The finding indicates that governance always positively affects the economy. However, when it interacts with public finance, this interaction has a diverse effect on economic growth in developed countries, depending on tax revenue or government expenditure. Nevertheless, in developing countries, this interaction has a beneficial impact on the growth of an economy. | VNU Journal of Science: Economics and Business, Vol. 34, No. 5E (2018) 1-25 How Does Governance Modify the Relationship between Public Finance and Economic Growth: A Global Analysis Nguyen Phuong Lien* Hoa Sen University, 8 Nguyen Van Trang, District 1, Ho Chi Minh City, Vietnam Received 18 July 2018 Revised 02 October 2018; Accepted 25 December 2018 Abstract: Aiming to investigate the role of governance in modifying the relationship between public finance and economic growth, this study applied a seemingly unrelated regression model for the panel data of 38 developed and 44 developing countries from 1996 to 2016. It is easy to see that this research measures public finance by two parts of the subcomponents: total tax revenue and general government expenditure. We also call governance the “control of corruption indicator”. The finding indicates that governance always positively affects the economy. However, when it interacts with public finance, this interaction has a diverse effect on economic growth in developed countries, depending on tax revenue or government expenditure. Nevertheless, in developing countries, this interaction has a beneficial impact on the growth of an economy. Keywords: Governance, public finance, economic growth, developed and developing countries. 1. Introduction Dzhumashev (2014) also showed that corruption forces government spending to be more effective [2]. He suggested that increasing levels of corruption may improve economic growth in less developed countries, but it should be detrimental in developed countries due to higher costs of private production. D‟Agostino, Dunne, and Pieroni (2012) and Ugur (2014) indicated that corruption suggests weakness of institutional quality, and has a potentially harmful effect on economic growth [3, 4]. Moreover, d‟Agostino, Dunne, and Pieroni, (2016) revealed that, although corruption does not directly affect the growth of economies, its interaction with spending on investment and military .
