Is Debt Always Harmful to Economic Growth? Evidence from Developing Countries

ROJAS, MARA LETICIA; IBAÑEZ MARTIN, MARÍA MARÍA; DABÚS, CARLOS

Buenos Aires

Congreso; Reunión Anual de la Asociación Argentina de Economía Política; 2022

AAEP

The study of a non-linear relationship to determine at what levels the debt begin to be harmful for growth is key to avoid an unduly high indebtedness, as to design an adequate economic policy. In order to prove heterogeneous effects of debt on growth in developing countries, this paper uses a panel threshold regression model, with initial real per capita GDP and debt to exports ratio as threshold variables. The results show that the effect of debt on growth depends on both variables. Debt affects negatively economic growth in countries with higher initial GDP, whereas the effect is non-significant for middle-income countries and positive for low-income economies. Furthermore, the debt to exports ratio exhibits a single turning point, above which debt becomes prejudicial for economic growth. Hence, beyond certain level high indebtedness seems to be mainly a heavy burden that impedes the process of economic growth.