East Asia DOI 10.1007/s12140-014-9211-5
The Relationship Between Revenue and Expenditure in the ASEAN Countries Cosimo Magazzino
Received: 18 January 2014 / Accepted: 28 April 2014 # Springer Science+Business Media Dordrecht 2014
Abstract The aim of this study is to assess the relationship between revenue and expenditure in the ASEAN countries. Using annual data for the period between 1980 and 2012 in ten member states, a long-run relationship between government expenditure and revenue emerges, both in ASEAN-6 and ASEAN-10 countries. Granger causality analysis shows mixed results, even though for five ASEAN countries the predominance of “tax-and-spend” hypothesis exists, given that government revenue drives the expenditure. Moreover, mixture models seem to produce homogeneous groups, considering the socio-economic structure, welfare state, and historical aspects. Finally, convergence measures show interesting results, confirming the sample’s heterogeneity. Keywords ASEAN . South-East Asia . Economic growth . Government expenditure . Government revenue . Panel JEL B22 . C33 . E62 . F33
Introduction The global economic and financial crisis in 2008–2009 led to a deep contraction in developing Asia’s growth. The severity of the economic downturn, however, varied from country to country. Asian governments then turned to activist fiscal policy by acting as the consumer of last resort. This was facilitated by the relatively healthy state of public finances in Asia vis-à-vis industrialized countries. Yet, the effectiveness of countercyclical fiscal policy will depend not only on its size but also its composition, i.e., relative importance of tax cuts versus government spending [22]. As explained ADB [2], the economic outlook for developing Asia is subject to three major risks as follows: an economic slowdown in the USA from missed fiscal deadlines, a worsening Eurozone debt crisis, and destabilizing capital flows. C. Magazzino (*) Department of Political Sciences, Roma Tre University, Via G. Chiabrera 199, 00145 Rome, RM, Italy e-mail:
[email protected]
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With public finances already under pressure, there may be limited options to provide support to the poor and the vulnerable groups. Large post 1997–1998 crisis fiscal deficits and financial sector restructuring have substantially raised public debt levels in Indonesia, Malaysia, Thailand, and the Philippines. Therefore, fiscal vulnerability has displaced financial sector weakness as a key source of crisis risk, especially for the Philippines and Indonesia. Achieving significantly higher primary surpluses in these economies would lower the risk of another regional financial crisis rearing up in a different guise [31]. Sound fiscal policy is crucial to promote internal equilibria, such as price stability and sustainable growth in employment and output. A large number of studies have considered the effects of fiscal policy on growth in different countries and/or regions, applying a variety of methodologies and analyzing different types of data. As discussed in Clinton et al. [9], fiscal consolidations generally involve a fundamental trade-off between short-run pain and long-run gain. The pain arises from the negative multiplier effects of lower spending or higher taxes, while the gain stems from the lower world interest rates and lower distortionary taxes associated with lower debt levels. The aim of this paper is to analyze the government revenue-expenditure nexus for the Association of Southeast Asian Nations (ASEAN, hereinafter) countries in the 1980–2012 period, using IMF data. Even though this issue has been well-debated in literature, few studies have analyzed Southeast Asia. Our analyses consider two groups of countries, namely ASEAN-6, which includes the former member states, and ASEAN-10, which concerns all countries of the Southeast Asia region. Since these subgroups of countries could represent an optimal currency area, sharing a common money, their budgetary policy might be integrated. The rest of this paper is organized as follows. “Literature Survey” section outlines the theoretical background and empirical evidence about this issue. In the “Methodology and Data” section, we briefly illustrate econometric methodologies and data. “Empirical Findings” section shows the empirical analyses, and “Concluding Remarks” section concludes, giving some policy implications.
Literature Survey During the 1960s, there were repeated unsuccessful attempts to create an association among Southeast Asian nations. The Association of Southeast Asia (ASA) composed of Malaysia, the Philippines, and Thailand was established in Bangkok on July 31, 1961. On August 8, 1967, the “Bangkok Declaration” gave birth to ASEAN, the Association of Southeast Asian Nations. ASEAN united the following five countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. It was based on three principles: respect for state sovereignty, non-intervention, and renunciation of the threat or use of force in resolving disputes. Brunei joined on January 8, 1984, Vietnam on July 28, 1995, and Laos and Myanmar on July 23, 1997. A political crisis in Cambodia prevented this country from joining ASEAN in 1997 as originally planned. However, the nation succeeded in joining the association on April 30, 1999 [42]. In order to understand the effectiveness of fiscal policy actions to reduce budget deficits, one needs to examine the time-series behavior of government revenues and government expenditures and their interdependence [38]. Several hypotheses have been
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set forth to describe the temporal relationship between revenues and expenditures. First, the “tax-and-spend” hypothesis advanced by Friedman [14], and Buchanan and Wagner [6] argues that changes in government revenues lead to changes in government expenditures. Second, the “spend-and-tax” hypothesis suggests that changes in government expenditures lead to changes in government revenues. This hypothesis receives a theoretical support by Peacock and Wiseman’s [39] “displacement effect” as well as by Barro’s [5] Ricardian Equivalence. Third, Musgrave [36] and Meltzer and Richard [34] suggest that voters compare the marginal benefits and marginal costs of government services, which involve a feedback mechanism, with a bidirectional causality flow. Thus, revenue and expenditure decisions are jointly determined under this “fiscal synchronization” hypothesis. Finally, Baghestani and McNown [4] relates to the institutional separation of the expenditure and taxation decisions of government, arguing in favor of a “neutrality” hypothesis, without any causal link. Obviously, the importance of identifying different fiscal trajectories should be highlighted, since alternative theoretical models involve different fiscal policy schemes and effect on economic activity. However, few studies have analyzed the government revenue-expenditure relationship for the Southeast Asia. Among them, the “tax-and-spend” hypothesis is confirmed by Huang and Tang [20], Chang and Ho [7], Karim et al. [24],1 Loganathan and Taha [27], Loganathan et al. [26], and Kurniawan [25], while Mithani and Khoon [35], Karim et al. [24],2 Hong [19], and Saysombath and Kyophilavong [44] found empirical results in line with “spend-and-tax” hypothesis. “Fiscal synchronization” hypothesis received empirical support by Aziz et al. [3], Chang et al. [8],3 Taha and Loganathan [46], and Mehrara et al. [33]. Finally, Chang et al. [8] 4 is in line with “neutrality” hypothesis (see Table 1). Wu [49] examines the sustainability of Taiwan’s fiscal deficits from 1955–1994, finding that budget deficits have increased and have also persisted since 1989, but there is no evidence to suggest that the government tends to default on its debts. Therefore, the budget deficit policy in Taiwan seems to be sustainable. Sinha [45] analyzes the relationship between gross domestic product (GDP) and government expenditure in Malaysia for 1950–1992, showing the existence of long-run relationship between GDP and government expenditure. Moreover, the growth of government expenditure does not contribute to the economic activity. The empirical results in Narayan [37] suggest that for three out of the nine countries, government revenue and government expenditure are cointegrated. In fact, for Indonesia, Singapore, and Sri Lanka in the short-run and for Nepal in both the shortand long-run, it emerges support for the tax-and-spend hypothesis, while Indonesia and Sri Lanka are in conformity with the spend-and-tax hypothesis in the long-run; finally, for other countries, there is evidence of neutrality. Testing the relationship between military expenditure and economic growth in ASEAN-5 countries from the year 1965 to 2006, Hirnissa et al. [17] discover that there are only three (Indonesia, Thailand, and Singapore) out of five countries analyzed 1
For Singapore and Thailand. For Indonesia, Malaysia, and the Philippines. 3 For Taiwan. 4 For Thailand. 2
East Asia Table 1 Results of existing literature on government revenue and expenditure relationship for Southeast Asian countries Author(s)
ASEAN countries
Time period
Causality
Aziz et al. [3] Chang and Ho [7]
Malaysia (A)
1960–1997
GGR↔GGTE
Taiwan (A)
1967–1999
Chang et al. [8]
GGR→GGTE
Taiwan and Thailand (A)
1951–1996
Taiwan: GGR→GGTE Thailand: Neutrality
Hong [19]
Malaysia (A)
1970–2007
GGTE→GGR
Huang and Tang [20]
Taiwan (A)
1951–1987
GGR→GGTE
Kurniawan [25]
Indonesia (A)
1982–2010
GGR→GGTE
Loganathan et al. [26]
Malaysia (A)
1970–2009
GGR→GGTE
Loganathan and Taha [27]
Malaysia (A)
1970–2006
GGR→GGTE
Karim et al. [24]
ASEAN-5 (A)
1970–2000
Indonesia, Malaysia, and the Philippines: GGTE→GGR Thailand and Singapore: GGR→GGTE
Mehrara et al. [33]
40 Asian countries (A)
1995–2008
GGR↔GGTE
Mithani and Khoon [35]
Malaysia (Q)
1970–1994
Narayan [37]
9 Asian countries (A)
Saysombath and Kyophilavong [44]
Laos (A)
1980–2010
LR: GGTE→GGR SR: Neutrality
Taha and Loganathan [46]
Malaysia (A)
1970–2006
GGR↔GGTE
SR: GGTE→GGR Indonesia (LR): GGTE→GGR Indonesia (SR): GGR→GGTE
→ indicates unidirectional causality, while ↔ implies bidirectional causality Sources: our elaborations A annual data, Q quarterly data, LR long-run, SR short-run
exhibit long-run relationship between military expenditure and economic growth. While for the case of Singapore, the causality is bidirectional, for Indonesia and Thailand, it is unidirectional from military expenditure to economic growth. Finally, for Malaysia and Philippines, no meaningful relationship could be detected. In an analogous study, Hirnissa et al. [18] explores the inter-relationship between military expenditure, education expenditure, and health expenditure in eight Asian countries, with mixed results. Empirical findings in Eskesen [11] show that fiscal policy can indeed be used for demand management, although the impact may be somewhat short-lived. To be effective, fiscal stimulus should be timely, well-targeted, significant, and prolonged. The results in Hadiwibowo [16] for Indonesia indicate that government revenue and current expenditure affect investment and economic growth negatively. On the contrary, development expenditure has positive effects on investment and economic growth. The evidence in Jha et al. [22] suggests that across emerging Asian countries, tax cuts may be more effective for countercyclical purposes than higher spending. That is, unanticipated tax cuts stimulate economic activity more than public spending. Moreover, the relative ineffectiveness of government spending in increasing output suggests a clear need to improve the design of countercyclical spending to enhance its impact in the future. In particular, the composition of discretionary expenditure matters.
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Investigating the relationship between government revenue and government expenditure in 40 Asian countries for the period of 1995 to 2008, Mehrara et al. [33] finds a cointegration relationship, while causality tests indicate a bidirectional flow in both the long- and the short-run. Finally, an exhaustive discussion of the government revenue-expenditure nexus is shown in Dalena and Magazzino [10].
Methodology and Data With the growing use of cross-country data over time to study purchasing power parity, growth convergence, and international R&D spillovers, the focus of panel data econometrics has shifted toward studying the asymptotic of macro panels with large N (number of countries) and large T (length of the time-series) rather than the usual asymptotic of micro panels with large N and small T. A strand of literature applied timeseries procedures to panels, worrying about non-stationarity, spurious regression, and cointegration. Im et al. (IPS, [21]) proposed a test based on the average of the augmented Dickey-Fuller (ADF) statistics computed for each individual in the panel. Formally, we assume that under the alternative hypothesis, the fraction of the individual processes that are stationary is non-zero. Maddala and Wu [28] proposed a new simple test based on Fisher’s suggestion, which consists in combining p values from individual unit root test. Fisher-type tests approach testing for panel-data unit roots from a metaanalysis perspective. The joint test statistic, under the null and the additional hypothesis of cross-sectional independence of the error terms εit in the ADF equation, has a chisquare distribution with 2N degrees of freedom. In essence, we choose these tests because they do not require strongly balanced data, and the individual series can have gaps. Then, we control for the (eventual) cross-section dependence in the data. The parametric testing procedure proposed by Pesaran [41] tests the hypothesis of crosssectional independence in panel data models with small T and large N. Furthermore, we adopted the t test for unit roots in heterogeneous panels with crosssection dependence, proposed by Pesaran [40]. Parallel to the Im-Pesaran-Shin (IPS) test, it is based on the mean of individual DF (or ADF) t statistics of each unit in the panel. Null hypothesis assumes that all series are non-stationary. Westerlund [48] proposed new panel cointegration tests that are designed to test the null hypothesis of no cointegration by testing whether the error correction term in a conditional error correction model is equal to zero. If the null hypothesis of no error correction is rejected, then the null hypothesis of no cointegration is also rejected. Granger causality tests [15] are statistical tests of causality in the sense of determining whether lagged observations of another variable have incremental forecasting power when added to a univariate autoregressive representation of a variable. Xt is Granger causal for yt if xt helps predict yt at some stage in the future. It should be noticed, however, that Granger causality is not causality in a deep sense of the word. It just talks about linear prediction, and it only has “teeth” if one thing happens before another. Finally, a finite mixture approach is proposed as an alternative tool to shed light on the relationship between public expenditure and revenue as well as to test for the
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Table 2 List of the variables
Variable Explanation
Source
y
Gross domestic product, constant prices, % change IMF
GGTE
General government total expenditure, % of GDP IMF
GGR
General government revenue, % of GDP
IMF
presence of poles of attraction. Mixture models express the density of a random variable as the weighted average of a finite number of component densities with specified functional form. The parameters estimated are the number of the mixture components and the parameters of the component densities. The empirical investigation in this study is carried out using panel methodologies for ASEAN member countries. The data have yearly frequency (from 1980 to 2012) and were provided by IMF5 database.
Empirical Findings Table 2 sums up the variables used in our empirical analyses. Moreover, Fig. 1 in Appendix gives supplementary graphical descriptions of these data. In Table 3, an exploratory data analysis is given. Moreover, for further preliminary descriptive statistics, see Table 18 in Appendix. We focused on two groups, namely ASEAN-10 and ASEAN-6. 6 Interestingly, ASEAN-10 countries show an economic growth faster than ASEAN-6 ones, together with small government size indices; in fact, public expenditure/GDP as well as revenue/GDP ratios are lower. Conversely, government expenditure share presents a similar median, around 21 %. A standard assumption in panel data models is that the error terms are independent across cross-sections. Empirical results in Table 4 show that, at a 5 % significance level, the null hypothesis of cross-sectional independence in our panel may be maintained for both series (GGR and GGTE) in ASEAN-6 countries and for government expenditure in ASEAN-10, while for revenue/GDP ratio, we reject H0. Table 5 shows the results of IPS and Fisher-type panel unit root tests. The level models have been specified without subtracting the cross-sectional averages from the series, while the Hannan-Quinn information criterion is used to determine the number of lags used to remove higher-order autoregressive components of the series. In general, GGR appears to be non-stationary (I(1)) everywhere, both in specification with trend (the more reliable) and in that without trend. Similar conclusions could be derived for government expenditure (GGTE), given that the null hypothesis that of non-stationarity in all panel members is rejected only in the MW test when the trend is not included in the model. To eliminate the cross-dependence, the standard DF (or ADF) regressions are augmented with the cross-section averages of lagged levels and first-differences of the individual series (CADF statistics). Here, when cross-dependence problem is taken into account, previous results are confirmed, since both government revenue and 5
See the website: http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx. ASEAN-10 includes all ASEAN countries, while ASEAN-6 relates the former member states: Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. 6
East Asia Table 3 Exploratory data analysis (ASEAN-6 and ASEAN-10 countries, 1980–2012) Variable ASEAN-6
ASEAN-10
Mean
Median
Standard deviation
Skewness
Kurtosis
Range
4.7947
5.1670
4.0702
−1.0336
5.5925
27.8900
GGTE
26.6232
21.6340
11.5185
1.5550
5.0713
56.9940
GGR
27.5504
23.2080
12.4111
2.0089
7.7040
71.1180
5.6700
5.9055
4.0366
−0.6974
6.0143
34.6590
y
y GGTE
23.3742
20.8000
10.9845
1.5096
5.9202
62.8390
GGR
22.5446
20.2080
12.6237
1.6589
7.4042
81.0990
expenditure series are integrated of order 1 in both samples, in line with conclusions based on previous tests (Table 6). In fact, the null hypothesis that all series are nonstationary largely holds. The panel cointegration tests point to the existence of a long-run relationship between government revenue and expenditure. As for these tests, the Ga and Gt statistics test H0: ai =0 for all i versus H1: ai
