The role of public debt on economic growth, the case of Albania

AuthorEneida Permeti
Performance and Risks in the European Economy
The Role of Public Debt on Economic
Growth, the Case of Albania
Eneida Përmeti1
Abstract: The global recession and the sovereign debt of European countries have triggered an intense d ebate
over the effectiveness of fiscal policy and over the consequences of rising public debt. The relation between
public debt and economic growth is a very studied and discussed debate. This paper aims to focus on some
essential questions. A high public debt has a negative impact on economic growth? Does a low economic growth
promote the growth of d ebt? What are the factors that affect the p erformance of these indicators and the
mechanisms of transmission from one to another? The literature identifies two main lines: the Ricardian theory
(or the Ricardian equivalence, under which the government debt is equivalent to th e future taxes) and the
conventional view (according to which the government debt stimulates aggregate demand and growth in the
short term and promotes the reduction of capital and national income in the long term). What about the empirical
data? The results are different in different countries and periods. What is the situation in Albania at about the
last 25 years? Analyzing the macroeconomic situation and the main causes of a positive growth and a
macroeconomic stability, but a high public debt, we can conclude over the expectations and the trend of the
Keywords: Economic Growth; Public Debt; GDP; Albania
1. Introduction
A stable economic growth is very important for any economy and of course for Albania, which, as a
developing country intends to take steps forward to achieve the membership in the European Union.
On the other hand, equally important is the Public Debt, who can influence: the monetary policy, the
international level of reliability, the political process, the capital outflows and the replacement of assets.
It must be preserved under the level permitted by the EU (under 60% of GDP).
A government to find funds that are necessary for fulfilling its tasks has three economic tools: the taxes,
the printing of currency and the public debt. The reasons why the government chooses the last alternative
are: it would not be appropriate in a growing economy, that the current generation be taxed for goods,
services or investments that would benefit a future generation; it is an efficient alternative for emergency
expenditures; growth or continued tax cuts could lead to economic uncertainty; printing of currency may
increase the money supply, interest rate and thus the inflation.
The economic growth and the public debt are two economic indicators that are closely related to each
other, so it is interesting to study how the performance of one affects the other and vice versa. There is
not a simple connection between them. There are many important factors for economic growth of a
1 PhD Candidate, University of Tirana, Faculty of Economy, Albania, Address: Kodra e Diellit Tirana, Albania, Tel + 355 4
4512345, Tel + 355 4 2441330, Corresponding author:

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