Assessing Fiscal Behavior of Asian Economies to Foreign Capital

Abstract

The current study has empirically estimated the impact of foreign capital in terms of grants and loans on the fiscal behavior of nine developing countries for Asian region over a period of 1984-2015. For this purpose it developed fiscal response model and used Non-linear Three-Stage Least Squares method for estimation. The results of the study revealed that 84 percent of loans money was used for consumption purpose and merely 16 percent of loans were channeled towards investment purpose that shows that the governments of this region heavily relying on external loans to meet recurrent expenditures. However the study has also an interesting finding that the most of the grant money goes for development purpose with a little leakage into the consumption. And the loans have pro-consumption effect while grants have pro-investment effect. It also found that 67 percent of the tax money is spent on recurrent expenditures while 33 percent is used for developmental purpose. The study proposes that the governments of this region should minimize its reliance on external sources particularly on loans and it should ensure that they are more directed towards developmental purpose. Moreover, Government should follow the policy of self reliance and should increase its tax base and tax net. It also proposes that health and education sector should be given priority.