Does Poverty Matter for Tax Revenue Performance in Developing Countries?

This article explores the effect of poverty on tax revenue performance (tax revenue share), using an unbalanced panel data set of 102 developing countries over the period from 1996 to 2015. Based on the two-step system generalized methods of moments (GMM) approach, the empirical analysis shows that higher poverty rates significantly reduce tax revenue performance in developing countries. However, the magnitude of this negative effect is lower in least developed countries (LDCs) than in other countries of the sample. The analysis has also revealed that the tax revenue performance effect of poverty depends on the level of household consumption as well as the prevailing unemployment rate in the economy. Finally, development aid inflows help to mitigate the negative effect of poverty on tax revenue performance in developing countries. These findings not only highlight the importance of poverty for tax revenue performance in developing countries, but they additionally show that the provision of higher amounts of development aid to these countries could help them mitigate the adverse tax revenue effect of poverty, and even allow them to enjoy higher tax revenue performance, which is key for attaining their development objectives. JEL Classification: I30, I32, H20

Financial Sustainability of Microfinance Institutions and Macroeconomic Factors: A Case of South Asia

This study explores the financial sustainability of microfinance institutions (MFIs) in the economic context to identify how macro-level economic decisions affect the micro-level decisions in the microfinance sector in South Asia. For that purpose, the data of 409 South Asian MFIs combined with the macroeconomic variables of respective countries are used over the period 1999–2017. The empirical analysis uses a fixed-effect model (FEM) to analyse the unbalance panel data of microfinance institutions and macroeconomic variables. We employ two-stage least squares (2SLS) model for robustness and System Generalized Method of Moment (GMM) to address the potential endogeneity and over-identification bias. The results reveal that economic indicators such as foreign investment, human development, inflation, interest rate, private credit, and labour force participation have negatively influenced financial sustainability except for the GDP growth. The overall economic results seem imperative from the good-governance perspective of MFIs. Besides, the government and microfinance policymakers need to give due consideration to the macro-level economic decisions to achieve the financial sustainability of MFIs. JEL Classification: A12, G21, G28, O1, Q01

Determinism and Non-linear Behaviour of Log-return and Conditional Volatility: Empirical Analysis for 26 Stock Markets

Determinism and non-linear behaviour in log-return and conditional volatility time series of the stock market index is examined for twenty-six countries. For this goal, the principal statistical techniques used in this study are a robust estimator of correlation dimension, a normalized non-linear prediction error, and pseudo-periodic surrogate data method. The proposed approach indicates, first, the stochastic behaviour of all log-return time series. Second, the inability of local linear, ARMA, or state- dependent noise models (such as ARCH, GARCH, and EGARCH) to describe its structure for the frontier, emerging, and developed markets. The same stochastic behaviour of conditional volatility time series, estimated by the stochastic volatility model with moving average innovations, is detected. This finding proves the efficiency of the stochastic volatility model compared with some analysed types of GARCH models for all studied markets. JEL Classification: C12, C52, D53, E44

Were Foreign Exchange Markets Reacting Negatively to Political Events? The Case of Malaysia

This article explores the effects of political events on foreign exchange returns in Malaysia. We identify five political events in recent history, namely the 13th General Election (GE13), the imprisonment of a key opposition politician, the scandal from the 1MDB exposé, the appointment of a new Central Bank Governor and the 14th General Election (GE14). Using event studies, our findings show that the imprisonment of the opposition party leader triggered a favourable response from the foreign exchange market. However, market reactions to the 1MDB scandal were largely unfavourable. The GE13 triggered unfavourable market response, while the reverse is true for market reactions to GE14. Market response to the appointment of the new Central Bank Governor was rather positive. The Event Study is the first of its kind that examines the foreign exchange market implications of key political events in Malaysia. There are practical considerations that emanate from these findings. JEL Classification: F31, D72, D73, O38

Incentives, Status and Thereafter: A Critical Survey

This article provides a critical discussion on the working of status as an instrument to elicit desirable effort within an organization. It postulates a comprehensive survey of the studies on incentive, especially non-monetary incentives like status. Different studies are summarized concisely and elaborate comments on the divergent views on valuation for status, the relationship between monetary and status incentives, the technique of modelling status and the cost of introducing status have been illustrated. The article underlines some probable adverse consequences associated with the use of the status incentive. Status works by creating inequality and has strong unwarranted influence even beyond organizational purview. It emphasizes the need for profound research to account for the optimal and prudent use of status as incentives. JEL Classification: L2, D21, D86

International Capital Flows When Safe Assets Scarcity Matters

In an open multi-country economy, the safe assets supply shapes the pattern of international capital flows. A higher productivity growth rate raises the net capital inflows for economies with abundant safe assets, but reduces the net capital inflows for economies with scarce safe assets. The cross-section analysis on a sample of 170 economies over 1980–2013 confirms the theory. The evidence is robust for instrument-variable (IV) analysis method. JEL Classifications: F15, F36, F43

Emerging Issues in Fiscal Sustainability in India: A Study of Central Government Finances, 1979–1980 to 2018–2019

The objective of the article is to examine the fiscal sustainability of the Indian central government’s finances in the era of rule-based fiscal policy. Asymmetric budgetary adjustment process and revenue–expenditure nexus are also analysed in this article by employing threshold autoregressive models/momentum threshold autoregressive models. Findings of the article reveal emerging issues in fiscal sustainability in India. The central government’s expenditure as a share of gross domestic product (GDP) has been falling continuously, leaving little room for further pruning. The current scenario of negative growth in central government’s revenue as a share of GDP, if not reversed, can become the Achilles heel of government finances in India. JEL Classification: E62, H600, H500, C32

The Optimal Distribution Rule of Federal Funds to States in India: A Suggested Methodology

A federal country like India distributes centrally collected funds through certain distribution rules, framed by the finance commission every five years, which primarily aims at horizontal equity among the states, although the goal of vertical equity has also been accommodated lately. The distribution rules do change, but they are largely governed by population and taxable capacity in a static sense. As a result, this brings some horizontal equity in the stated time frame but misses the root cause of inequity among states. This highlights the importance of the dynamics of growth of per capita income of the states which depends on public capital formation since private investment is complementary to public investment. This also raises the issue of time preference along with the attitude towards inequality aversion on the part of individuals in different states in India, which determines the savings that set the limits to private capital formation. This helps one to estimate the optimal value of public capital in a state which would ensure certain predetermined growth target along with inclusivity. If the finance commission could accommodate in its distribution rule the development gap of each state in terms of actual and optimal public capital as mentioned, the horizontal as well as vertical equity can be pursued in a sustainable manner since this addresses both inequity among and within states over time.

Output-inflation Trade-off in the Presence of Foreign Capital: Evidence for Vietnam

On one monthly time-series data set of Vietnam economy over 02/2008–09/2018, the Time-Varying-Coefficient VAR model records that the trade-off between inflation and output growth is mitigated by the foreign capital inflows. The inflation is mostly determined by credit supply growth, while output growth is largely driven by foreign direct investment (FDI) capital inflows. A monthly increase of FDI by USD 1 billion can raise 1.77% of monthly output growth rate. The result also holds on accounting for exchange rate fluctuation. JEL Classifications: E31, F15, F36, F43

Gravity Models in International Trade: An Exploration in Econo-Physics

Several strands of the static and dynamic theoretical constructs and the empirical applications in the subject of economics owe substantially to the well-known principles of physical sciences. The present article explores as to how the development of the popular gravity models in international trade can be traced back to Newton’s law of gravitation, and to both Ohm’s Law and Kirchhoff’s Law of current electricity, as well as to the pattern recognition techniques commonly deployed in scientific applications. In addition to surveying these theoretical analogies, the article also offers numerical applications for observed trade patterns between India and a set of countries. JEL Classifications: F41, F42, C61, F47