The Nexus between External Debt and Growth Convergence: Evidence from Asian Countries
Main Article Content
Abstract
This paper aims to investigate the relationship between growth and external debt in selected Asian economies during the period from 2000 to 2019. To this aim, panel data collected from the World Development Indicators (WDI) of the World Bank are analyzed by the conditional beta convergence framework. Three indicators of external debt (namely total debt service, debt stock and public and publicly guaranteed debt service) are incorporated in the model regressing the average growth rate of income on the natural logarithm of the initial level of GDP per capita. Results of the fixed effect estimations show an inverse relationship between external debt ratios and economic growth. The role of external debt in the convergence process is further examined by including debt interaction terms in the conditional convergence model. We found that a higher debt service level is associated with a higher rate of convergence. These findings reveal that over the past two decades the economic convergence among Asian countries has been much debt-led. Our findings inform policymakers of the effectiveness of government borrowings as a source for economic growth.
Keywords:
Asian countries, external debt, economic growth, beta convergence.
References
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Bellemare, M.F., Masaki, T., & Pepinsky, T.B. (2017). Lagged explanatory variables and the estimation of causal effect. The Journal of Politics, 79(3), 949-963.
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Dias, D.A., Richmond, C., Wright, M.L.J. (2014). The stock of external sovereign debt: Can we take the data at ‘face value’? Journal of International Economics, 94 (1), 1-17.
Dogan, T., & Bilgili, F. (2014). The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach. Economic Modelling, 39, 213-220.
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Ghatak, S., & De, P. (2021). Income convergence across Asian economies: An empirical exploration. Journal of Asia-Pacific Business, 22 (3), 182-200.
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Hakimi, A., Boussaada, R., & Karmani, M. (2019). External debt, investment, and economic growth: A seemingly unrelated regression model for low-income countries. Journal of Economic Integration, 34 (4), 725-745.
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Onafowora, O., & Owoye, O. (2019). Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis. Economic Change and Restructuring, 52 (2), 157-179.
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Schularick, M., & Taylor, A.M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870-2008. American Economic Review, 102 (2), 1029-1061.
Solow, R.M. (1956). A contribution of the theory of economic growth. The Quarterly Journal of Economics, 70 (1), 65-94.
Spilioti, S., & Vamvoukas, G. (2015). The impact of government debt on economic growth: An empirical investigation of the Greek market. Journal of Economic Asymmetries, 12 (1), 34-40.
Villaverde, J., & Maza, A. (2011). Globalisation, growth and convergence. The World Economy, 34 (6), 952-971.
Villieu, P., Minea, A., & Ehrhart, H. (2014). Debt, Seigniorage, and the growth Laffer Curve in developing countries. Journal of Macroeconomics, 42, 199-210.
Yasar, N. (2021). The causal relationship between foreign debt and economic growth: Evidence from Commonwealth Independent States. Foreign Trade Review, 56 (4), 415-429.
Yusuf, A. and Mohd, S. (2021). The impact of government debt on economic growth in Nigeria. Cogent Economics & Finance, 9 (1), 1946249.
Wamboye, E., & Tochkov, K. (2015). External debt, labour productivity growth and convergence: Evidence from Sub-Saharan Africa. The World Economy, 38 (5), 856-877.
Wang, R., Xue, Y., & Zheng, W. (2021). Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality. Economic Modelling, 103, 105591.
World Bank. (2021). World Development Indicators [online]. Washington DC: The World Bank. Available from: https://databank.worldbank.org/source/world-development-indicators [Accessed 30th December 2021].
Azam, M. (2016). Does governance and foreign capital inflow affect economic development in OIC countries? Journal of Economic Cooperation and Development, 37 (4), 21-50.
Barro, R.J., & Sala-i-Martin, X. (1992). Convergence. Journal of political Economy, 100 (2), 223-251.
Barik, A., & Sahu, J.P. (2022). The long-run effect of public debt on economic growth: Evidence from India. Journal of Public Affairs, 22, e2281.
Baumol, W.J. (1986). Productivity growth, convergence, and welfare: what the long-run data show. The American Economic Review, 1072-1085.
Bellemare, M.F., Masaki, T., & Pepinsky, T.B. (2017). Lagged explanatory variables and the estimation of causal effect. The Journal of Politics, 79(3), 949-963.
Canlas, D.B. (2020). Is there economic convergence in Asia? UPSE Discussion Paper, No. 2020-09, University of the Philippines, School of Economics (UPSE).
Demikha, L., Shaharuddin, A.B., & Ridzuan, A.R. (2021). The effects of foreign direct investment, external debts and trade openness on economic growth: Evidence from the Ottoman Empire 1881-1913. International Journal of Economics and Business Research, 21 (3), 387-410.
Dias, D.A., Richmond, C., Wright, M.L.J. (2014). The stock of external sovereign debt: Can we take the data at ‘face value’? Journal of International Economics, 94 (1), 1-17.
Dogan, T., & Bilgili, F. (2014). The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach. Economic Modelling, 39, 213-220.
Fischer, A.M. (2018). Debt and development in historical perspective: The external constraints of late industrialization revisited through South Korea and Brazil. The World Economy, 41 (12), 3359-3378.
Ghatak, S., & De, P. (2021). Income convergence across Asian economies: An empirical exploration. Journal of Asia-Pacific Business, 22 (3), 182-200.
Gourinchas, P.O., & Obstfeld, M. (2012). Stories of the Twentieth Century for the Twenty-First. American Economic Journal: Macroeconomics, 4 (1), 226-265.
Green, S.B., & Salkind, N.J. (2003). Using SPSS for Windows and Macintosh: Analyzing and Understanding Data. Prentice Hall, New Jersey.
Hakimi, A., Boussaada, R., & Karmani, M. (2019). External debt, investment, and economic growth: A seemingly unrelated regression model for low-income countries. Journal of Economic Integration, 34 (4), 725-745.
Huffman, N., & Huffman, W. (2021). Convergence theory and conditional income convergence among sub-Saharan African countries. Agricultural Economics, 52, 915-925.
Krugman, P.R. (1988). Financing vs. Forgiving a Debt Overhang. Journal of Development Economics, 29, 253-268.
Kwan, C.Y., & Malki, I. (2020). Convergence on ASEAN. Working Paper Series, No. 2020/005, Westminster Business School.
Leszczensky, L., & Wolbring, T. (2019). How to deal with reverse causality using panel data? Recommendations for researchers based on a simulation study. Sociological Methods and Research, 1-29.
Li, H., & Xu, Z. (2007). Economic convergence in seven Asian economies. Review of Development Economics, 11 (3), 531-549.
Li, J., Ding, H., Hu, Y., & Wan, G. (2021). Dealing with dynamic endogeneity in international business research. Journal of International Business Studies, 52, 339-362.
Makun, K. (2021). External debt and economic growth in Pacific Island countries: A linear and nonlinear analysis of Fiji Islands. Journal of Economic Asymmetries, 23, e00197.
Mankiw, N.G., Romer, D., & Weil, D.N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107 (2), 407-437.
Marelli, E.P., & Parisi, M.L. (2019). Economic convergence in the EU and Eurozone. Journal of Economic Studies, 46 (7), 1332-1344.
Michelis, L., & Neaime, S. (2004). Income convergence in the Asia-Pacific region. Journal of Economic Integration, 19 (3), 470-498.
Mohsin, M., Ullah, H., Iqbal, N., Iqbal, W., & Taghizadeh-Hesary, F. (2021). How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression. Economic Analysis and Policy, 72, 423-437.
Munir, K., & Mehmood, N.R. (2018). Exploring the channels and impact of debt on economic growth: Evidence from South Asia. South Asia Economic Journal, 19 (2), 171-191.
Oberholzer, B. (2021). Long-term development of Kenya’s growth potential. International Review of Applied Economics, 35 (5), 729-748.
Onafowora, O., & Owoye, O. (2019). Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis. Economic Change and Restructuring, 52 (2), 157-179.
Quah, D. (1993). Galton's fallacy and tests of the convergence hypothesis. The Scandinavian Journal of Economics, 427-443.
Rant, V., Marinc, M., & Porenta, J. (2021). Debt and convergence: Evidence from the EU member states. Finance Research Letters, 39, 101617.
Rey, S.R., & Tareque, M. (2020). External debt and growth: Role of stable macroeconomic policies. Journal of Economics, Finance and Administrative Science, 25 (50), 185-204.
Schularick, M., & Taylor, A.M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870-2008. American Economic Review, 102 (2), 1029-1061.
Solow, R.M. (1956). A contribution of the theory of economic growth. The Quarterly Journal of Economics, 70 (1), 65-94.
Spilioti, S., & Vamvoukas, G. (2015). The impact of government debt on economic growth: An empirical investigation of the Greek market. Journal of Economic Asymmetries, 12 (1), 34-40.
Villaverde, J., & Maza, A. (2011). Globalisation, growth and convergence. The World Economy, 34 (6), 952-971.
Villieu, P., Minea, A., & Ehrhart, H. (2014). Debt, Seigniorage, and the growth Laffer Curve in developing countries. Journal of Macroeconomics, 42, 199-210.
Yasar, N. (2021). The causal relationship between foreign debt and economic growth: Evidence from Commonwealth Independent States. Foreign Trade Review, 56 (4), 415-429.
Yusuf, A. and Mohd, S. (2021). The impact of government debt on economic growth in Nigeria. Cogent Economics & Finance, 9 (1), 1946249.
Wamboye, E., & Tochkov, K. (2015). External debt, labour productivity growth and convergence: Evidence from Sub-Saharan Africa. The World Economy, 38 (5), 856-877.
Wang, R., Xue, Y., & Zheng, W. (2021). Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality. Economic Modelling, 103, 105591.
World Bank. (2021). World Development Indicators [online]. Washington DC: The World Bank. Available from: https://databank.worldbank.org/source/world-development-indicators [Accessed 30th December 2021].