Essays on government spending-inflation nexus and fiscal decentralization-development outcomes nexus : evidence from emerging asia

This thesis brings out the important roles that the public sector finance and reforms play in shaping nations' welfare through providing empirical evidence using new data sets on the links between government spending and inflation, and between fiscal decentralization and development outcomes for the four Asian emerging economies of India, China, Indonesia and Vietnam. Chapter 2 empirically tests the nexus between government spending and inflation for the three countries of India, China and Indonesia utilizing the cointegration and the Vector Error Correction Model (VECM) method on time series data for the period 1970-2010. This chapter employs a bivariate VECM of government spending and inflation and, to address potential endogeneity concerns, two trivariate models with real GDP and nominal exchange rate separately added. The results show a cointegrating long-run relationship between government spending and inflation and that, in the short run, government spending can significantly influence the rate of inflation (positively for India and Indonesia while negatively for China). An important policy implication is that governments in the region would need to be more prudent regarding decisions to change government spending, which can potentially result in large fluctuations in inflation. Chapter 3 shifts the focus to fiscal policy matters at sub-national levels. This chapter examines the effects of fiscal decentralization on economic growth at the provincial level in Vietnam, an Asian economy with rapid growth performance resulting from the comprehensive reform, 'Doi Moi', starting in 1986. Using a newly available provincial-level dataset spanning the period 2004-2010, this chapter provides evidence that fiscal decentralization has had a significant and positive impact on provincial economic growth in Vietnam during the period of analysis. The measure of fiscal decentralization adopted captures both the fiscal capacity and autonomy of provinces. The fixed-effect and the Generalized Methods of Moments (GMM) models help address the unobserved heterogeneity and potential endogeneity issues. Finally, Chapter 4 further quantitatively investigates the effects of fiscal decentralization on development outcomes. Specifically, the two main hypotheses to be tested in this chapter are whether fiscal decentralization had significant effects on poverty outcome and health outcome at the provincial level in Vietnam during the period 2006-2011. Given the important role of the agriculture sector, the chapter also tests for other hypotheses that are concerned with sectoral growth patterns, the contribution of agricultural growth to poverty reduction, and the urban-rural gap in poverty. The main results suggest that fiscal decentralization had a positive effect on health outcomes but, surprisingly, did not contribute to poverty reduction. Another finding is that agricultural sector has made a significant contribution to poverty reduction in dominantly agricultural provinces. Also, the poorer regions have benefited from agricultural growth more than growth in other sectors. Finally, the chapter does not find significant evidence for the urban-rural gap for poverty in Vietnam. On balance, from a policy maker's perspective, while growth-enhancing effects are encouraging, the potential distributional effects of fiscal decentralization warrant careful considerations of the reform agenda so that the poor and the disadvantaged can share the gains in potential benefits