EXTERNAL DEBT AND ECONOMIC GROWTH: NEW EVIDENCE FOR AN OLD DEBATE

EXTERNAL DEBT AND ECONOMIC GROWTH: NEW EVIDENCE FOR AN OLD DEBATE

This study aims to contribute to the understanding of the impact of external debt on economic growth by using the data for moderately indebted middle-income countries over the period of 1985-2013. The paper employs a relatively recent panel analysis technique, the common correlated effects (CCE) framework, which considers cross-sectional dependence and heterogeneity implications in the data. Our overall findings suggest a negative linear effect of external debt for the panel despite some exceptions in the country-specific results. In the panel results, the impact of external indebtedness occurs through the debt stock rather than a direct impact of liquidity constraint represented by a debt service variable.

___

  • • Arnone, M.; Bandiera, L. and Presbitero, A.F. (2005) “External Debt Sustainability: Theory and Empirical Evidence”, Catholic University of Milan (Piacenza) Working Paper, No. 33, December.
  • • Avramovic, D.; Husain, S.S.; de Weille, J.; Froland, J.; Hayes, J. P.; Wyss, H. (1964). Economic Growth and External Debt. Washington, D.C.: The World Bank.
  • • Bhattacharya, R. and Clements, B. (2004) Finance and Development, 41(4), 48-50.
  • • Breusch, T.S. and Pagan, A.R. (1980) “The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics", Review of Economic Studies, 47(1), 239-253.
  • • Chenery, H.B. and Strout, A.M. (1966) “Foreign Assistance and Economic Development”, American Economic Review, 56(4), 679-733.
  • • Chowdhury, A.R. (2001) “Foreign Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis”, WIDER Discussion Papers, World Institute for Development Economics (UNU-WIDER), No.2001/95.
  • • Claessens, S. (1990) "The Debt Laffer Curve: Some Estimates", World Development, 18(12), 1671-1677.
  • • Claessens, S.; Detragiache, E.; Kanbur, R. and Wickham, P. (1996). "Analytical aspects of the debt problems of heavily indebted poor countries”, World Bank Policy Research Working Paper Series, No.1618.
  • • Clements, B.; Bhattacharya, R. and Nguyen, T.Q. (2003) “External Debt, Public Investment, and Growth in Low-Income Countries”, IMF Working Paper, No.03/249.
  • • Cohen, D. (1993) "Low Investment and Large LDC Debt in the 1980s", American Economic Review, 83(3), 437-449.
  • • Cordella, T.; Ricci, L.A. and Ruiz-Arranz, M. (2005) “Debt Overhang or Debt Irrelevance?Revisiting the Debt-Growth Link”, IMF Working Paper, No.05/223.
  • • Desphande, A. (1997) “The Debt Overhang and the Disincentive to Invest”, Journal of Development Economics, 52, 169-187.
  • • Easterly, W. (2002) “How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief”, World Development, 30(10), 1677-1696.
  • • Elbadawi, I.; Ndulu, B. and Ndung, N. (1997) “Debt Overhang and Economic Growth in Sub-Saharan Africa,” in External Finance for Low-Income Countries, ed. by Iqbal, Zubair and Ravi Kanbur, Washington: IMF Institute, 49-76.
  • • Eratas, F. and Basci Nur, H. (2013) “Dış Borç ve Ekonomik Büyüme İlişkisi: ‘Yükselen Piyasa Ekonomileri’ Örneği”, Marmara Üniversitesi İİB Dergisi, 35(2), 207-230 (in Turkish).
  • • Fosu, A.K.F. (1996) “The Impact of External Debt on Economic Growth in Sub- Saharan Africa”, Journal of Economic Development, 21(1), 93-118.
  • • Greene, J. and Villanueva, D. (1991) "Private Investment in Developing Countries", IMF Staff Papers, 38(1), 33-58.
  • • Griffin, K. and Enos, J. (1970) “Foreign Assistance: Objectives and Consequences”, Economic Development and Cultural Change, 18, 313-327.
  • • Hadri, K. and Kurozumi, E. (2012) “A Simple Panel Stationarity Test in the Presence of Serial Correlation and a Common Factor”, Economics Letters, 115, 31–34.
  • • Herzer, D. and Vollmer, S. (2012) “Inequality and Growth: Evidence from Panel Cointegration”, Journal of Economic Inequality, 10, 489-503.
  • • International Monetary Fund (2002) “The Enhanced HIPC Initiative and the Achievement of Long-Term External Debt Sustainability”, Staff Papers, April 2002.
  • • Krugman, P (1988) “Financing vs. Forgiving a Debt Overhang”, Journal of Development Economics, 29, 253-268.
  • • Oks, D. and van Wijnbergen, S. (1994) "Mexico After the Debt Crisis: is Growth Sustainable?", World Bank Policy Research Working Papers, No.1378.
  • • Patillo, C.; Poirson, H., and Ricci, L. (2002) “External Debt and Growth”, IMF Working Paper, No.02/69 (also published as Patillo, C.; Poirson, H., and Ricci, L. (2011) “External Debt and Growth”, Review Economics and Institutions, 2(3), 1- 30.)
  • • Patillo, C.; Poirson, H., and Ricci, L. (2004) “What Are the Channels Through Which External Debt Affects Growth?”, IMF Working Paper, No.04/15.
  • • Pesaran, M.H. (2004) “General Diagnostic Tests for Cross Section Dependence in Panels”, University of Cambridge Working Papers, No.0435.
  • • Pesaran, M.H. (2006) “Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure”, Econometrica, 74(4), 967-1012.
  • • Pesaran, M.H. (2007) “A Simple Panel Unit Root Test in Presence of Cross-Section Dependence”, Journal of Applied Econometrics, 22, 265–312.
  • • Pesaran, M.H. and Yamagata, T. (2008) Testing slope homogeneity in large panels, Journal of Econometrics, 142, 50–93.
  • • Presbitero, A.F. (2005) “The Debt-Growth Nexus: a Dynamic Panel Data Estimation”, Universita Politecnica Delle Marche, Department of Economics Working Paper, No.243.
  • • Sachs, J. (1989) “The Debt Overhang of Developing Countries” in Calvo, G.A.; Findlay, R; Kouri, P and De Macedo, JB (eds) Debt Stabilization and Development: Essays in Memory of Carlos Diaz Alejandro. Oxford: Basil Blackwell, 80-102.
  • • Savvides, A. (1992) "Investment Slowdown in Developing Countries During the 1980s: Debt Overhang or Foreign Capital Inflows," Kyklos, 45(3), 363-378.
  • • Schclarek, Alfredo (2004) "Debt and Economic Growth in Developing and Industrial Countries", Lund University, Department of Economics Working Papers, No.2005/34. • Serieux, J. and Samy, Y. (2001) “The Debt Service Burden and Growth: Evidence from Low-Income Countries”, presented at WIDER Conference on Debt Relief, 17-18 August 2001, Helsinki, Finland.
  • • Serven, L. (1997) “Uncertainty, Instability, and Irreversible Investment: Theory, Evidence, and Lessons for Africa”, World Bank Policy Research Working Paper, No.1772.
  • • Westerlund, J and Edgerton, L.E. (2007) “A Panel Boostrap Cointegration Test”, Economics Letters, 97, 185-190.