The fiscal policy impact on economic performance in ASEAN5+3 : empirical analyses

Abstract

This dissertation consists of two research papers to examine the impact of fiscal policy on overall economic performance in ASEAN5+3 and Thailand. The relationship between fiscal policy and economic growth has been a highly contentious issue among economists. Main economic theories differ in their proposition on the role of fiscal policy. Classical economics believes that fiscal policy has no long-term implication on output growth, while Keynesian economics put forth its theory that fiscal policy does have both temporary and permanent impact on the economy. With these seemingly opposing views, it is crucial for the policy-makers and the public to understand the role of fiscal policy particularly taxation and government expenditure on economic growth. It is imperative for policy-makers to better understand the role and implication of fiscal policy. This dissertation titled “The Fiscal Policy Impact on Economic Performance in ASEAN5+3: Empirical Analyses” comprises of two research studies as follows: 1) “Assessment of Fiscal Policy Impact on Economic Performances in ASEAN5+3” and 2) “Thailand’s Fiscal Policy Impact Analysis.” The first paper would focus on examining the role of fiscal policy and economic growth using the panel data for the five ASEAN countries and the Plus Three countries (China, Japan, and Republic of Korea) using cross-sectional data during the periods from 1979-2008. This study classifies fiscal policy into productive versus non-productive expenditure and distortionary versus non-distortionary taxation to examine in details how fiscal policy implemented by ASEAN5+3 countries has impacted growth. Other non-fiscal variables are also included such as domestic investment, international trade, and labor force. The overall results strongly suggest that fiscal policy in the ASEAN5+3 does have discernable impact to explain the strong growth performances in the region. Moreover, economic growth can also be attributed to higher domestic investment, international trade, and prudent fiscal policy as the underlying factors in supporting growth in the past decades. The second paper would focus specifically on Thailand using the Vector Autoregression (VAR) and Vector Error Correction Model (VECM) methods to identify the implication of fiscal policy shocks on growth as well as analyze detailed components of tax and expenditure policies on economic growth in Thailand. The study finds that, contrary to a priori expectation, the short-run fiscal policy implemented through tax and public spending does not have significant impact on economic growth. However, in the longer-term, fiscal policy show discernable impact on growth particularly tax exhibiting negative impact and government expenditure showing positive impact on growth. However, in the case of Thailand, public consumption and its components show positive effects on growth, while public investment does not seem to have positive impact on economic performance in the longer-term. This serves as a critical illustration for Thai policy-makers to improve the productivity of Thailand’s public investment spending in the coming years. Overall, the main finding of the two researches is that fiscal policy does have impact on growth in both positive and negative ways. Tax policy generates negative impact on economic growth in which the government must consider the costs and benefits of implementing specific tax policies in order to minimize economic distortions and to ensure that the negative effect from raising the fiscal resources would be offset by the positive effect after the fiscal resources are deployed through spending policies. Public expenditures can have positive impact on growth by its provisions of public goods, infrastructure development, national security, law and order. However, some public spending generates more positive economic effects than others. In Thailand, public investment has not generated discernable positive growth impact on the economy. Public expenditure policy should reorient spending towards more productive types in order to maximize the positive impact on economic growth and development. Last but not least, it is hoped that these studies would shed insightful findings and analyses that would benefit policy-makers in Thailand as well as the Asian region responsible for fiscal policy formulation for the years to come.