Is Debt Always Harmful for Economic Growth? Evidence from Developing Countries

The debate on damage risks of high levels of debt on long run economic performance is not new. Nonetheless, this has achieved increasing interest during the last decades because of several countries and regions have acquired high indebtedness, particularly those with doubtful capacity of repayment. The study of a non-linear relationship between both macroeconomic variables and the value (or values) at which the incidence of debt could change sign at said threshold are relevant issues for the performance of economies, the economic policy and, even, the debt payment. This paper uses a panel threshold regression model, with initial real per capita GDP and debt-to-exports ratio as threshold variables, in order to prove heterogeneous effects of debt on growth in developing countries. The results show that the effect of debt depends on both threshold variables. Higher levels of initial GDP are related to negative effects of debt on growth, the relation between debt and growth tends to be insignificant for medium values and exhibits a positive relation to low values of product. Furthermore, debt-to-exports ratio exhibits a single turning point beyond which debt seems to be harmed for economic growth. The level of those thresholds is also estimated.