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Debt relief and growth

Debt and economic growth in developing and industrial countries

Exploring the relationship between debt and growth for a number of developing and industrial economies.

Authors: A. Schclarek
Publisher: Department of Economics, Lund University, Sweden, 2004

Full text of document

This paper investigates both the linear and nonlinear relationship between debt and economic growth for developing and industrial countries. Further, it seeks to determine the channels through which debt affects economic growth, by considering its effects on total factor productivity, capital accumulation and private savings rates, respectively. In order to specify the growth regression, it uses five alternative independent variables sets commonly used in the empiric growth literature.

The results show that, for developing countries:there is a negative and significant relationship between total external debt and economic growth, i.e. lower total external debt levels are associated with higher growth rates

  • when distinguishing between public external debt and private external debt, there is a negative relationship between public external debt and growth, but no significant relationship when only considering private external debt
  • the negative relationship between total external debt and economic growth is driven by the incidence of public external debt levels, and not by private external debt levels
  • private savings rates are not affected by external debt levels
  • there is very limited evidence of nonlinear effects for these relationships
  • when considering other debt indicators, such as interest payments and debt services, the results suggest that there is no robust relationship between these debt indicators and growth.