The effectiveness of fiscal policy: contributions from institutions and external debts

464 | ICUEH2017 The effectiveness of fiscal policy: Contributions from institutions and external debts NGUYEN PHUC CANH University of Economics HCMC – canhnguyen@ueh.edu.vn Abstract The effectiveness of fiscal policy is an interesting field in literature of macroeconomics In this paper, we use panel data from 2002 to 2014 from 20 emerging markets to investigate the effects of fiscal policy on economic growth under contributions from the differences in institutions and external debt levels By using GMM estimators for unbalanced panel data, our results show positive growth effects of fiscal policy across emerging markets in the examined periods Notably, the improvement in institutions promotes higher crowding-in effects of fiscal policy In addition, this paper finds interesting evidences that the external debt has non-linear effects on economic growth, whereas the heterogeneous effects of fiscal policy on economic growth as positive effects in low indebted level and negative effect in high indebted level may explain the mechanism of this non-linear relationship The results have significant contributions to the literature and useful implications for authorizers in promoting sustainability of the economy The authorizers are strongly recommended to focus on improving the institutional quality that not only boosts the effectiveness of fiscal policy in general, but also solves the dilemma of high indebted countries when the fiscal policy loses the effectiveness Keyword: external debt; effectiveness; fiscal policy; institutions Introduction Fiscal policy is conducted by government through taxation and public spending with the aims at sustainable development for the economy So, fiscal policy and its impacts on the economic growth tend to be at the center of macroeconomic and political debates The field of the effectiveness of fiscal policy has re-highlighted in light of the 2008 global financial crisis with the new contemporary drivers such as external debt (Ruščáková & Semančíková, 2016) Due to the complexity of the fiscal process by which it is not fully captured, that why different theories provide different answers regarding macroeconomic effects of fiscal policy and arguments about the suitability and real effects Nguyen Phuc Canh | 465 of government expenditures on economic growth are still interesting field of study (Bouakez, Chihi, & Normandin, 2014) Whereas, the main question in the literature of the fiscal policy’s effectiveness is that whether fiscal policy presents crowding-out and/or crowding-in effects in a country and what its drivers In fact, many researchers try to find evidences with the parallel existence of both and mixed conclusions (see Ahmed and Miller (2000), Heutel (2014), Şen and Kaya (2014)) The studies of the effectiveness of fiscal policy have developed and conducted in long history through many economic growth models Many studies use versions of the Solow (1956) model to study the dynamic effects of taxation on economic growth, while other studies use neo-classical growth model (Easterly & Rebelo, 1993) In this regard, researchers argue that the effects of government expenditures on economic growth follow two different regimes including crowding-out effects and crowding-in effects The neoclassical theory states that government expenditure crowds out private investment then has negative impacts on economic growth While, Keynesian view, in contrast, states that government expenditure stimulates private investment in the case of un-fully employment, which then has positive impacts on economic growth, especially in developing countries (Ahmed & Miller, 2000) Moreover, the effects of fiscal policy on economic growth is driven by many factors such as the employment in the economy, the transparency of government, the composition of government expenditures, or even the government size (see Akanbi (2013), Arestis (2011), Kasselaki and Tagkalakis (2016), Hemming, Kell, and Mahfouz (2002)) In empirical literature about the determinants of fiscal policy’s effectiveness, there are, in fact, some studies that consider the role of institutional framework such as corruption situation, economic freedom, democracy (see Baldacci, Hillman, and Kojo (2004), Martinez-Vazquez, Boex, and Arze del Granado (2007), Nelson and Singh (1998)) Meanwhile, the burdens of external debt on the sustainability of fiscal policy are also concerned For instance, Amato and Tronzano (2000) find the evidence that the debt maturity and the share of foreign-denominated debt are crucial determinants of exchange rate stability in Italia Bal and Rath (2014) find that Indian economic growth is impacted by central government debt, total factor productivity growth, and debt-services in the short-run They also recommend that Indian government should follow the objective of inter-generational equity in fiscal management over the long term to stabilize debt level 466 | ICUEH2017 Which means that the external debt may influence the effectiveness of fiscal policy Recent study, Doğan and Bilgili (2014) find that external borrowing has negative impact on growth both in regime at zero and regime at one, but the public debt has higher negative effects on economic growth and development, thus they conclude a non-linear relationship between economic development and borrowing variables In fact, there are very early studies about the effects fiscal policy such as Smith (1937), Bailey (1971), Buiter (1977), and Arestis (1979), and many recent studies try to investigate the impacts of both government expenditures on private investment and especially economic growth However, the debate with regard to the effectiveness of fiscal policy is still ongoing (Bouakez et al., 2014; Heutel, 2014; Kameda, 2014a; Şen & Kaya, 2014) Precisely, the literature of fiscal policy is lacking of the studies about the effectiveness of fiscal policy under the contributions from the institutions and external debts in a comprehensive work Therefore, this study is conducted under the motivations from the study of Doğan and Bilgili (2014) by investigating the effectiveness of fiscal policy on economic growth under the relationships with the changes in the institutions and the burdens of external debt in the context of 20 emerging markets including Argentina, Bangladesh, Brazil, Bulgaria, China, Colombia, Egypt, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Romania, Russia, South Africa, Thailand, Turkey, and Vietnam In this paper, we achieve our objectives by implementing following strategy We firstly examine the impacts of fiscal policy on economic growth through the modified model of endogenous growth theory by incorporating government expenditure and controlling other common drivers of economic growth including capital, labor, financial development, technology, economic openness (trade and capital flows) Then, the institutional factors including government effectiveness, regulatory quality, and control of corruption are incorporated, respectively, to test the impacts of institutions on economic growth Next, we use the interaction terms between government expenditure and institutions to examine the effectiveness of fiscal policy under the associations of institutional framework We then estimate the growth model with the explanatory variables including both external debt level to GNI and its square to examine the nonlinear relationship between external debt and economic growth After that, we divide our data into two sub-samples (the low indebted countries and high indebted countries) to Nguyen Phuc Canh | 467 investigate the effectiveness of fiscal policy under two regimes At last, we use GDP per capita growth rate in replacing GDP growth rate to check robustness of results By doing this strategy, we believe that this study has significant contributions to both theory and practice Firstly, this study has contribution to the literature of fiscal policy effectiveness and fiscal indebtedness by adding the effects of government expenditures under the external debt level and the associations with institutional quality The results find significant evidences that the institutions enhance the effectiveness of fiscal policy Notable, the external debt level presents the non-linear relationship with economic growth through the mechanism that the fiscal policy has the heterogeneous effects on economic growth: the crowding-in effect in low indebted level and crowding-out effects in high indebted one Secondly, this study has significant implications for the authorizers in implementing the long-term sustainable fiscal policy in line with borrowing policy and the solutions for the high indebted countries that face to the dilemma of ineffective fiscal policy This paper is structured as following Section states our motivations of this study Section briefly presents literature reviews and then our arguments on the effectiveness of fiscal policy under the contributions from institutions and external debt Methodology and data are provided in Section Section presents the results and our discussions The concluding remarks are discussed in Section Literature reviews In the literature of fiscal policy effectiveness, it is natural place to start with the Keynesian theory In Keynesian model, the sticky price and excess capacity are assumed that contraries to the classical economics, so that aggregate demand determines output and government expenditures have a multiplier effect on aggregate demand and output (Coddington, 1976) Therefore, Keynesian economics call for the government intervention and incorporate government expenditure into the aggregate demand function The Keynesian views argue that there is very rare case for an fully employed economy, thus the sensitivity of investment to interest rates would be low and then an increase in interest rates due to expansionary fiscal policy would be minimal, the government expenditure, in turn, has positive impacts on economic growth (O’Hara, 2011; Şen & Kaya, 2014) This view is also called as the crowding-in effects of fiscal policy, where the government should 468 | ICUEH2017 undertake the expenditure in the recession time to cover the lack of private consumption and investment (Jahan, Mahmud, & Papageorgiou, 2014) However, some of extensions in the line of Keynesian model allow for crowding-out effects of fiscal policy, which means the expansion of government expenditure crowds out the private demand and then influences negatively on output, through the changes in interest rates and exchange rate in the case of open economy With the assumption that the private investment is negative impacted by the increase in interest rate, the expansionary fiscal policy that backed by borrowing leads to the lower private investment due to higher interest rates Moreover, the higher interest rates due to the expansionary fiscal policy attract capital flows in the case of open economy that appreciate exchange rate and then results the deterioration in current account (see Mundell (1963), Fleming (1962)) The neo-classical economics address the shortcomings of Keynesian economics on its lack of microeconomic foundations The neo-classical views focus on the determination of goods, outputs, and income distributions in markets through both supply and demand sides by adding the assumption of utility maximization of income-constrained individuals and firms under the boundary of factors in production and available information (see Gaffney (1994), Goodland and Ledec (1987), Davis (2006)) In which, the neo-classical economics raise the rational expectations in comparing to the adaptive expectations in Keynesian economics This brings forward adjustments in economic factors that occur more progressively so that fiscal policy matters in not only long-term but also short-term period And the permanent fiscal changes can lead to the crowding-out effects since private sectors expect the persistent changes in interest rates and exchange rates in this case (see Buiter (1977), Arestis (1979), Mundell (1963), Fleming (1962)) In addition to neo-classical economics, the Ricardian view that is based on Ricardian equivalence theorem assumes that the individuals are forward-looking in the current activities, which is also in contrasting with the Keynesian economics view as individuals rely on current income (see Barro (1988), McCallum (1984)) In Ricardian view, individuals anticipate a present tax cut as higher government borrowing that turns into the higher taxes in the future so that there is no change in permanent income This condition in along with the assumptions of no liquidity constraints and perfect financial markets lead to no change in private consumption in general (Barro, 1974) Thus, Nguyen Phuc Canh | 469 Ricardian view suggests neither crowding-in nor crowding-out effects of fiscal policy (Arestis, 2011; Şen & Kaya, 2014) However, if governments change lump-sum taxes for the fiscal policy, the features of progressive taxes will have impacts on permanent income and then the aggregate demand and output As a result, the effectiveness of fiscal policy most likely depends on how it is paid in the future and the productivity of government expenditures (Hemming et al., 2002) As a brief summary, the government expenditure, as according to the Keynesian views, is needed to cover the lack of consumption in private sectors, which means the fiscal policy presents a positive effect on economic growth However, the Keynesian view is lacked of considering other factors such as institutional environment or debt burden on the effectiveness of fiscal policy The neo-classical economics views further explains the effectiveness of fiscal policy in the some manner relationship with the public debt In neoclassical views, today’s individuals think that the existing budget deficits due to the expansionary fiscal policy to increase the consumption level have to pay back through taxes for future generations In addition to the less effective of government expenditure in comparing to private investment so that the increased output as a result of the debt financed expenditure does not fully offset the negative effect due to the crowding-out effects to private investment on output Therefore, the fiscal policy presents crowdingout effects at the end Meanwhile, the Ricardian view suggests that fiscal policy presents neither crowding-in nor crowding-out effects due to the independently path of private investment and government spending Where, the increase in government spending is anticipated to be accompanied by a rise in taxes in the future, thus government expenditure financed by debts is expected to be repaid by revenue generated through taxes levied in the future As the result, interest rates and private investment remain unchanged All above economic views require assumptions to be presence such as no liquidity constraints, perfect financial markets in Ricardian equivalence However, these assumption are usually un-existed thus the significance of theories is questioned in both theory and practice (Haque & Montiel, 1989) Furthermore, there are some cases that the effectiveness of fiscal policy is explained by all of these views For instance, if government is restricted by the fiscal rules to balance the fiscal budget in the long run, thus individuals may partial adjust their behaviors if they have short-term horizon which presents the presence of both Ricardian and neo-classical views In the same idea, if the current path 470 | ICUEH2017 of government debt is not sustainable and future tax increases will be required to lower the debt, the Ricardian view may be presence in expansionary fiscal policy seemingly with the Keynesian view which depends on the level of public debt (Sutherland, 1997) Or, if the government expenditure is in line of an upward-trending stochastic process that individuals believe a sharply fall when it approaches a specific “target point”, there will be a non-linear relationship between private consumption and government expenditure (Bertola & Drazen, 1991) Therefore, the argument of a non-linear relationship between fiscal policy and economic growth makes sense in literature However, the literature needs the explanations for the mechanism and empirical evidences In fact, many previous studies have investigated the effects of fiscal policy in many countries, especially in advanced countries such as US, Japan, European area1 In which, empirical works usually focus on the relationships between fiscal policy, interest rates, private investment, exchange rates, and the existence of Ricardian equivalence with three main streams including the estimation of fiscal multiplier from macroeconomic model simulations, the lesson studies of fiscal policy, and the determinants of fiscal multipliers (Hemming et al., 2002) Hemming et al (2002) summary that the fiscal policy presents mostly with positive multipliers, it means that government expenditure has positive impacts on economic growth in the short run In addition, they find few evidences of negative short-term multipliers They also document that the spending changes have higher fiscal multipliers than the tax changes However, the long-term fiscal multipliers, in contrasting to the short-term, are generally smaller and reflect the crowding-out effects of government expenditures Recently, Afonso and Strauch (2007) find that the European fiscal policy makes market swap spreads response in mostly around five basis points or less in 2002 Similarly, the study of Kameda (2014a) finds that an increasing of 26–34 basis points in real 10-year interest rates in responding to a percentage point increase in both the projected/current deficit-to-GDP ratio and projected/current primary-deficit-to-GDP ratios in Japan Kameda (2014b) documents that the diffusion index of the attitudes of financial institutions have a definite impact on fiscal expansion effects In particular, the government expenditure has non-Keynesian effects under the demand-enhancing effects if the existence of liquidity-constrained households when banks’ attitude toward lending See Hemming et al (2002) for the more detail summary Nguyen Phuc Canh | 471 is tight and the fiscal condition is bad Bhattarai and Trzeciakiewicz (2017) use a DSGE analysis to examine the fiscal policy in UK They note the highest GDP multipliers for government consumption and investment in the short-run, whereas capital income tax and public investment have long-run crowding-out effect on GDP Moreover, they emphasize that the fiscal policy presents decreasing effects in a small open-economy scenario Besides the presence of plentiful empirical literature in the effectiveness of fiscal policy, this field of study is got much less evidence on the short-term effects in developing countries due to data deficiencies, the structural/institutional factors in the last century (see Hemming et al (2002)) For instance, Haque and Montiel (1989) find that the Ricardian equivalence is not supported in the developing countries due to liquidity constraints Montiel and Haque (1991) go further by using the Mundell-Fleming model with rational expectations and full employment for 31 developing countries and conclude that the increasing of government expenditures have contractionary short-term and medium-term effects Previous, Khan and Knight (1981) find positive nominal income elasticities of government expenditures and taxes and they are close to unity in 29 developing countries Then, other empirical studies such as Agenor and Montiel (1996), Easterly, Rodriguez, and Schmidt-Hebbel (1994), Rama (1993) document evidences that fiscal policy has crowding-out effects on private investment through the impacts on interest rates in developing countries Meanwhile, empirical studies also provide evidences supporting for partial or/and fully existences of the Ricardian equivalence in developing countries such as Agenor and Montiel (1996), Corbo and Schmidt-Hebbel (1991), Masson, Bayoumi, and Samiei (1995), Giavazzi, Jappelli, and Pagano (2000) However, the economic development in emerging market economies, which is a new definition of the development level of economies and nearly relating to the developing countries definition, boosts their roles in the world economy In addition, the better fulfill of data have re-highlighted the interesting in investigating the effectiveness of fiscal policy by adding more methods and conditions into model for this group For example, Cuadra, Sanchez, and Sapriza (2010) note that emerging market economies typically exhibit a procyclical fiscal policy, where governments increase (decrease) expenditures in economic expansions (recessions) and rise (reduce) tax rates in bad (good) times This situation is in line with the characteristic of counter-cyclical default risk in their business cycle They also note that the incomplete markets and sovereign default risk premium have important 472 | ICUEH2017 roles in explaining the pro-cyclicality of public expenditures and tax rates in these economies Therefore, the assumptions of Ricardian view are not existed that propose for the Keynesian or neo-classical views of fiscal policy For instance, Papageorgiou (2012) emphasizes that government should decrease the labor-income tax rate and increase the consumption tax rate to stimulate the economy and increase welfare, while the increasing in public investment is a good solution for the economy In the same direction of study in Greece, Kasselaki and Tagkalakis (2016) find that the tax based fiscal consolidation has more pronounced and more protracted crowding-out effects on output, while the government spending-based fiscal consolidation improves financial markets and boosts economic sentiment While, Akanbi (2013) tests the effectiveness of fiscal policy with existing structural supply constraints versus demand-side constraints in South Africa for the period 1970 – 2011 The results suggest that fiscal policy is more effective in conditions of limited or no supply constraints In addition, expansionary or consolidating fiscal policies through government expenditure changes will be more effective in condition of no structural supply constraints, while tax changes will be more effective in contrasting cases Jha, Mallick, Park, and Quising (2014) go further to examine fiscal policies in 10 emerging Asian countries and find that tax cuts have a better countercyclical effect on output than government expenditures No surprising that the debate on the role and the effectiveness of fiscal policy are continuous argued broadly in both literature and practice Recently, Arestis (2011) notices that the “New Consensus in Macroeconomics”, recent developments in macroeconomics and macroeconomic policy, downgrades fiscal policy’s roles in contrasting with monetary policy due to its ineffective Through a careful literature review and discussion at recent developments on the fiscal policy literature, he then concludes that fiscal policy does still have significant roles in economic policy through its impact on allocation, distribution and stabilization However, researchers and authorizers have to careful consider the assumptions in economic theories of fiscal policy’s effectiveness as Ricardian and nonRicardian economic existences, liquidity-constraints, and the endogenization of labour supply and capital accumulation Whereas, other features of the economy should be considered in study the effectiveness of fiscal policy such as the institutional framework and the debt burden Nguyen Phuc Canh | 473 In fact, the dependence of fiscal policy’s effectiveness on institutional aspects is discussed under the literature with two main strands including the inside and outside lags of effects and the political economy considerations (Hemming et al., 2002) First, the fiscal policy has inside and outside lags, where the inside lags present the needed time to see that fiscal policy should changes, the outside lags are the function of the political process and the fiscal management that is the time for fiscal measures take effects on aggregate demand (Blinder & Solow, 1974) Due to the long time to design, approval, and implementation, the inside lag may be longer, while the outside lag is more variable depending on the institutional environment Second, the fiscal policy is impacted by the political considerations such as the fiscal illusion of public and policy-makers, the favor of transferring current fiscal burden to future generations, the limitation of government due to the debt accumulation, the delay of fiscal consolidations due to the political conflicts, and the function of current budget institutions that leads to high spending The institution is defined as the social rules of the game (Douglass C North, 1990), which includes “humanly devised”, “the rules of the game” to set “constraints” on human behavior, and the economic incentives (see Douglass Cecil North (1981), Acemoglu and Robinson (2008)) The better institutions reduce asymmetric information problem, transaction cost, and risk, while they improve the market efficiency, especially efficiency of asset allocation (Cohen, Hawawini, Maier, Schwartz, & Whitcomb, 1983; T S Ho & Michaely, 1988; Williamson, 1981) Therefore, the better institutions should have positive associations with the effectiveness of fiscal policy since the lower asymmetric information problem, transaction cost, and higher market efficiency reduce both the inside and outside lags that then increase the efficiency of fiscal policy, especially the short-term effects Moreover, the problems of inside and outside lags are more important in emerging market economies, thus the improvement in institutional framework is expected with higher enhancing impacts on the effectiveness of fiscal policy In addition, the better institutions also reduce the fiscal illusions, the political conflicts, while it pushes more responsibility of governments in building and implementing fiscal policy, the fiscal policy, in turn, should be more effective In fact, the empirical literature in the field of fiscal policy had considered the role of institutional framework in some manners such as politics, democracy, economic freedom, and corruption in recent decades Nelson and Singh (1998), for instance, argue that a democratic political system permits active in a voluntary way, at the same time it creates Nguyen Phuc Canh | 491 Model Dep var: GDP growth Popg Credit Patent Fdi Trade Govexg Goveff Regu Concor N No of group (13) (14) (15) Group Group Group Group Group Group -0.705 0.443 0.470*** 0.133 1.325** 0.106 -1.081** 0.801** -1.606* 0.310 0.028 2.142** -0.076 0.072 -0.713 0.370 0.413*** 0.211 1.308** 0.082 0.906** * -1.925** 0.507 0.062 2.282*** -0.078 -0.690 0.538 0.402*** 0.254 1.061* 0.084 0.782** -1.904** 0.536* 0.039 2.367*** -0.078 -1.074** 0.667 -1.331** 86 0.963 126 78 126 78 126 12 12 12 AR(-2) test (p-value) 0.314 0.752 0.360 0.723 0.193 0.716 Sargan/Hansen test (p-value) 0.173 0.159 0.116 0.171 0.143 0.199 By dividing the sample into two sub-samples: the low indebted countries (group 1) and high indebted countries (group 2) and regress the impacts of government expenditure and institutions on economic growth We find that the increasing in government expenditure in group has significant positive impact on economic growth, while it has insignificant negative impact in the group The results suggest that the fiscal policy is effectiveness in stimulating the economic growth when countries have low debt burden, but it loses the effectiveness when countries face to high burdens of external debt These findings are consistence with literature and our arguments This means that the high indebted countries have less fiscal room and the unfavorable terms in accessing the international financial markets, while the high level of external debt creates constraints for the private sectors so that their fiscal policies present the crowding-out effects We believe that the findings have significant contributions for literature, especially for the practice of fiscal policy In addition, the results in Table provide us additional interesting facts While the fiscal policy is more effectiveness in the low indebted countries, the institutions are more effective in promoting economic growth in high indebted countries This result suggests a very useful measure for the high indebted countries that they should not promoted to use the fiscal policy to stimulating economic growth, otherwise they must improve the institutional framework As stated in previous findings, the fiscal policy presents 492 | ICUEH2017 crowding-out effects in the high indebted countries so that they face to the dilemma if they want to use fiscal policy to promote economic growth: they want to use the fiscal policy but they have less fiscal room, while they are under the burden of external debts and it makes fiscal policy less effective Therefore, the rightful choice in this situation is institutional improvement and revolution Table 10 Government expenditure and economic growth (GDP per capita growth rate) Model (16) Dep var: Gdp per capita growth (17) Coef P-value Gdppcg(-1) 0.191*** 0.000 0.150*** 0.005 Gdppc(-1) -0.718*** 0.000 -0.620*** 0.000 Capg 0.254*** 0.000 0.250*** 0.000 Popg -0.335*** 0.003 -0.427*** 0.001 Credit 0.203 0.584 0.268 0.480 Patent 0.442*** 0.000 0.382*** 0.003 Fdi 0.291*** 0.000 0.368*** 0.000 0.549* 0.096 0.270 0.418 0.125** 0.049 Trade Coef Govexg N 193 192 No of Group 20 20 P-value AR(-2) test -0.92 0.359 -0.53 0.593 Sargan/Hansen test 16.03 0.248 15.99 0.250 Table 11 Institutions and economic growth (GDP per capital growth rate) Model (18) (19) (20) Dep var: Coef P-value Coef P-value Coef P-value Gdppcg(-1) 0.123** 0.024 0.097 0.108 0.065 0.323 Gdppc(-1) -0.710*** 0.000 -0.616*** 0.001 -0.690*** 0.001 Capg 0.250*** 0.000 0.239*** 0.000 0.244*** 0.000 Popg -0.732 0.130 -0.554*** 0.000 -0.521*** 0.003 Credit 0.108 0.808 0.080 0.842 0.034 0.938 Patent 0.458*** 0.004 0.409*** 0.006 0.454*** 0.007 Fdi 0.344*** 0.002 0.433*** 0.000 0.453*** 0.000 GDP per capita growth Nguyen Phuc Canh | 493 Model (18) (19) (20) Dep var: GDP per capita growth Coef P-value Coef P-value Coef P-value Trade 0.552 0.207 0.452 0.289 0.430 0.380 Govexg 0.126* 0.054 0.119* 0.095 0.119* 0.064 Goveff -0.567 0.160 -1.042*** 0.006 -1.272*** 0.004 Regu Concor N 192 192 192 No of Group 20 20 20 AR(-2) test -0.49 0.621 -0.42 0.672 -0.40 0.686 Sargan/Hansen test 15.53 0.275 14.92 0.312 13.99 0.374 Table 12 Institutions, government expenditure and economic growth (GDP per capita growth rate) Model (21) (22) (23) Dep var: GDP per capita growth Coef P-value Coef P-value Coef P-value Gdppcg(-1) 0.079 0.270 0.030 0.649 0.049 0.522 Gdppc(-1) -0.723*** 0.000 -0.627*** 0.000 -0.736*** 0.000 Capg 0.223*** 0.000 0.235*** 0.000 0.227*** 0.000 Popg -0.564 0.399 -0.508*** 0.000 -0.496*** 0.010 Credit 0.057 0.903 0.407 0.143 0.149 0.748 Patent 0.434** 0.011 0.286** 0.014 0.407* 0.053 Fdi 0.484*** 0.000 0.593*** 0.000 0.571*** 0.000 0.565 0.223 0.330 0.321 0.117 0.826 0.116* 0.074 0.441** 0.038 Regu -2.210*** 0.000 Govexg*Regu 0.223*** 0.004 Concor -3.275* 0.072 Govexg*Concor 0.490* 0.089 Trade Govexg 0.153 0.124 Goveff -1.743* 0.065 Govexg*Goveff 0.241* 0.086 N 172 172 192 No of group 20 20 20 AR(-2) test 0.19 0.852 0.85 0.394 -0.70 0.487 494 | ICUEH2017 Model (21) (22) (23) Dep var: GDP per capita growth Coef P-value Coef P-value Coef P-value Sargan/Hansen test 17.50 0.177 15.30 0.289 13.14 0.437 Table 13 External debt level and economic growth (GDP per capita growth rate) Model Dep var: GDP per capita growth (24) (25) Coef P-value Coef P-value Gdppcg(-1) 0.178** 0.012 0.176* 0.052 Gdppc(-1) -0.885*** 0.000 -1.608*** 0.000 Capg 0.257*** 0.000 0.268*** 0.000 Popg -0.255** 0.048 0.115 0.689 Credit 0.149 0.644 0.863 0.246 Patent 0.589*** 0.001 1.116*** 0.000 Fdi 0.386*** 0.000 0.583*** 0.000 Trade 0.225 0.621 -1.619 0.154 Govexg 0.060 0.558 0.034 0.638 0.028** 0.050 0.264*** 0.004 -0.002** 0.012 Debt Debt^2 N 172 172 No of group 20 20 AR(-2) test 0.44 0.662 0.86 0.390 Sargan/Hansen test 14.79 0.321 14.39 0.347 Table 14 Government expenditure and economic growth (GDP per capita growth rate) under two debt level regimes (26) (27) Model countries with average debt40% Dep var: GDP per capita growth Coef P-value Coef P-value Gdppcg(-1) 0.033 0.738 0.148* 0.076 Gdppc(-1) -1.004*** 0.000 -0.394* 0.061 Capg 0.285*** 0.000 0.195*** 0.000 Popg -1.333** 0.036 -0.132 0.647 Nguyen Phuc Canh | 495 (26) (27) Model countries with average debt40% Credit 0.674* 0.073 -1.483** 0.045 Patent 0.383*** 0.001 0.309 0.136 Fdi 0.105 0.655 0.104 0.484 Trade 1.232** 0.041 1.885** 0.019 Govexg 0.125* 0.060 -0.020 0.748 N 78 126 No of group 12 AR(-2) test -1.03 0.304 -0.29 0.772 Sargan/Hansen test 25.66 0.108 27.10 0.133 Table 15 Institutions, government expenditure and economic growth (GDP per capita growth rate) under two debt level regimes Model Dep var: GDP per capita growth (28) Group (29) Group Group (30) Group Group Group Gdppcg(-1) 0.025 0.142* 0.028 0.140 0.032 0.133 Gdppc(-1) -0.969*** -0.407* -0.808*** -0.615** -0.781*** -0.505** Capg 0.287*** 0.194*** 0.288*** 0.195*** 0.266*** 0.191*** Popg -1.746** -0.145 -1.670** 0.106 -1.745*** -0.175 Credit 0.402 -1.618** 0.319 -2.049** 0.420 -1.792** Patent 0.465*** 0.340 0.395*** 0.575* 0.380*** 0.491 0.130 0.111 0.166 0.135 0.198 0.123 Trade 1.352** 1.969** 1.198** 2.314*** 0.964 2.096** Govexg 0.110 -0.019 0.114* -0.081 0.127* -0.012 Goveff -1.075** 0.151 -0.976* 0.805 -1.394** 0.694 Fdi Regu Concor N 78 126 78 126 86 126 No of group 12 12 12 AR(-2) test (pvalue) 0.303 0.763 0.352 0.696 0.168 0.741 Sargan/Hansen test (p-value) 0.127 0.122 0.102 0.364 0.103 0.127 496 | ICUEH2017 As robustness check, we recruit the GDP per capita growth rate to replace for GDP growth rate as dependent variable The results are presented in Table 10 to 15 The estimation shows the robustness results in comparing with the previous models excepting for the impacts of population growth rate on economic growth However, the change in the effects of population growth on GDP growth rate and GDP per capita growth rate is easy to understand In the model of GDP growth rate, the growth in population has significant positive impacts on economic growth, the results are consistence with the economic growth theories where the increasing in labor factor contributing to the economic growth in total Meanwhile, the GDP per capita growth rate presents the growth of GDP in relationship with the growth of population so that the significant negative impacts of population growth on GDP per capita growth rate suggesting that the economic growth in emerging market economies needs to consider in relating with the population growth As a summary, the results are consistence and robustness for both GDP growth and GDP per capita growth models Remarking conclusions The conditions for the effectiveness of fiscal policy are under debate in both literature and practice This is re-highlighted from the severe of the 2008 global financial crisis and the European debt crisis This study contributes to literature and practice by shedding the light on the contributions of institutions and external debt on the effectiveness of fiscal policy This study collects the annual data from World Governance indicators and World Development Indicators of Worldbank for 20 emerging markets in the period 2002-2014 to examine the effectiveness of fiscal policy in the relationships with institutional framework and external debt burden Applying the endogenous growth model with the common elements of economic growth including labor, capital, technology, credit, trade openness, and capital flow, we then incorporate the government expenditure to investigate the effective of fiscal policy As our most notable contributions, we examine the impacts of institutions on the effectiveness of fiscal policy through the interaction terms between government expenditure and institutional indicators including government effectiveness, regulatory quality, and control of corruption In addition, we examine the non-linear relationship between external debt and economic growth, where Nguyen Phuc Canh | 497 this relation is investigated more detail for its mechanism through the fiscal policy Through GMM estimators for panel data, the study presents some meaningful findings: Firstly, the fiscal policy presents the crowding-in effects in emerging market economies in the period of 2002-2014 This result confirms the important role of fiscal policy in the case of emerging market economies, it is also consistence with our arguments and theory of Keynesian views In fact, the emerging market economies present with the low level of capital accumulations, the low level of financial development so that the interest rates may not be too sensitive with the fiscal policy, while the fiscal policy is essential to build the basic infrastructure for the economic activities of private sectors Thus, the fiscal policy is effective in promoting economic growth Secondly, even the fiscal policy has positive effects on economic growth; the study finds interesting evidences that fiscal policy loses this effect in the case of high indebted countries The results have significant contributions to both theories and practice Whereas, the external debt creates constraints for the effectiveness of fiscal policy, especially in the case of high indebted countries This relationship may explain the mechanism for the non-linear relationship between external debt and economic growth Thirdly, we find evidences that the improvement in institutions boosts the effectiveness of fiscal policy This notable finding has very useful contributions to literature and implications for the practice in the case of emerging market economies In which, the institutions under aspects of government effectiveness, regulatory quality, and control of corruption enhance the positive impacts of government expenditure on economic growth at both level: GDP and GDP per capita In addition, the empirical results also suggest us essential measures for the government in dilemma of ineffective fiscal policy when they are in high indebted level that they should focus on the institutional improvement, which enhances the effectiveness of fiscal policy in one hand, it has positive impacts directly on economic growth on the other hand./ 498 | ICUEH2017 Acknowledgement The author wish to thank the Editors, Professor Su Dinh Thanh, for their many helpful comments and suggestions which greatly enhance the brevity and quality of this study I am grateful for the financial support from the Project on “Promoting the Enhance Quality of the English-Language Version of Journal of Economic Development, Intended as a Scopus-Listed Journal” of Journal of 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