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The Debt-Growth Nexus: a Dynamic Panel Data Estimation

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  • Andrea PRESBITERO

    () (Universita' Politecnica delle Marche, Dipartimento di Economia)

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.

Suggested Citation

  • Andrea PRESBITERO, 2005. "The Debt-Growth Nexus: a Dynamic Panel Data Estimation," Working Papers 243, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  • Handle: RePEc:anc:wpaper:243
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    References listed on IDEAS

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    More about this item

    Keywords

    HIPC; debt relief; economic growth; external debt;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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