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Are there links between institutional quality, government expenditure, tax revenue and economic growth? Evidence from low-income and lower middle-income countries

Mak Arvin, Rudra P. Pradhan and Mahendhiran S. Nair

Economic Analysis and Policy, 2021, vol. 70, issue C, 468-489

Abstract: We study the interactions between institutional quality, government expenditure, tax revenue, and economic growth in low-income countries (LICs) and lower middle-income countries (LMICs) over 2005–2019. The primary distinguishing factor of the paper is the simultaneous inclusion of all these four variables in a single temporal causal model. A second distinguishing feature of the paper is its focus on LICs and LMICs and a clear distinction between short-run and long-run results. Tax revenue is considered as general revenue as well as revenue from taxes on international trade, and customs and other import duties. Our results show that institutional quality, government expenditure, tax revenue, and economic growth often have endogenous links among each other in the short run. These results are not always uniform across our samples. On the other hand, a robust and uniform result across all samples is that the three covariates are important drivers of long-term economic growth. Thus, the co-development of stronger institutions and more effective fiscal policies (relating to taxes and government expenditure) appear to be key in procuring sustained long-term economic growth of countries.

Keywords: Tax revenue; Government expenditure; Institutional quality; Economic growth; Granger causality (search for similar items in EconPapers)
JEL-codes: E31 E44 O16 O43 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.eap.2021.03.011

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