The Debt-Growth Nexus and Poorer LDCs
Arvin, B. Mak, Choudhry, Saud A., Atlantic Economic Journal
The developing country debt crisis has received considerable attention in recent years. The crisis has set in motion various adverse effects that have hindered economic recovery of many developing nations. The pernicious impact of foreign debt on the growth performance of developing countries has been established through a number of empirical studies [Sachs, Brookings Papers on Economic Activity, 1985; Kaminarides and Nissan, World Development, 1993]. The problem with these studies is that only a unidirectional causal link between indebtedness and growth is investigated. That is, it is assumed greater debt burden leads to slower economic growth. This paper allows for the existence of two-way causality. The rate of growth simultaneously affects and is affected by the level of indebtedness, especially for low-income countries whose growth rates are lower than average. Thus, a Granger causality test is conducted in order to determine whether causation runs in both directions simultaneously.
The Granger causality method [Granger, Econometrica, 1969] is applied to data on 10 severely indebted low-income nations over the 1978-92 period. Data are gathered from the World Bank's World Debt Tables and the United Nation's Yearbook of National Accounts Statistics. The relationship between economic growth and the level of indebtedness (defined as debt as a percentage of GNP) is estimated for each country separately in order to avoid the aggregation biases introduced by differing country experiences. It is worth noting that most studies in this area do not estimate specific country relationships separately. …