The External Debt and Economic Growth Conundrum: Evidence From 81 Countries
Abstract
Considering the rising external debt across countries, empirical research over the past twenty years of the twenty-first century has focused on the relationship between debt and growth. This study investigates the linear and nonlinear impact of external debt on economic growth for 81 highly indebted countries divided into three distinct groups based on the percentage of external debt (i.e., 50th, 75th, and 75th+ percentiles) during the last decade for the period of 2008-2023. The panel data random effects model was employed to test the relationship. Data from WDI is used for the estimation of the models. The results show a highly significant and negative linear as well as nonlinear relationship across all three groups and the overall sample. The study also found that the impact of external debt gets stronger with an increase in the percentage from 50 to 75. The study concludes that external debt is a significant negative determinant of economic growth for an overall sample of 81 countries, as well as a distinct group of countries. The study recommends revenue mobilization and efficient debt management for the sample group of countries.