Impact of Corruption on the Effectiveness of Fiscal Policy Stabilizing Economy: A Case Study of the ASEAN – 5 Countries

This study aims to examine the effectiveness of fiscal policy in stabilizing output fluctuation in the business cycle by taking account of corruption level for five countries (Malaysia, Singapore, Thailand, the Philippines, and Indonesia) in the Association of Southeast Asian Nations (ASEAN) from 1996 to 2019. Based on voracity effect theory, a poor institutional quality due to high corruption levels put more pressure on government spending during economic booms which limited fiscal space during economic recessions. This effect could reduce the effectiveness of fiscal stabilization on output fluctuation in business cycle. This study utilizes Fully Modified Ordinary Least Square (FMOLS), where the results address fiscal stabilization in the long run perspective.  The result suggests that discretionary fiscal policy is countercyclical and can stabilize output fluctuation by 7 percent. When the interaction term of discretionary fiscal with corruption variables is included, the stabilizing effect reduces from 0.7 percent to 0.36 percent. The result shows there is a small reduction in countercycle response for Singapore, contrary to Malaysia, which has a large reduction in countercycle response, as the interaction terms are included. Meanwhile, fiscal stabilization for Indonesia, Thailand, and the Philippines is slightly reduced to a small and insignificant effect.