BUSINESS OR POLITICS: EXPLORING THE DETERMINANTS OF POLICY MIX IN SOUTH ASIA

Abstract

This study explores the determinants of policy mix in South Asia from 2000 to 2022, by using panel least squares and fixed/random effect models. We have used defense spending, health and education expenditures, corruption levels, and financial development, whereas policy mix, monetary freedom and fiscal freedom have been used as dependent variables. In South Asian nations, defense spending have statistically insignificant and adverse affect on policy mix. Conversely, higher investments in health and education show a notable positive impact on the policy mix, contributing to overall well-being and economic stability. Corruption levels and financial development do not significantly correlate with the policy mix. Our study also uncovers distinct relationships between these independent variables and fiscal and monetary freedom. Defense expenditures negatively affect fiscal freedom, while health and education spending plays a positive role. A well-educated and healthy workforce significantly enhances fiscal freedom. Corruption levels have no significant linear relationship with fiscal freedom, but financial development creates a trade-off between financial stability and fiscal freedom. Interestingly, defense expenditures positively affect monetary freedom, highlighting their role in creating a secure environment for investments. Education spending also positively impacts monetary freedom. Corruption levels do not significantly correlate with monetary freedom, but financial development negatively affects it, indicating a trade-off between financial development and monetary freedom. To enhance policy mix and economic and monetary stability in South Asia, we recommend strategically allocating more resources to the health and education sectors. Careful assessment and possible reallocation of defense budgets can reduce the fiscal burden and promote efficient resource utilization. Balancing defense spending with economic priorities can maximize its positive impact on monetary freedom, stimulating economic growth in the region.