A Model to Explain the Impact of Government Revenue on the Quality of Governance and the SDGs^†

Round 1

Reviewer 1 Report

 

This paper investigates empirically in a wide panel of countries and for several decades of data the direct effects of changes in government revenue on the achievement of SDGs and the indirect impact on them through improvements in the quality of governance.

The authors employ two alternative methodologies to quantify the effects of an increase in the government revenues per capita on various indicators of governance quality (single equation GMM and a Vector Error Correction VECM model). Both models show significant effects of increasing government revenues on the governance indicators.

The paper is carefully crafted in terms both of methodology and clarity and the issue is certainly relevant.

I have one main concern, however, about the consistency of estimates and their interpretation, namely, the fact that both government revenue and the quality of governance are likely to be increasing in a country’s level of GDP.

The long-run changes in both variables are similarly strongly dependent on GDP growth. Indeed, the authors somehow acknowledge this risk and admit: “A weakness of this work is that we treated the governance indicators as exogenous variables. We believe that governance will also respond to economic development, and by ignoring this effect, we may be underestimating the impact of an increase in government revenue on the SDG indicators”.

Consequently, any empirical investigation of the relationship between revenues, governance and SDGs achievement should control for the level of GDP. This is my only major suggestion to improve the study.

Author Response

Response to referee 1

This referee suggests that we should control for GDP in our analysis.

Response

We have added the following comment

There is obviously a close link between Government revenue and GDP, in almost all countries the correlation between these two is very high. In our modelling we have focused on Government revenue rather than GDP because one of our concerns is the effect of tax avoidance on the SDGs. When this is reduced government revenue will increase but GDP may not. We therefore focus on the link from revenue to the quality of governance rather than GDP.

 

Rather than seeing GDP as a separate effect on governance we view the system as GDP affects government revenue which in turn affects governance.

The referee said

The long-run changes in both variables are similarly strongly dependent on GDP growth. Indeed, the authors somehow acknowledge this risk and admit: “A weakness of this work is that we treated the governance indicators as exogenous variables. We believe that governance will also respond to economic development, and by ignoring this effect, we may be underestimating the impact of an increase in government revenue on the SDG indicators”.

This has misinterpreted what we said, the work we were referring to here was our earlier paper which did treat governance as an exogenous variable. This paper clearly does not do that as the whole point of this paper is to derive a model for governance. We have attempted to clarify this by amending the sentence

A weakness of this earlier work is that we treated the governance indicators as exogenous variables

 

Reviewer 2 Report

Article title: A Model to explain the impact of government revenue on the quality of governance and the SDGs

 

After reviewing this paper carefully, I have some comments below:

- In the introduction, the authors should make clear the research objective and new contribution to the literature. What is the research gaps in this study?

 

- Need to introduce the paper structure at the end of the introduction

- In section 2, the authors need to review more and update some related studies. I suggest the author review and cite some works relating to governance quality (institutional quality) such as Dang et al. (2022), Abbas et al (2021); Almustafa et al. (2023); Musa et al (2023) (see references) ...

 

- In section 3, the authors must establish sub-sections, for example 3.1 research data...

- In table 3, the author should show the Hansen test, the number of instruments for GMM results.

- The author should show the research limitations in the conclusion

- There are some grammatical errors, which the authors need to check carefully.

 

References

Abbas, Q., Junqing, L., Ramzan, M., & Fatima, S. (2021). Role of governance in debt-growth relationship: Evidence from panel data estimations. Sustainability, 13(11), 5954.

Almustafa, H., et al. (2023). "The impact of COVID-19 on firm risk and performance in MENA countries: Does national governance quality matter?" PloS one 18(2): e0281148.

 

Dang, V. C., et al. (2022). "Corruption, institutional quality and shadow economy in Asian countries." Applied Economics Letters: 1-6.

Musa, K., Sohag, K., Said, J., Ghapar, F., & Ali, N. (2023). Public Debt, Governance, and Growth in Developing Countries: An Application of Quantile via Moments. Mathematics, 11(3), 650.

Author Response

Referee 2

The referee said

- In the introduction, the authors should make clear the research objective and new contribution to the literature. What is the research gaps in this study?

We have added the following statement to the introduction

In this paper, we investigate the importance of this route with the aim of combining these sets of equations in a single model which will capture both effects. Thus the objective here is to estimate a set of relationships which will explicitly model the link between government expenditure and the various measures of the quality of governance.

 

Referee  2 said

Need to introduce the paper structure at the end of the introduction

The introduction ends with the following statement:

The plan for the rest of this paper is as follows; section 2 reviews the literature, and section 3 outlines the research question, the broad methods, and the data we will use. Section 4 then goes through the econometric analysis and results, and section 5 gives conclusions and policy implications.

Referee 2 said

In section 2, the authors need to review more and update some related studies. I suggest the author review and cite some works relating to governance quality (institutional quality) such as Dang et al. (2022), Abbas et al (2021); Almustafa et al. (2023); Musa et al (2023) (see references)

We have added these references

Referee 2  said

- In section 3, the authors must establish sub-sections, for example 3.1 research data...

We have done this

Referee 2 said

- In table 3, the author should show the Hansen test, the number of instruments for GMM results.

The j-statistic is the Hansen test, this has been clarified. The instruments are listed in the footnote.

Referee 2 said

The author should show the research limitations in the conclusion

we have added

The main limitation of this research has been Data limitations. Many developing countries have either poor quality data or missing data. This is partly  offset by panel data techniques but of course there will always be data issues in such a study,

 

We have also carefully checked the grammar of the paper.

Reviewer 3 Report

I am pleased to review the paper titled " A Model to explain the impact of government revenue on the quality of governance and the SDGs". The author(s) have done well in structuring their study. In order to improve the quality of the paper, minor comments are provided below:

1) Abstract: The abstract should include at the beginning to provide a brief background of the paper

2) Introduction: The contributions of the study should be precisely highlighted

3) Moreover, a summary paragraph of literature will also be adding more value. Also, up to date the current literature by 2023 should be added.

4) Conclusion: Please mention the limitations of the paper and mention the future research direction as well. 

Author Response

Referee 3

• Abstract: The abstract should include at the beginning to provide a brief background of the paper

The paper has an abstract which was on the title page, I assume this was not sent to the referees.

 

• Introduction: The contributions of the study should be precisely highlighted

We have added this

In this paper, we investigate the importance of this route with the aim of combining these sets of equations in a single model which will capture both effects. Thus the objective here is to estimate a set of relationships which will explicitly model the link between government expenditure and the various measures of the quality of governance.

 

• Moreover, a summary paragraph of literature will also be adding more value. Also, up to date the current literature by 2023 should be added.

We have done this adding a number of recent studies

• Conclusion: Please mention the limitations of the paper and mention the future research direction as well. 

We have added a limitations section and future research

The main limitation of this research has been Data limitations. Many developing countries have either poor quality data or missing data. This is partly  offset by panel data techniques but of course there will always be data issues in such a study. In the future we would intend to extend the range of SDGs which we are able to cover and investigate alternative measures of the quality of governance.

 

Round 2

Reviewer 1 Report

Dear Authors,

I still believe that GDP levels should enter as a control for economic AND methodological reasons. Richer countries do have significantly better governance in general, not only because they have higher goverment revenues. The research question is correct (do higher government revenues help improve governance?), but the authors should try to isolate the marginal effect of revenues from the overall impact of GDP, and show whether the former is statistically significant once the latter are accounted for.  

Author Response

I am afraid that along with the other two referees I cannot agree with this comment. We are not interested in the marginal effect of an increase in government revenue which would I agree be almost minimal. We are concerned with the total effect including the effect from a general growth in GDP. In this case we think of government revenue as a scale variable which captures the size of the economy as well as specific effects on revenue itself.

Reviewer 2 Report

This version is better and can be published.

Author Response

Thank you for your suggestion to publish

Reviewer 3 Report

The paper is corrected according to reviewers suggestions.

Author Response

Thank you for your suggestion to publish