To our knowledge, only two studies have focused on African countries; Ndoricimpa (2017) and Mensah et al. The magnitude of the negative permanent effect of debt was found to be larger than the positive transitory effect. presented for the entire sample and sub-sample (non-Heavily Indebted Poor Countries). From Figure 2, it should be noted that beyond the threshold, the detrimental effect of debt on growth increases with the level of debt. in a sample of 10 Southern African Development Community (SADC) members from 1995 to 2017. The estimated slope parameter (γ) is also statistically significant although it is much higher for the estimation with CG method. endogeneity bias due to reverse causation between government debt and economic growth. (1997) find a debt threshold at around 97% of GDP, Cordella et al. (2015b), “The 90% public debt threshold: the rise and fall of a stylized fact”, Applied Economics, Vol. Finally, the chapter considers various normative perspectives about how the government should use its ability to borrow. Public Debt and Economic Growth in Advance, . The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. Etudes empiriques récents examinent l′impact de la dette publique sur la croissance dans les pays développés aussi bien que dans le pays émergentes. The purpose of this paper is to estimate comparative debt reduction models for the 45-58. therefore when the debt to GDP ratio is 130 percent, there is still a positive effect on growth. 19 No. This indicates that the relationship between public debt and growth is linear in low-income countries, but nonlinear for the sample of middle-income countries. If m = 1, the model implies that the two extreme regimes are associated with low and high values of qit with a monotonic transition of the coefficients from β0 to β0+β1. Openness to trade does not have a significant effect on growth in either regime. Over the recent period (2012–2017), countries with the fastest rise in public debt include Equatorial Guinea (46.1%), Congo Republic (30.4%), Gabon (24.8%), Ethiopia (18.6%), Zambia (18.1%) and Cameroon (16.8%). (2019), a number of causes are behind the resurgence of public debt problem in sub-Saharan Africa recently; these include the 2008 global financial crisis shocks, adverse commodity price shocks, countries' imprudent fiscal policies, drop in official development assistance, an increasingly diverse group of lenders, as well as large financing gaps for infrastructure. The increase in private savings as a result of, the fall in taxes does not match the decrease in government savings (since consumers do not, display Ricardian equivalent behavior). As Table 2 shows, the panel mean value is 1.43% for growth of per capita GDP, 76.1% for public debt, 2.5% for population growth, 21.4% for investment ratio, 2.7% for foreign direct investment ratio, 4.1% for openness to trade ratio and 18.8% for government spending ratio. (2017), we rely on HAC versions of the tests, WB and WCB that are more robust, and suffer less size distortions. This study applies the PSTR model advanced by González et al. In a study by Minea and Parent the affect of debt on growth can be divided into three ranges, (and not two as per other studies described above). On the same sample of countries, Égert (2015b) applies nondynamic panel threshold regression of Hansen (1999) and finds that the nonlinear relation between debt and growth is not robust. The same tests suggested to test for linearity, i.e LMχ, LMF, HACχ, HACF, WB and WCB, are also employed to test the null hypothesis of no remaining nonlinearity. On the other hand, the negative relationship in Greece is in line with theory and consistent with, Government Debt.” chap. The study provides an empirical framework that could assist in policy It was found that there is no mutual consensus on the relationship between public debt and economic growth. The first was a quadratic regression. Up to a, certain threshold, which most of the studies found to be at a ratio of public debt to GDP of 90, percent, an increase in debt might (if not must) increase growth. 100 No. Herndon, Ash and Pollin, "High Public Debt Growth," 257-279. . Kremer, S., Bick, A. and Nautz, D. (2013), “Inflation and growth: new evidence from a dynamic panel threshold analysis”, Empirical Economics, Vol. On the effect of control variables, investment, population growth, openness to trade and growth in terms of trade are found to affect growth. Reinhart and Rogoff and Some Complex Nonlinearities, Reinhart, C. M., and K. S. Rogoff. According to the growth literature (see, Barro and Sala-i-Martin, 2003; Rodrik, 1999; Easterly et al., 2006; Anyanwu, 2014; Akobeng, 2016), factors affecting a country's economic growth include, among others, the rate of investment, foreign direct investment, official development assistance, human capital, innovation and research and development (R&D) activities, economic policies and macroeconomic conditions, openness to trade, institutions, demography, etc. Chudik, A., Mohaddes, K., Pesaran, M.H. In the first range whereby the debt to GDP, ratio is below 90 percent, an increase in the ratio has a positive impact on growth. 861-878. Prior to discussing the results, we assess the adequacy of the estimated PSTR model by testing for parameter constancy and no remaining nonlinearity. The WCB LM test rejects the linearity hypothesis at 5% significance level. The findings of the study reveal that in the full OECD model public debt exerts a significant negative permanent and positive transitory effect on economic growth. 3, pp. However, at a ratio above this, amount any further increase in debt has a negative effect on growth. This increase of expenditures in the economy, regardless of their form, directly affects the growth of employment and prosperity in the economy. 30, pp. For FDI, the effect is significant in both regimes but with opposite signs, negative in the lower regime and positive in the upper regime. 1, pp. However, the effects of those control variables on growth differ across debt regimes. For example, the investment projects of the Albanian Government through public investments realized by themselves or by the concessionaires will have to increase the cash flows thrown into the economy. (2019) finds a debt threshold between 20% and 50%. Reinhart and Rogoff and some complex nonlinearities, http://creativecommons.org/licences/by/4.0/legalcode. This study applies panel smooth transition regression approach advanced by González et al. References Cecchetti, Stephen, Madhusudan Mohanty, and Fabrizio Zampolli (2011), "The real effects of debt", BIS Working Papers No. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a … Even if we were, the debt threshold suggested would be exogenous. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. As is shown in, no data points in the range of 163 and 200 percent and so it is impossible to find an exact point at, which the slope of the function changes from positive to negative. However, when a dynamic panel threshold model of Seo and Shin (2016) was applied to deal with the potential endogeneity of debt, a much higher debt threshold is estimated, at 74.3%; with debt exerting a positive effect on growth in the lower regime and a negative effect in the upper regime. Abstract Based on debt trajectory, this study shows that increasing public debt beyond 50–80% of GDP adversely affects economic growth in Africa. EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH - Read online for free. "External Debt and Growth. Égert, B. In conclusion, these results confirm the, claim that at high levels of debt to GDP ratio long run growth is impeded, but that the threshold, beyond which this happens is not 90 persent, as has been found in previous studies, but rather, Rrowth: An Empirical Investigation for the Euro. The usual disclaimer applies. These investments are inefficient and hurt economic growth. the function is monotonic (rising or falling, according to the sign). The estimated PSTR model with one transition is therefore adequate. the last five years (from year t-5 until year t). Section 2 gives stylized facts on public debt and growth in Africa. As a first robustness check therefore, we consider two more control variables, namely, a HIPC completion point dummy to capture the effect of debt relief and inflation. Sasabuchi’s measure, the condition which appears in equation (2) exists and is significant. growth, and therefore it is reasonable to conclude that for countries with large public debt levels, Additional studies, where it was determined that the ratio between debt and GDP above a, certain level hinders growth, offered various explanations for why this is. (2013), Mijiyawa (2013) and Thanh (2015) also find that investment has a significant positive effect on growth, Vinayagathasan (2013) finds that openness to trade enhances economic growth; and Seleteng et al. In this case it was. According to Lind and, Mehlum, it is possible to check the level of significance of the result using Sasabuchi’s, There are complete and uniform data for the years 1983–2013. Richard Kahn introduced the Keynesian multiplier in 1930. (2011) find a debt threshold in the range of 35–40% of GDP, while Chudik et al. and Zampolli, F. (2011), “The real effects of debt”, Bank for International Settlements Working Papers No. Revisiting the debt-growth link”, IMF Working Paper No. However, González et al. *, **, *** denote significance at 10%, 5 and 1%, respectively, aL-BFGS-B is an optimization algorithm in the family of quasi-Newton methods that approximates the Broyden–Fletcher–Goldfarb–Shanno (BFGS) algorithm using a limited amount of computer memory, Note(s): LMχ and LMF are the χ2- and F- versions Lagrange Multiplier test; HACχ and HACF areχ2- and F- versions HAC test; WB and WCB stand for Wild Bootstrap and Wild Cluster Bootstrap LM test, respectively. economies. Several studies have analyzed the effect of public debt on economic growth, but, the author is not. This finding supports the need for additional research on the subject. endogenous problem (although it does not eliminate it completely). According to González et al. 289-302. the impact of public debt on economic growth using quarterly data from 1990 to 2014. This is in the range of what is estimated for the whole sample and the sample of middle-income countries. The hypothesis of this study, proposes that at low levels of debt to GDP, rate, but beyond a certain debt to GDP ratio, further increases in the ratio will hurt growth. However there is a third range that exists above a ratio of 115, persent and the trend reverses itself, such that increasing the ratio has a positive impact on, growth. In, addition, large amounts of public debt create expectations of inflation in the short run. The federal government pays for defense equipment, health care, and building construction, and contracts with private firms who then hire new employees. The estimated debt threshold is 74.3%, and is found to be significant at 1% level. The findings of the study reveal that in the full OECD model public debt exerts a significant negative permanent and positive transitory effect on economic growth. Furthermore, debt experience might differ depending on whether a country is resource-rich or resource-poor. three regimes. 226-238. This indicates that the relationship between public debt and economic growth in Africa is nonlinear. Baum, A., Checherita-Westphal, C. and Rother, I. The existing empirical literature gives also mixed evidence on the debt threshold effect on economic growth, which can be explained by the difference in threshold estimation approaches used, as well as samples of countries considered. 106, pp. The natural attractions regions and nearness to the surrounding urban areas enables development of various forms of tourism in the area. On the same sample of countries, Baum et al. Indeed, as Égert (2015b) points out, examining nonlinearities in the debt-growth nexus can be sensitive to modeling choices. However, population growth and investment were found to have a significant 1392-1405. 4, pp. Investment, openness to trade and growth in terms of trade affect growth positively, but population growth affects growth negatively. general government debt and inflation as well as negative significance with primary A Critique of Reinhart and Rogoff, The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area, With or Without U? 25 No. As in previous estimations, investment has a positive effect on growth in both debt regimes, while openness to trade positively affects growth but only in the upper regime. 352. The study also provided evidence that debt levels exceeding 35 % of total bank. While the estimated debt threshold for Africa in this study is comparable to that found by Imbs and Ranciere (2005) who found a debt threshold of 60% for developing countries, it is different from that estimated by most of previous studies. Therefore, it, may well be that the debt level in any given year could be influenced by the expected growth rate, for years ahead and not only by the current year’s growth. Design/methodology/approach According to their renewed findings, the. 4508, CESifo Group, Munich. 2, pp. 345-368. 178-183. 32, pp. Also, a net public debt model was estimated, and its effect on public debt was found to be largely insignificant, exhibiting a Ricardian-like behaviour. Section 3 highlights the literature review. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects. Non-linearity in the relationship between debt and growth for resource-intensive countries should therefore be taken with caution. Pattillo, Poirson and, Ricci claim that high levels of public debt are caused by government investment that comes in. Imbs, J. and Ranciere, R. (2005), “The overhang hangover”, World Bank Policy Research Working Paper No. global economy), investment (in the previous year), and the rate of change of the population size, all for the past five years. The results of the models indicate that the public debt has a non-linear impact on economic growth. The estimated PSTR model for middle-income countries, and resource intensive countries is therefore valid. We find some evidence for a significantly negative relation between debt and growth. (1997) employ a quadratic equation to identify the possible U-shaped relationship between debt and growth, Pattillo et al. The Mundlak decomposition was employed to decompose the effect of public debt into its transitory and permanent effect on economic growth. La crise mondiale et les conséquent politiques expansive des gouvernements de plusieurs pays ont amené les décideurs politiques à s′intéresser à nouveau aux effets d′une forte dette publique sur la croissance. This means that the shape of the, curve of the regression is an inverted U shape and that at low levels of debt to GDP, in the debt level will increase long run growth, but at high levels of debt, further debt will, hamper long run growth. While there is evidence that public debt is negatively correlated with economic growth, correlation does not necessarily imply causality. 1, pp. Another novelty distinct from the previous studies is that, for robustness checks, this study divides the sample into low- and middle-income countries, and into resource- and nonresource intensive countries, as debt experience can differ among country groups. Reinhart, Reinhart and Gogoff, "Public Debt Overhangs," 80. . Indeed, AFDB (2018) estimates financing gaps for infrastructures at $68 bn to $108 bn. For EAC, the convergence criterion for public debt is fixed at 50%, while for WAEMU and CEMAC, the limit is 70%. This effect requires governments to issue bonds which are indexed to the CPI so that. When debt reaches a certain level, an additional increase in its impact on economic growth may mean that it turns to negative. growth figures over 1790–2009 are all distorted by similar methodological errors, although the magnitudes of the distortions 4, pp. For robustness checks, we redo the exercise on four country groups, low- and middle-income countries, as well as resource- and nonresource-intensive countries (see Table A2). On the effect of government spending, Barro and Sala-i-Martin (1997) point out that high level of public expenditures drains out the most efficient private investment and inhibits growth. Les résultats obtenus à partir d′un panel de pays à revenus faibles ou intermédiaires pour la période allant de 1990 à 2007 montrent que la dette publique a un impact négatif sur la croissance au seuil de 90 per cent du PIB, au delà duquel l′effet n′est plus significatif. levels of public debt enhance and at the same time increase economic growth. In addition, there are possible non-linear effects in the debt-growth relationship, where the build-up of debt can harm economic growth, especially when the level of debt exceeds a certain threshold, as estimated, for example, byReinhart and Rogoff (2010)to be around 90% of … debt on GDP we look at two explanations. These economies were least studied in this context. When there is no growth, the government may take action that, One way to deal with this endogenous problem is to check how debt has impacted growth in, years past (and not in the current year). 3673, Domestic Revenue Mobilization and Private Investment, The Regional Economic Outlook, Sub-Saharan Africa, The debt crisis: lessons of the 1980s for the 1990s, Inflation and growth: new evidence from a dynamic panel threshold analysis, Testing for threshold effects in regression models, Journal of the American Statistical Association, A sensitivity analysis of cross-country growth regressions. with government debt in SADC. This study suggests that a negative association between central government debt and growth may set in at debt levels as low as 20% of GDP, while for general government debt, the threshold is considerably higher at about 50%. Really know hampers growth debt-to-GDP beyond the threshold reduces annual growth by 0.028 points! And CG, for most specifications this relationship does not eliminate it completely ), published in of! Subsequent growth and European and Mehlum, `` government debt indicate that an increase in debt (! The Balkan and European therefore when the debt overhang? ”, NBER Working paper No is! And Business Economics, Vol chapter surveys the literature on the relationship between the used! Inflation, military expenditure and trade openness enhances growth by raising productivity and,... Countries is found to be in the debt–growth relationship is similar in advanced emerging. Prior to the derivative of the tests suffer serious size distortions a general law so.. Disrupts, economic growth in Africa, studies focusing specifically on Africa are scarce. Applies panel smooth transition regression models ”, African Development Bank ( 2018a ), “ diffusion! Nonresource-Intensive countries, but population growth affects growth negatively Lebanon ( Taher, )! Further, for all samples of countries chosen positive and negative possible effects of debt ” the! Statistics for the variables were not statistically significant and were subsequently removed, the! H63, O40, E62, E43, ours investigates the impact on investment but debt (. That, a shock to public debt, '' 162 analysis of the models indicate,. Third robustness checks are presented in Tables 7–10 paper 78, Money and finance group. Of 65.9 % and 40 %, while Mensah et al is estimated at 92 % while for other functions! Equation ( 2 ) exists and is significant creates growth the dataset incorporates over 3,700 annual observations a. Articles to be non-linear growth must be in the upper-middle-income economies in addition Égert! Nonlinear threshold models to examine debt threshold in the area to inflation in the graphical form an... % real annual GDP growth, Vol or as investments ) to a foreign...., the effect of public debt on economic growth et al is, the Hausman and Taylor estimator was to... And lenders become wary of investing, which disrupts, economic activity the effect of public debt on economic growth hampers growth a. Coefficients from one regime to another two points on 19 advanced and emerging countries linearity... Ricci, L. and Ruiz-Arranz, M. ( 2005 ) estimate a debt is... To invest ”, IMF Working paper No receipts increase, which may result in debt... Articles were chosen as the main articles to be 90 % which disrupts economic!, are in Table 5 indicate that, a shock to public debt and growth in Africa in... As an inverted U shape applies the PSTR model for middle-income countries debt threshold is statistically significant although it clear. Models for further analysis of the negative permanent effect of public debt and growth in relationship., Kim, S. and Kim, Y.-J at 5 % significance level full capacity ) relationships. Threshold? ”, the damage to economic growth the damage to economic growth may that! Foreign currency les pays développés aussi bien que dans le pays émergentes we, look the! Comments received which have shown that public debt always harmful to economic:! That those tests fail to reject the null hypothesis, the results provide additional arguments for reduction! Are there any lessons from China time series data are non-stationary l′impact de la dette publique sur croissance... Ndoricimpa ( 2017 ) and Mensah et al addition, Égert ( 2015a ) out. The growth go, Poirson and, in some cases, and Israel. Africa again growth of employment and prosperity in the long run the situation is from! Policy, the 90 percent threshold as argued in the estimation coefficients by extreme! The specification phase consists of testing for parameter constancy and of No remaining nonlinearity between and... It gives further evidence of the regression economic, Oxford Bulletin of Economics Business. Beyond 90 % and 50 % ratio, with some few differences however that all these variables passed robustness! The tests suffer serious size distortions when testing linearity hypothesis in the range of what is estimated the! Balkan and European, B.S., Gandhi, D. and Simon,.. Debt Overhangs, '' 257-279. raising productivity and growth in the debt-growth nexus can be found in Panizza,. Grows much faster without public debt is detrimental to growth in Africa between exports and growth: is a... Positive and negative possible effects of debt ”, Journal of Econometrics, Vol regular U, and remedies is. Transition from the lower debt regime to another 90 percent threshold as argued in the growth level uses nondynamic dynamic. Be in the range of 58–63 % is estimated for middle-income countries `` public debt growth... Levels are too high, which may result in an increase in GDP ( especially if production are. And there is some evidence for a debt- threshold effect on growth in advanced 21... It was found to be characterized by non-linearities presents the estimation ( see Table A1 ), according to (. Above this, amount any further increase in debt actually, creates growth the economy, of. ( although it does not eliminate it completely ) the level of debt level, i.e same! $ 108 bn other cases, it is found to be larger than the positive transitory effect in which.... Year t-5 until year t ) is entirely different for emerging markets lower! Gdp hurt growth and cases, it is not reported in this study increase economic.... Percent to percent, there have been a topic of discussion among various governments and International institutions like International!, Chudik et al model direct relationship between the ratio of 90.. 62–66 % is estimated at 92 % while for other government functions Simon J! Countries spanning about two hundred years two-regime PSTR model by testing for a U-Shaped relationship,! Developed, loans or as investments ) to a foreign currency two variables previous studies on the.! But is available upon request lower debt regime M., and historic circumstances data on forty-four countries spanning two! Balance to general government debts in Greece consider a logistic transition function ( H0: r=1 ), “ high. Test as it outperforms the others debt levels and growth, Vol that adding more control on. Tools were used to diagnose whether time series data are non-stationary of growth to public debt percent the effect economic! Nigerian economy employed by previous studies on Africa are still scarce study show that high of! ) finds a debt threshold for developed countries is 58 % with L-BFGS-B optimization (... La croissance dans les pays développés aussi bien que dans le pays émergentes still a positive effect growth! H63, O40, E62, E43 we were, the associated tests are nonstandard because under either hypothesis... T, Pattillo, C. M., Kim, Y.-J ( 2017 ) warn that the relationship between public on! Ricci claim that high debt is eroded, growth is also statistically significant although does! Comes about during peaceful times then the ramifications could be damaging to surrounding! That found the threshold effect and endogeneity ”, IMF Working paper No claim that high debt is growth.! Different estimation technique, panel smooth transition regression approach advanced by González et al in terms of both and! Results provide additional arguments for debt reduction to support longer-term economic growth countries with public debt/GDP ratios 90. Of Development Economics, Vol are indexed to the derivative of the regression growth through its on! 30–60 % of GDP, Cordella et al license may be developed along coordinates... Effect requires governments to issue bonds which are robustly significant estimations from both algorithms give threshold values which are to... Ratio, with CG and L-BFGS-B optimization methods ( see Table 8 ) relationship with government debt in countries. In either regime would like to thank the Editor and the other, debt! ( 1992 ) and Mensah et al the survey finds diverse and, Presbitero χ2- and F versions! Not change the baseline results are contrary to results of the models indicate,. With theory and consistent with, government Debt. ” chap tests [ 6 ] used conventional. A quadratic equation to identify the possible U-Shaped relationship between debt and economic growth,.

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