Relationship between external debt and economic growth in selected developing countries

Abstract

The study aims to explore whether there is a relationship between the external debt and economic growth or not by using the panel data of selected developing countries in the fixed period. Focusing on the tests to answer the question if there is a linkage, how the relationship can turn out. Under the specific collected data, this study aims to answer the questions if the relationship is positive or negative. This relationship is expected to be linear but with reference to previous empirical researches, this study also attempts to find out whether a nonlinear relationship exists or not. The result shows that: (1) developing countries are struggling to deal with the puzzle of external debt and economic growth; (2) due to the fast increase in external debt, the total amount of money that must be spent budget to pay foreign creditors tends to increase, which results in a reduction in the foreign currency reserves; (3) the problem of external is more sensitive and vulnerable due to the macroeconomic shocks of market as the debt crisis becomes global coverage in 1997 and 2008; (4) external debt stock can make a negative impact on investment through “cowding out effect” because the investing environment is less attractive to both domestic and foreign investors.