The Debt-Growth Nexus: a Dynamic Panel Data Estimation

Andrea Presbitero

No 243, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: This paper investigates the relationship between external debt and economic growth in poor countries. The adverse effects of external debt on economic performance are due to the crowding out of public investment and to the disincentive effects, because of debt overhang and uncertainty. Notwithstanding a general agreement on theory, empirical evidence is not conclusive and lacks of robustness. This contribution aims to shed more light on the relationship between external debt and economic growth and to draw some policy implication for debt relief. This work highlights the critical role of econometric and methodological issues. The results for a panel of 152 developing countries over the period 1977-2002 support a negative linear relationship between external debt and economic growth, and between debt service and investment. These effects are found to be stronger in the Low-Income Countries than in the overall sample, raising concern about the dramatic effect that debt has on economic performance in the world's poorest countries. In LICs, a debt reduction from a debt-to-exports ratio of 300 to the HIPC threshold of 150 is estimated to add more than one percentage point to per capita GDP growth, and a debt service reduction is found to be more than two times more effective than an equal increase in foreign aid. Eventually, external debt impairs economic growth through the liquidity constraint, the creation of macroeconomic instability, the lower efficiency of investment, and its effect on macroeconomic policies and institutional development.

Keywords: HIPC; debt relief; economic growth; external debt (search for similar items in EconPapers)
JEL-codes: C33 F34 H63 O11 (search for similar items in EconPapers)
Pages: 43
Date: 2005-10
New Economics Papers: this item is included in nep-afr and nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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http://docs.dises.univpm.it/web/quaderni/pdf/243.pdf First version, 2005 (application/pdf)

Related works:
Journal Article: The Debt-Growth Nexus: a Dynamic Panel Data Estimation (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:243

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