A PANEL ANALYSIS TO UNDERSTAND WHETHER DEBT IS A BURDEN OR GROWTH DRIVER IN HIGHLY INDEBTED COUNTRIES

Abstract

This research paper delves into the intricate relationship between external debt and economic growth across 56 countries, identified as the most indebted among those with available data. Utilizing a comprehensive dataset spanning from 1990 to 2021, sourced from World Development Indicators (WDI) and Worldwide Governance Indicators (WGI), the study employs a multifaceted analytical approach. It combines the power of Panel Autoregressive Distributed Lag (ARDL) to provide both short-term and long-term insights into the nexus between external debt and economic growth. Simultaneous Quantile Regression is employed to explore the influence and relationships between countries, offering a deeper and more comprehensive understanding of the dynamics at play. The analysis also encompasses economic and governance variables, including gross fixed capital formation (GFCF), government consumption (GOVCONS), inflation (INFL), rule of law (RULE), and voice and accountability (VOICE). Findings reveal that high external debt levels can hinder long-term economic growth, emphasizing the importance of prudent debt management. Investments in fixed capital exhibit a consistently positive impact on GDP growth across different segments, highlighting the need to foster capital accumulation and infrastructure development. Governance indicators such as the rule of law and voice and accountability, while not directly causal, remain pivotal for societal well-being and economic development. The research offers essential policy recommendations, urging fiscal responsibility, enhanced investment promotion, and governance improvements to ensure sustainable economic growth in an interconnected global economy. This study contributes valuable insights to policymakers, economists, and researchers, advancing the discourse on financial sustainability and the role of external debt in shaping the destinies of nations.