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

• Author: Eneida Permeti
• Pages: 275-279

Performance and Risks in the European Economy

275

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

future.

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: ermeti.eneida@yahoo.com.