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

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2016.Theo đó, đề tài mà luận án hướng đến là “Chi tiêu công, quản

trị công và tăng trưởng kinh tế tại các quốc gia đang 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 5 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

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

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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 + 𝛽

1+𝛽(1 − 𝜏)(1 − 𝛼)𝐴𝑧𝑡1−𝛼𝑘𝑡𝛼−1 − [𝑔 + 𝑥 −(1 − 𝛼)𝜏]𝐴1𝛼𝑥1−𝛼𝛼 − (1 + 𝛼𝐴1𝛼𝑥1−𝛼𝛼 )𝑑𝑡

𝑘𝑡 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 là một hằng số Thus, the equation implies the effect of public expenditure

on economic growth:

+ In the first part of the right-hand equation (−1 + β

1+β(1 −τ)(1 − α)Azt1−αktα−1), An increase in public expenditure (z) will have a positive effect on economic growth However, this section

also shows that the magnitude of this effect depends on the negative impact from the tax burden τ

+ The second part of the right-hand equation ([g + x −(1 − α)τ]Aα1x1−αα ) will be zero if budget balance [g + x − (1 − α)τ]

is zero Accordingly, this section describes the marginal impact of public expenditure on fiscal balance

+ The third part of the right-hand equation [(1 + αA1αx1−αα )dt

kt] describes the impact of public expenditure on economic growth through public debt An increase in public expenditure x increases interest rates

Thus, an increase in public expenditure would have a positive impact on economic growth However, this positive impact depends

on the budget constraint and public debt

2.3 The role of public governance in the relationship between public expenditure and economic growth

2.3.1 Theory of public choice and political economy

The theory of public choice and political economy approaching governance are mainly political These theories reject the

"benevolent government" hypothesis that politicians are not always aiming to maximize social benefits Accordingly, differences in political institutions may affect public expenditure policies in countries (Brahmbhatt & Canuto, 2012, Vergne, 2009)

As the scope of the study is political science, the economic efficiency of public expenditure policies as well as their interactions with other market factors are not the focus of these theoretical schools (Mueller, 2015)

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2.3.2 New Instituional Economics

The new institutional economics theory is more concerned with the effective aspects of government and the legal framework of public governance Governance plays a role in creating the environment, the legal framework for economic activity (Zhuang et al., 2010)

In summary, due to the different scope of research, different theoritical studies approach the concept of governance in different aspects Accordingly, for the second research objective, the thesis establishes an analytical framework of the role of governance in the relationship between public expenditure and economic growth, in which governance is considered in many respects

2.3.3 The role of governance in the relationship between public expenditure and economic growth

As Brahmbhatt & Canuto (2012) argues, the impact of public expenditure on economic growth depends on fiscal and institutional constraints Thus, in order to clarify the analytical framework of Brahmbhatt & Canuto (2012), the thesis provides empirical verification in the case of developing countries in the period 1998-

2016 in order to clarify the impact of public expenditure to economic growth in budget constraints and institutional and political constraints (aspects of public governance)

2.4 Previous empirical studies

2.4.1 The relationship between public expenditure and economic growth

Based on research objectives, these empirical studies can be grouped into the following main groups:

+ First, a number of studies aim to explore the causal relationship between public expenditure and economic growth in different case studies

+ Second, some studies focus on the short-run impact of public expenditure on economic growth

+ Third, some studies are concerned with the impact of public expenditure on economic growth over the long term This study examines the factors that affect the economic impact of public expenditure on economic growth, such as public expenditure composition (Bayraktar & Moreno-Dodson, 2015, Benos, 2009) ); Budget constraints (Benos, 2009); Nonlinear Impact (Altunc & Aydın, 2013; Herath, 2012) However, studies often only analyze the factors individually Accordingly, the thesis builds the framework for analyzing and evaluating the role of these factors influencing the impact of public expenditure on economic growth in developing countries

2.4.2 The relationship between public expenditure, governance and economic growth

In the context of the approach to the concept of governance, studies

on the subject can be divided into two main categories:

On one hand, based on the theory of endogenous growth and the theory of new institutional economics, some studies examine the

Accordingly, the thesis establishes a framework for analyzing the role of public governance in the relationship between public expenditure and economic growth, in which public governance is considered in many respects

2.4.3 Research gaps and research questions

The thesis aims to answer the specific research questions:

+ What is the role of budget constraints in the relationship between public expenditure and economic growth in developing countries? + Is there any difference in the economic efficiency of the public expenditure components between the pre and post crisis period? + What role does governance play in adjusting the impact of public expenditure components on economic growth in developing countries?

+ What role do political institutions play in adjusting the impact of public expenditure components on economic growth in developing

countries?

CHAPTER 3: EVALUATE THE IMPACTS OF PUBLIC

EXPENDITURE TO ECONOMIC GROWTH IN THE

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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)

GDP (-1) -0.6797*** -0.5991*** -0.679*** Investment 0.4766*** 0.4777*** 0.277*** Human Capital 5.1043*** 4.6285*** 4.310*** Public Expenditure -0.7703*** -0.6902*** -0.0036 Openness -0.0075 0.0007 -0.0748 Public debt -0.2164*** -0.078 -0.145***

Note: *, **, *** respectively correspond to levels of significance of 10%, 5%, 1%