What Are the Channels Through Which External Debt Affects Growth?

By Helene Poirson, Luca A Ricci, Catherine A Pattillo

January 1, 2004

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Helene Poirson, Luca A Ricci, and Catherine A Pattillo. What Are the Channels Through Which External Debt Affects Growth?, (USA: International Monetary Fund, 2004) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).

Subject: Capital accumulation, Human capital, Labor, National accounts, Production, Production growth, Productivity, Total factor productivity

Keywords: Africa, Asia and Pacific, Capital accumulation, Debt coefficient, Debt impact, Debt level, Debt threshold, Debt variable, Debt-overhang effect, External debt, Global, Growth, Growth accounting, Human capital, Laffer curve, Middle East, Physical capital, Production growth, Productivity, Stock ratio, Sub-Saharan Africa, Threshold d, Total factor productivity, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/015
Stock No:

WPIEA0152004
ISBN:

9781451843293
ISSN:

1018-5941

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