Fiscal policy, institutions and inclusive growth: evidence from the developing Asian countries

Abstract

Purpose The purpose of this paper is to examine the impact of fiscal policy and institutional quality on the inclusive growth process of the selected developing Asian countries. Inclusive growth is a growth process which ensures that everyone is participating and benefited by growth process. Design/methodology/approach This study uses system generalized method of moment to address the problem of endogeneity and omitted variable bias. Findings Empirical results showed that both fiscal policy and institutions have positive effects on inclusive growth. Our empirical results confirmed that fiscal policy can work more efficiently in the presence of good quality institutions in the developing Asian countries. Research limitations/implications Government should take measures to improve infrastructure, roads and transport system, and main share of government expenditures should be allocated to development, education and health projects. There is a need to transform the tax structure of the countries with the huge emphasis on the progressive tax system and this is likely to benefit the lower segment of the population. There is a need to develop institutions as they serve as a road map for the development of a country. There should be coordination between government policies and institutions. Supervision of fiscal policy through good institutions is needed for the proper allocation and utilization of public resources. Practical implications By restructuring the taxation system subject to the provision of quality institutions, government can incentivize entrepreneurs to make significant investments. This creates jobs for lower segment of a society, brings down poverty and increases the income level of a country. This increases the individual and collective welfare of an economy that ensures the inclusive growth within a country. Originality/value In this study, proxies used for fiscal policy are government expenditures and tax revenues as a percentage of gross domestic product (GDP) to examine its impact on the certain measures of inclusive growth such as employment, income inequality and GDP per capita. This study provides useful insights for the policy makers using fiscal policy to achieve the goal of inclusive growth in developing countries.