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External Debt and Growth

Authors:
Catherine Pattillo at International Monetary Fund
Catherine Pattillo
Hélène Poirson at International Monetary Fund
Hélène Poirson
Luca Antonio Ricci at International Monetary Fund
Luca Antonio Ricci
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This paper assesses the non linear impact of external debt on growth using panel data for 93 developing countries. The estimates support a non-linear, hump-shaped, relationship between debt and growth, especially when the debt burden is measured relative to GDP. For a country with average indebtedness, doubling the debt ratio reduces growth by a third to a half percentage point after controlling for endogeneity. Our findings also suggest that the average impact of debt becomes negative at about 160–170 percent of exports or 35–40 percent of GDP and the marginal impact of debt at about half of these values.
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... Recent research has increasingly directed its focus toward examining the non-linear impact of external debt on economic growth within an indirect framework, a methodological approach deemed more logical (Pattillo et al., 2011). Some empirical studies found evidence of non-linearity (see Alemu et al., 2023;H. ...
... Building on established theories of debt overhang and crowding-out effects, the theoretical foundation anticipates a negative impact of external debt on economic growth through specific channels (Adekunle et al., 2021;Turan & Yanikkaya, 2021). This theoretical perspective recognizes the non-linear nature of these relationships, aligning with the proposition that an optimal level of external debt exists; beyond this threshold, adverse effects like debt overhang and crowding-out may manifest (Azretbergenova et al., 2022;Pattillo et al., 2011). ...
... Contemporary research on external debt's impact on economic growth has shifted to examine non-linear relationships, emphasizing crucial mediating channels like investment, savings, total factor productivity, and interest rates, departing from a simple linear association. This approach offers a comprehensive understanding of the complex interplay between external debt and economic growth (Afonso & Tovar, 2013;Beyene & Kotosz, 2023;Haque et al., 2023;Pattillo et al., 2011;Qureshi & Liaqat, 2020;Schclarek, 2004;Silva, 2020). In the context of the discussion on the transmission channels between external debt and debt servicing with economic growth, it is crucial to elucidate the dual aspects of these channels for constructing a theoretical framework. ...
External Debt, Transmission Channels, and Economic Growth: Evidence of Debt Overhang and Crowding-Out Effect
Article
Full-text available
  • Jul 2024
Plain language summary This study explores the intricate links among external debt, debt service, and economic growth in 32 Asian Developing Economies from 1995 to 2020. Using advanced statistical methods like the two-step system generalized method of moments (GMM) and a dynamic common correlated estimate (DCCE) model, the research investigates various macroeconomic pathways, specifically testing for non-linear effects such as debt overhang and crowding-out. Key findings emphasize the significance of public and private investment, total factor productivity, and national savings as pivotal channels for the non-linear impact of external debt on economic growth. Notably, the study reveals that private and public investment exhibit non-linear effects in response to debt service, while productivity and savings show linear effects. The research recommends strategic approaches for developing countries, focusing on judicious debt management, timely project completion, and initiatives to boost productivity, domestic savings, and private sector growth, thereby reducing reliance on foreign debt. Acknowledging valuable insights, the study recognizes limitations in the available data from 32 countries and emphasizes the need for further investigation into mediating and moderating variables in the relationship between external debt and economic growth. Particularly in the context of foreign debt financing policies, the study underscores the importance of exploring threshold values for negative impacts on transmission channels, suggesting avenues for future research to provide a more nuanced understanding of the dynamics involved. In essence, the study offers valuable insights into the nuanced relationship between external debt and economic growth, along with strategic recommendations for sustainable development in developing economies.
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... Reinhart and Rogoff (2010) presented findings indicating an inverted "U" relationship between growth and public debt. Additionally, Pattillo, Poirson, and Ricci (2011) suggested that the impact of debt on economic growth could initially be positive but might turn negative with the accumulation of debt, implying a non-linear relationship. Conversely, DiPeitro and Anoruo (2012) argued that economies have surpassed the optimal debt level, suggesting a potential for a linear relationship between the variables. ...
... Moreover, these findings and methodologies offer significant advancements compared to previous research that focused solely on total external debt without addressing variable heterogeneity. This expansion holds particular relevance for studies investigating the impact of disaggregated external debt on growth, echoing methodologies employed by Reinhart and Rogoff (2010), Pattillo, Poirson, and Ricci (2011), and Turan and Yanikkaya (2021). Notably, these scholars primarily examined central government and external debt, overlooking nuances such as heterogeneity and cross-sectional dependence. ...
Impact of Disaggregated External Debt on Economic Growth: Evidence from Asian Developing Economies
Article
  • Oct 2024
  • STUD NONLINEAR DYN E
This study investigate the impact of total and disaggregated external debt on economic growth, across 32 Asian developing economies (ADE) from 1995 to 2020. The study applied the generalized method of moments (GMM) and dynamic common correlated estimator (DCCE) with interaction terms of institutional quality and macroeconomic policy to address the non-linearity, across-country heterogeneity, cross-sectional dependence and endogneity. The empirical results indicate that total external debt and its types initially harm economic growth, except for commercial creditors’ debt, which has positive effects. Short-term, private, and multilateral debt show weaker negative associations compared to long-term, public, and bilateral debt. Incorporating interaction terms in non-linear models reveal a shift from negative to positive impacts, highlighting the importance of robust institutional quality and stable macroeconomic policy in mitigating adverse debt effects. Our findings underline the necessity of tailored policies accounting for specific impacts of different debt types on economic growth. Moreover, highlight the significance of institutional quality and macroeconomic policy standards to manage risks, optimize debt management practices, adjust fiscal policies, and foster sustainable economic growth. Future research should further investigate the broad impact of domestic debt in conjunction with external debt across different countries, time periods, and methodological approaches.
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... Empirical evidence generally supports this view. The extant literature using cross-country data at the macro-level documents a negative association between government debt and future economic growth, while several influential studies point to some nonlinearity and heterogeneity in this association, e.g., showing that government debt predicts lower growth after a threshold, or that country-specific factors play a role in the link between debt and growth (among many others, see Caner et al. 2010, Checherita-Westphal and Rother 2010, Reinhart and Rogoff 2010, Cecchetti et al. 2011, Kumar and Woo 2010, Pattillo et al. 2011, Eberhardt and Presbitero 2015, Jalles and Medas 2022. 6 Nonetheless, the vast majority of the literature on the association between government debt and growth fails to establish causality, since (i) lower GDP growth can lead to higher government debt as percent of GDP, thereby leading to reverse causality (Easterly 2001), and (ii) there can be other country-level factors jointly driving lower growth and high government debt (the issue of omitted variables). ...
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... Another channel large debt stock affects the domestic economy is through poor macroeconomic policy environment. This is likely to affect the efficiency of investment, as governments will eventually have less incentive to undertake difficult policy reforms such as trade liberalization or fiscal adjustment (Pattillo et al., 2011). Ali Ali and Mustapha (2012) examined the long-run and short-run impact of external debt on economic growth in Pakistan from 1970 to 2010. ...
External Debt, Debt Service and Economic Growth: Empirical Evidence from the ECOWAS Sub-Region
Article
Full-text available
  • Jan 2025
The paper investigated the impact of external debt, and debt service on economic growth in the ECOWAS sub-region during the period 1990-2022. The study analyzed a panel data set using the fixed and random effect models. The results of the panel data unit root test confirmed that the variables in the specified model were integrated in different orders. The panel co-integration tests indicated that a long-run relationship existed among the variables in the specified debt-growth model. The results of the model estimation revealed that external debt negatively and significantly impacted economic growth at the 1% level during the period of the study. The results further revealed that debt service negatively impacted economic growth, but failed the significance test at the 5% level. The paper recommended that countries in the ECOWAS sub-region should reduce external debt accumulation, and efficiently use revenue generated from external debt to boost economic growth.
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... In the first place, the Reinhart-Rogoff work was criticized with regard to the implied causality (Irons and Bivens 2010), 6 and then for some methodological and statistical problems (Herndon et al. 2013). 7 Further works support the existence of critical debt-to-GDP ratios under various time and space observational fields (but there is no agreement on their level: see, among others, Pattillo et al. 2011, Baum et al. 2012, Checherita-Westpahl and Rother 2012. Some authors point out 4 As to the lively debate on austerity see e.g. ...
Good Debt or Bad Debt?
Preprint
Full-text available
  • Dec 2024
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... Policymakers and academic experts continue to highlight the link between public debt and investment and economic growth as a result, as one of the most pressing issues facing the country not just due to the various features of each country's development, but also because of the various economic events that accompany with these developments (Nguyen et al., 2003;Pattillo et al. 2011;Checherita & Rother, 2010;Picarelli et al., 2019;Siying, 2024). ...
The link between public investment strategy and public debt: An empirical assessment
Article
Full-text available
  • Nov 2024
Economic growth and long-term output are significantly impacted by public investments. Public debt serves as a major source of funding for these investments. The purpose of this study is to assess, along with a few other macroeconomic factors, the short-and long-term effects of Albania's external and domestic debt on public investment. The empirical research was conducted using the autoregressive distributed lag (ARDL) estimation approach, based on annual data for the years 2000-2022. Among other things, the results demonstrated that Albania's public investments are significantly and negatively impacted in the long-run term by external debt. However, for the period under consideration, there is no statistically significant correlation between internal debt and public investments. Furthermore, we discovered that the amount of public investments is positively and significantly correlated with both the gross domestic product (GDP) and foreign direct investments (FDI). The conclusions of the research can be helpful to the Albanian government because they shed light on the relationship between two main categories of public debt and public investments. The paper suggests that stringent project implementation guidelines be put in place by the government to guarantee profitable borrowing and closely monitor public debt.
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... Figure 2 illustrates the data on Türkiye's gross external debt from 2011 to 2022. The magnitude of a country's gross external debt is crucial as it diminishes the effectiveness of its investment, particularly for emerging nations, although not affecting the overall volume of investment (Pattillo et al., 2002). The presence of a substantial amount of external debt also gives rise to the issue of debt sustainability, which in turn leads the country to confront a multitude of issues and heightens its susceptibility (Loser, 2004). ...
Examining the Status Quo Bias for the Recent Global Economic Crisis: The Case of Türkiye
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The objective of this paper is to investigate the "status quo bias,” which is a key concept in behavioral economics, using macroeconomic data from the recent economic crisis in Türkiye. The current global economic situation provides a favorable opportunity to analyze this idea, as there are abundant and relevant inputs for this type of study. Specifically, this paper analyzes the nexus between consumption and income before and after the economic crisis that triggered by the Covid-19 pandemic in Türkiye, with the aim of examining the "status quo bias” by employing ARDL Bounds Test. The analysis findings support that Türkiye has exhibited status quo bias for the period from 2013 to 2022. This research fills a gap in the literature by presenting evidence that Türkiye, a country that has been overlooked in the field of behavioral economics, exhibits the status quo bias in the context of recent economic crisis triggered by the Covid-19 outbreak.
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Effectiveness of fiscal policy measures in different public debt regimes
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The aim of the research is to illustrate how the degree of effectiveness of fiscal policy measures varies depending on the level of public debt within a group of Central and Eastern European (CEE) states. To this end, a T-SVAR (Threshold Structural Vector Autoregressive) model was implemented, based on two regimes, calibrated as a function of the evolution of public debt. The results illustrate that, in most of the countries analysed, increasing government expenditure generates a stronger increase in economic growth under the low public debt regime in comparison with the situation at the level of the high public debt regime. Thus, the effectiveness of fiscal policy measures declines as the level of government debt rises. Another result obtained within the analysis highlights that the positive effect of public debt reduction on economic growth is more strongly felt in the higher public debt regime than under a low public debt regime. On the basis of these results, it is recommended that the CEE countries continue their efforts to reduce public debt in order to increase the effectiveness of fiscal policy measures.
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Foro de Estudios sobre Guerrero
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The use of floursfrom unconventionalsourcesfor the production of degradable films contributes to addvalue to crops that are little known at present and diversifies their industrialization. Degradation by weight loss and solubility have been reported as tests that predict the percentage of degradation, in bio films made by thermo pressing. For this study, the compost was used as a substrate to assess the degradation of biofilms and water to assess its solubility.The control sample and the HP: 90-FB: 10- M70sample, had a higher percentage of degradation weight loss after 45 days of burial in the compost,finding values of 69.23 ± 9.14 and 49.43 ± 5.20, respectively, being the HP: 90-FB: 10-M30 sample presented a lower percentage of degradation (19.15 ± 1.58).On the other hand, the results of the percentage of solubility indicate that the control sample had the highest values (11.87 ± 2.79), followed by the sample with the formulationHP: 92.5-FB: 7.5- M30 which contained less fiber and more particle size (11.25 ± 0.31).
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The External Debt Burden and Economic Growth in the 1980s: Evidence from Sub-Saharan Africa
Article
Full-text available
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The study estimates the effect of external debt on economic growth in sub-Saharan Africa (SSA) during the 1980s when debt became a burden, and a majority of SSA countries defaulted. By using 1980–1990 World Bank data across 35 SSA countries in an augmented production function framework, the study finds that net outstanding debt was deleterious to economic growth for given levels of production inputs, whereas SSA's growth would have been 50% higher without the external debt burden. Meanwhile, there is little evidence of a negative correlation between debt and investment levels. External debt may still be burdensome even if it exerts little influence on the level of investment.
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Growth, Debt and Economic Transformation: The Capital Flight Problem
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An outstanding characteristic of the 1990s is the large number of countries (particularly in the ‘East’ and the ‘South’) that are engaged in profound economic transformation processes. These processes entail a considerable amount of construction but, also, a considerable amount of destruction — or ‘creative’ destruction, as Schumpeter used to say (see, for example, Calvo and Coricelli, 1993; Kornai, 1993). Although these countries are prepared to ‘burn their old idols’, they do so in the expectation that they will be rewarded with much better economic performance — that is, more growth and social welfare. The question then arises: are these hopes realistic? Can we identify some key ‘traps’ lying on the road to successful growth?
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We document five stylized facts of economic growth. (1) The “residual ” rather than factor accumulation accounts for most of the income and growth differences across nations. (2) Income diverges over the long run. (3) Factor accumulation is persistent while growth is not persistent and the growth path of countries exhibits remarkable variation across countries. (4) Economic activity is highly concentrated, with all factors of production flowing to the richest areas. (5) National policies closely associated with long-run economic growth rates. We argue that these facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, and that highlight the role of factor accumulation. Empirical work, however, does not yet decisively distinguish among the different theoretical conceptions of “total factor productivity growth.” Economists should devote more effort towards modeling and quantifying total factor productivity.
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Debt Relief and Adjustment Incentives
Article
  • Dec 1988
  • IMF STAFF PAPERS
The argument that debt relief would increase the incentive of a debtor country to make an adjustment effort (to invest) and that for this reason creditors may benefit by granting relief is analyzed in this paper. It is shown that there are actually opposing incentive effects of debt relief and that the argument could be valid in particular circumstances. A distinction is made between exogenous and endogenous relief, the latter compelled by low capacity to pay caused by low investment earlier.
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