a) Growth rate and stability in economies
Figure 1.3 shows that in the high income countries, the economy has been on the way becoming stability thoughout the years, whereas in the case of meddilde income and low income countries, it has not been so.
Figure 1.3: the shrink frequency rate Source: World Bank group (2017)
b) Tax revenue, government expenditure, and control of corruption
Tax revenue is an important component of revenue for most governments. While most developing countries collected less in taxes than developed countries, they spent more, and their economies grew more rapidly from 1996 to 2016 (see figure 1.5 ).
Figure 1.4: Line trend of tax revenue – government expenditure – GDP per capita2 for whole sample (82 countries) in 1996-2016
Source: World bank’s database – WDI and IMF’s database - GFS.
Figure 1.4 shows the trend of spending more and fast trend of economic growth in whole 82 countries.
Figure 1.5: Line trend of tax revenue – government expenditure – GDP per capita for 44 developing cuntries in 1996-2016
Source: World bank’s database – WDI and IMF’s database - WEO.
Through figure 1.5, we can observe that the rapid economic growth trend in developing economies is the same as that of the whole sample.
2 GDP per capita is gross domestic product divided by midyear population. The World Bankconsidered that GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. This calculation of GDP is without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in constant 2010 U.S. dollars.
However, beginning in 2010 these countries have attempted to spend more and collect fewer taxes for rapid growth
Figure 1.6 : Line trend of tax revenue – government expenditure – GDP per capita for 38 developed cuntries in 1996-2016.
Source: World bank’s database – WDI and IMF’s database - GFS.
In contrast, developed countries prefer to collect more taxes and spend less to maintain a slow rate of growth in their economies (see figure 1.6). The World Bank’s report shows that a large gap exists between developed and developing countries in economic growth, as well as tax revenue. What is the cause of the differences between two these groups of countries? Policy makers around the world have been challenged in dealing with this question. In summary, the global economy from 1996 to 2016 varies from year to year.
There is a large gap in income per capita between developed countries and developing countries. There is also a large gap in the ratio of contribution to global GDP growth. As mentioned by Spence (2011), the global monitoring report 2015/2016 confirms that high-income countries contributed 60% to global GDP growth in 2014, but their population was less than 15%.
Moreover, the World Bank estimated that income per capita in this period might have increased more than it will in future periods. There are also large differences between poor and rich countries in tax revenue, effectiveness of government expenditure, and corruption, in this period. The maximum of GDP
per capita can be bigger than the minimum by 490 times. The largest gap between the highest rate of tax revenue or expenditure and its lowest is 7 times. The highest indicator of control of corruption is 2.47, while the lowest is only -1.53 (see table 4.1).
Control of corruption (1996) in 38 developed countries
2.5 2 1.5 1 0.5 0 -0.5
-1
Control of corruption (1996)
Control of corruption (2016) in 38 developed countries
2.5 2 1.5 1 0.5 0 -0.5
Control of corruption (2016)
Figure 1.7: The control of corruption indicators in 38 developed countries in 1996 and 2016
Source: World bank’s database –WGI.
Control of corruption (1996) in 44 developing countries
1 0.5 0 -0.5 -1 -1.5 -2
BeninCote…EthiopiaIslamic…Madagas…MauritiusSouth…TunisiaArmeniaCambodiaIndonesiaMalaysiaNepalPhilippinesVNBelizeBrazilColombiaGeorgiaJamaicaPeruRussia
Control of corruption (1996)
1 0.5 0 -0.5 -1 -1.5
Control of corruption (2016) in 44 developing countries
Russia Peru Jamaica Georgia Colombia Brazil Belize VN Philippines Nepal Malaysia Indonesia Cambodia Armenia Tunisia Africa Mauritius Madagascar Islamic… Ethiopia d'Ivoire Benin
South Cote
Control of corruption (2016)
Figure 1.8: The control of corruption indicators in 44 developing countries in 1996 and 2016
Source: World bank’s database –WGI.
Through figure 1.7, we find that in 2016, with exception of Greece, which maintained a negative index of control of corruption, most other developed countries had a positive index of control of corruption. However, figure 1.8 indicates that most developing countries showed a negative index of
control of corruption, and a lower index of human development of around 0.26 to 0.7. In 1996, the developing country with the highest index of human development is Bulgaria, and the lowest was Mali. This index improved; in 2016, the highest index is 0.8 and belongs to Russia, while Mali remained the lowest (0.44). Georgia is a country that improved its corruption status too rapidly. In 1996, this country had the lowest indicator of control of corruption (-1.53), and Namibia had the highest score of about 0.81. In 2016, Georgia became the country with the highest score of control of corruption (0.67), while Cambodia was at the bottom with a -1.3 score of control of corruption.
The real situation of global economies requires us to answer the question:
How does public finance correlate with economic growth in long-term? Does total tax revenue and government expenditure affect each other? How does governance change the impact of public finance on economic growth differently according to different economic groups?