Long-Run Relationship Between Fiscal Policy and Economic Growth in Asia: Evidence Using Pedroni’s Cointegration Approach

Hussin Abdullah,Tan Boon Hui,Muzafar Shah Habibullah,Ahmad Zubaidi Baharumshah

doi:10.32890/mmj.11.1-2.2007.8947

Hussin Abdullah, Tan Boon Hui + Show 2 more

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https://doi.org/10.32890/mmj.11.1-2.2007.8947

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Abstract

This paper investigates the long-run relationship between fiscal policy and economic growth in Asia between 1982 and 2001 through the application of Pedroni’s Cointegration approach. It examines two different channels through which fiscal policy can affect long-run economic growth in Asian countries. The first channel is when components and aggregate government expenditure affect the real per capita GDP, and the second channel is when the distortionary taxation, budget balance, and aggregate of other fiscal variables affect the real per capita GDP. There is a positive and statistically significant impact of health and education expenditure, aggregate of government expenditure, and aggregate of other fiscal variables on real per capita GDP. It was found that the defence expenditure, distortionary taxation, and budget balance are significantly and negatively related to real per capita GDP. The Pedroni Cointegration result establishes a long-run relationship between fiscal policy and economic growth.

Highlights

Fiscal policies have a benign role for economic growth in the region, namely to provide a stable macro environment for investment
This study provided a growth model from the conventional growth accounting framework and the production function below takes the standard neoclassical form with a minor modification which includes human capital in the Cobb-Douglas production function: where n is the exogenous rate of growth of the labour force, g is the exogenous rate of technological progress, P is variables of vector of fiscal policy that can affect the level of technology and efficiency in the economy, and q is a vector of coefficient related to these variables
We focused on three types of government expenditures, namely government expenditure on health, education, and defence

Summary

Introduction

Fiscal policies have a benign role for economic growth in the region, namely to provide a stable macro environment for investment. The changed environment of liquidity constraints on external borrowing and slowdown in output growth has led to new attention being directed toward the role and contribution of fiscal policies to reviving growth in the region (Gangopadhyay & Chatterji, 2005). Fiscal policies were neither the cause of the crisis nor the critical determinant of economic growth. Their role in both the pre-crisis and post-crisis period in Asian countries has been seen as crucial, primarily in terms of its contribution to economic growth

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