External Debt, Institutional Quality and Economic Growth

International Journal of Academic Research in Economics and Management Sciences, 2021

Utilizing GMM panel data analysis, covering twenty-three samples of countries from 2011 to 2014, this study examines the nexus between external debt and economic growth where institutional quality acts as a moderator. The samples for the study are divided into two groups consisting of low and high governance groups of countries. Findings report the importance of institutional quality as a moderator in the relationship between external debt and economic growth for both samples of study. The results confirm that, despite the importance of good governance practices, as indicated by the significant effect of high scores in governance indicators such as voice and accountability (samples from low governance countries) and regulatory quality (samples from high governance countries), prescribing the right policy is crucial to avoid the negative impact of the wrong policy prescription on economic growth. The results are dissected into two groups, for low governance and high governance countries respectively. Overall, the study suggests good debt management and feasible policy prescriptions are the keys to controlling external debt.

Utilizing the data from 1996 to 2018 for forty-three member countries of the Organization of Islamic Cooperation (OIC), this study delves into the impact of public debt on economic growth and evaluates how institutional quality moderates this effect. The outcomes of the study disclose a nonlinear relationship between public debt and economic growth in OIC countries. The results disclose threshold value of public debt is 63.43 as a percent of GDP in OIC economies after this it thwarts the economic growth. The quantitative outcomes unveil that quality of political and economic institutions boost economic growth. The findings from the various models demonstrate that political institutions influence the growth impact of the economic institutions, these findings are acknowledging the "Hierarchy of Institutions Hypothesis." The results of the interaction term reveal that, even as public debt hurts the economic growth, but better political and economic institutional quality measures alleviate this negative impact. Institutional infrastructure reforms are critical for public debt accumulation policy to mitigate the undesirable consequence of debt on economic growth in OIC member countries. Countries should considerably lessen their dependence on public debt and keep it below the threshold level that harms economic growth. OIC countries should mobilize their internally produced revenue collection mechanisms in order to increase revenue generation and close the gap between available resources and spending while incurring the least amount of public debt. Our findings can be pragmatic to design a germane fiscal policy to maximize the economic growth.

Pertanika Journal of Social Sciences and Humanities

Household debt has a detrimental effect on economic growth. Thus, this study examines the connection between household debt and growth in institutional quality. The impact of ,the relationship on economic growth is assessed using a bias-corrected least square dummy variable of 43 nations. We discovered that institutional quality enhances the role of household debt in sustaining economic growth. Household debt is significantly detrimental to growth when institutional quality is low. Its harmful effect can be lessened with medium institutional quality. Interestingly, higher household debt is beneficial in sustaining growth if accompanied by better institutional quality. Household debt and institutions reinforce each other towards sustaining economic stability for countries with higher institutional quality. The findings are expected to assist central banks and other government authorities in formulating the relevant institutional settings for ensuring economic sustainability, such as ...

Journal of economics, finance and management studies, 2024

Sub-Saharan African (SSA) countries have recently embarked on an economic growth trajectory which is characterized by ambitious national development aspirations. The ability of the SSA economies to generate sufficient domestic revenues to spur their desired economic growth is limited resulting into fiscal deficits. External Debt has provided alternatives to the fiscal deficits prevalent in SSA economies. Dividends from external debt investments have been unevenly witnessed among the SSA countries. Regions with better institutional quality continue to reap considerable dividends from external debt investments while SSA economies continue to accumulate external debt with sluggish economic performance. This study made use of the Generalized Method of Moments (GMM) to examine the role played by institutional quality on the nexus between external debt and economic growth on a panel of 28 SSA countries over the period 2005-2021. Empirical results indicate that institutional quality influences a positive and significant relation between external debt and economic growth. Policy makers in SSA countries should therefore strive to improve on institutional quality in regard to external debt management in order to reap more economic benefits from external debt.

SSRN Electronic Journal, 2017

2019

While other regions with better institutional quality have benefitted considerably from borrowing, sub-Saharan Africa continues to accumulate public debt with a long history of dismal economic performance. This paper examines the impact of public debt and institutional quality on economic growth using the Generalised Method of Moments (GMM) approach on a sample of 46 sub-Saharan African countries over the period 2000–2014. The empirical result indicates that institutional quality has both a direct and indirect impact on economic growth and therefore reveals that the interaction term of institutional quality and public debt has a statistically significant impact on the debt-growth relationship. This confirms the hypothesis that the impact of public debt on economic growth is a function of institutional quality. Moreover, government effectiveness, control of corruption and regulatory quality were found to have the strongest influence in mitigating the negative impact of public debt on...

European Xtramile Centre of African Studies WP/21/017, 2021

The main contribution of this study is the determination of an endogenous threshold of institutional quality, beyond which external debt would affect economic growth differently. The focus is on 14 countries of the African Franc zone over the period 1985-2015. Based on the panel Smooth Threshold Regression model, the results reveal that the relationship between external debt and economic growth is based on institutional quality. It is found that the level of indebtedness at which the effect of external debt on economic growth becomes negative is higher in countries with lower levels of corruption and high levels of democracy. This means that poor institutional quality prevents a country from taking full advantage of its credit opportunities. Thus, the more countries become democratic, the more debt helps finance economic growth. These results are robust to sensitivity analysis and Generalized Method of Moments estimation.

Prague Economic Papers

This paper provides empirical evidence in support of the view that quality of institutions is an important determinant of medium and long-term growth in OECD countries. Regarding the methodology, a panel data analysis with two-stage least squares (2SLS) estimation will be used to account for the endogeneity of the institutional variable. Besides institutional quality, we also consider other relevant determinants of potential growth such as the initial level of GDP per capita, public debt, and structural variables typically referred to in economic growth theory. Our estimation results show a positive impact of institutions on subsequent economic growth: an increase in 1 point in institutional quality leads to an estimated increase of 16.88 percentage points in potential GDP per capita growth, in the case of high-debt countries. With this, we notice a particular relevance of institutions in countries with high levels of debt. Therefore, our findings support the necessary attention to the institutional tissue of societies since improvements in institutional quality can subsequently improve economic growth.

The impact of external debt on economic growth is a debatable issue between scholars since the onset of the debt crisis in 1980's. This thesis examines whether external debt affects the economic growth of selected heavily indebted poor African countries through the debt overhang and debt crowding out effect. This is carried out by using data for eight heavily indebted poor African countries between 1991 to 2010.The result from estimation shows that external debt affects economic growth by the debt crowding out effect rather than debt overhang. Moreover, in an attempt to mark out debt servicing history, the thesis found the selected countries are not paying (servicing) more than 95% of their accumulated debt.

Both sides of the institutions and growth debate have resorted largely to microeconometric techniques in testing hypotheses. In this paper, I build a panel structural vector autoregression (SVAR) model for a short panel of 119 countries over 10 years and find support for the institutions hypothesis. Controlling for individual fixed effects, I find that exogenous shocks to a proxy for institutional quality have a positive and statistically significant effect on GDP per capita. On average, a 1% shock in institutional quality leads to a peak 1.7% increase in GDP per capita after six years. Results are robust to using a different proxy for institutional quality. There are different dynamics for advanced economies and developing countries. This suggests diminishing returns to institutional quality improvements.