From external debt to economic growth and back

• Author: Oana Simona (Caraman) Hudea
• Position: Assistant, Faculty of Social and Administrative Sciences, 'Nicolae Titulescu' University. Bucharest. Ph.D Candidate, Academy of Economic Studies, Bucharest
• Pages: 252-260

252 Lex ET Scientia. Economics Series

LESIJ NO. XVIII, VOL. 1/2011

FROM EXTERNAL DEBT TO ECONOMIC GROWTH … AND BACK

Oana Simona (CARAMAN) HUDEA*

Abstract

This paper is meant to trace the relationship existing between external debt and economic

growth for 109 countries spread all over the world. We have resorted for this study to

cross-sectional data, the economic modelling being simultaneously made for a three-year period.

After having constructed four models and after having estimated them by econometric techniques,

we have selected the most appropriate of them, which is in fact the version to be build upon within

future personal studies. The results indicated as optimum the model including GDP in logarithm

as endogenous variable and total external debt in logarithm and development level dummy as

exogenous variables. The analysis revealed a positive relationship between external debt and

economic growth, indicating that the threshold above which the indebting influence on the

economic performance should become negative has not been reached yet. The coefficients

obtained within the estimations performed, construed as elasticities, show that, while GDP is

inelastic in relation with debt, the latter has a supra-unitary elasticity, therefore its modification

being ampler than the GDP one.

Keywords: economic growth, external debt, impact factors, estimates, economic modelling

1. Introduction

This study, based on an analysis made on 109 countries, for a three year period, that is

2006, 2007 and 2008, with annual data, is meant to reveal several important issues on the

economic growth phenomenon and to analyse some of its main influencing factors.

According to the economic theory, economic growth represents the increase of the real

GDP from a period to another one and reflects the living standard and well being of a society. This

is the reason why it is highly important to identify the key elements with major impact on

economic growth and to determine the type of relationships established with each and every single

such item, so as to provide accurate arguments for a ground development of a nation. The said

factors cover a large range, comprising, among others, without limitation, investments, unemploy-

ment rate, budgetary deficit, exports, imports, governmental expenses, external debt or population

increase. Given their significant number, we have decided to take them separately and to further

render our analysis increasingly complex in subsequent studies.

Therefore, we have started, by resorting to only one item, save for GDP, meaning external

debt, taken consecutively as exogenous and endogenous variable. Subsequently, we have

separately added two dummies, one relating to the geographical layout and the other one to the

level of development of the analysed countries. After having taken into account various facets of

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* Assistant, Faculty of Social and Administrative Sciences, “Nicolae Titulescu” University. Bucharest. Ph.D

Candidate, Academy of Economic Studies, Bucharest. This work was cofinaced from the European Social Fund

through Sectoral Operational Programme Human Resources Development 2007-2013, project number

POSDRU/107/1.5/S/77213 „Ph.D. for a career in interdisciplinary economic research at the European standards” –

ASE Bucharest (e-mail: caraman_simmy2005@yahoo.com).