25 4.77 6.48* 9.18** 5.81 3.48 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test 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 546 | Policies and Sustainable Economic Development Table 13 Governance quality, total external debt, and capital expenditure 46 (REM) 47 (REM) 48 (REM) 49 (REM) 50 (REM) Gdpg(-1) 0.918*** 0.896*** 0.974*** 0.931*** 0.919*** Debt(-1) -0.005 -0.004 -0.018 -0.007 -0.011 Corruption -1.025 Caprexpeng Govereffect -1.657 Political 0.141 Reguquality -1.051 Law -0.954 Constant 0.686 0.915 1.329 0.838 1.090 0.027 0.027 0.027 0.027 0.027 0.374 0.412 0.346 0.373 0.366 0.048 0.050 0.046 0.047 0.047 12.24*** 12.84*** 11.71*** 12.07*** 12.10*** N 249 249 249 249 249 No of countries 25 25 25 25 25 0.99 0.71 0.25 0.35 0.66 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Table 14 Governance quality, long-term external debt, and capital expenditure 51 (REM) 52 (REM) 53 (REM) 54 (REM) 55 (REM) 0.920*** 0.898*** 0.983*** 0.934*** 0.920*** LongDebt(-1) -0.013 -0.016 -0.016 -0.015 -0.018 Corruption -1.052 Caprexpeng Gdpg(-1) Govereffect -1.691 Political 0.047 Reguquality -1.127 Law -1.060 Constant 0.920 1.329 0.996 1.019 1.242 0.028 0.028 0.027 0.027 0.027 0.372 0.411 0.345 0.373 0.366 0.048 0.050 0.045 0.047 0.047 12.28*** 12.92*** 11.63*** 12.12*** 12.15*** N 249 249 249 249 249 No of countries 25 25 25 25 25 4.39 0.56 0.25 0.24 0.56 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test Note: *, **, *** are significance levels at 10%, 5% and 1% respectively Policies and Sustainable Economic Development | 547 Table 15 Governance quality, short-term external debt, and capital expenditure 56 (REM) 57 (REM) 58 (REM) 59 (REM) 60 (REM) 0.923*** 0.908*** 0.955*** 0.937*** 0.921*** ShortDebt(-1) 0.043 0.065 -0.050 0.034 0.009 Corruption -1.469 Caprexpeng Gdpg(-1) Govereffect -2.316 Political 0.249 Reguquality -1.547 Law -1.116 Constant -0.140 -0.069 1.129 0.025 0.445 0.027 0.027 0.026 0.026 0.027 0.383 0.435 0.353 0.385 0.370 0.048 0.051 0.046 0.047 0.047 12.31*** 13.06*** 11.74*** 12.09*** 12.05*** N 249 249 249 249 249 No of countries 25 25 25 25 25 0.92 0.69 0.09 0.34 0.65 2 R /R -within 2 R -ad/R -between R -overall F-test/Wall-chi2 Hausman test 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 estimations, results show that both institution and long-term external debts have negative impacts on fiscal policy Long-term external debts have significant effects on taxation policy of Asia Pacific countries, and this implys governments should pay more attention to long-term external debts in fiscal policy than short-term external debts Higher governance quality lower expenditure growth rate and tax growth rate, which means the fiscal policy should be more conservative This paper also 548 | Policies and Sustainable Economic Development has implications for international financial organization in making agreements with governments to implement the conservative fiscal policies in the long-run References Acemoglu, D., & Robinson, J (2008) The role of institutions in growth and development World Bank, Washington, DC Adam, C S., & Bevan, D L (2005) Fiscal deficits and growth in developing countries Journal of Public Economics, 89(4), 571-597 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