Academic journal article Journal of Economics and Economic Education Research

The Nexus between Foreign Direct Investment, Economic Growth and Public Debt in the Southern Mediterranean Countries: Evidence from Dynamic Simultaneous-Equation Models

Academic journal article Journal of Economics and Economic Education Research

The Nexus between Foreign Direct Investment, Economic Growth and Public Debt in the Southern Mediterranean Countries: Evidence from Dynamic Simultaneous-Equation Models

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Nowadays, the nexus among public debt (PD), foreign direct investment (FDI) and economic growth is at the heart of the research debate. This study deals with three major axes. First, it shows the impact of public debt and foreign direct investment on the Gross domestic product (GDP) (Amilcar Serrao, 2016; Dar Atul & Amirkhalkhali, 2014; Pak Mo, 2001; Edsel Beja, 2007). Then, it explores the impact of foreign direct investment and gross domestic product on the public debt (Jurgita & Ausrine, 2013; Nguyen, 2015). Finally, it looks into the impact of public debt and gross domestic product on foreign direct investment (Bolanle Azeez, 2015; Moga Tano Jilenga, 2016; Desir Avom, 2015; Moga, 2016).

The southern Mediterranean countries are vulnerable to both the impact of the economic crisis (subprime 2007) and the Arab spring movement. These economic shocks had a significant impact on trade, foreign direct investment and economic growth. In other words, these countries are vulnerable to such crisis. Moreover, the 2007 financial crisis led to the slowdown of economic activity, the rise of the global financial volatility, and the spread of the factors that decrease the degree of resilience of the different economies in the region. These global economic problems had been aggravated by the immediate negative impact of the 2011 Tunisian revolution which was characterized by a long period of uncertainty and instability. During that period, this southern Mediterranean region became the epicenter of a wave of political, social and economic transitions. As a result, Tunisia has been going through a period of profound transformation that give rise to new challenges and opportunities.

The slowdown of the global economy and the decline of the European FDI have impacted the southern Mediterranean countries although they are less integrated into the global economy since the European FDI does not exceed 50% of the total amount of investment (IMF 2013).

In recent years, Southern Mediterranean countries have attempted to attract FDI through various measures such as macroeconomic stabilization, exchange rate policies, signing of partnership agreements with Europe, tax exemption and the institutional reforms. The adoption advent of these measures led to the liberation of initiative, the stimulation of foreign direct investment, and the expansion of the economic activity.

Foreign direct investment is an important factor that could increase economic growth, adapt the offer to the business needs and solve the problems in the labor market. However, the increase of the public debt and the weakness of foreign direct investment in the country had an impact on liquidity, unemployment rate, exports, inflation and economic growth. According to Benjamin Carton (2013), low economic growth causes an increase of the public debt rate and a lower foreign direct investment.

The direct links between public debt, the foreign direct investment and the economy are the subject of a current debate, various authors argue that the importance of foreign direct investment and public debt in terms of economic policy( Rogoff, 2009; Cecchetti & Fabrizio, 2011; Afzalur Rahman, 2015; Taiwo Muritala, 2011).

The main objective of this article is to examine the relationship between public debt, foreign direct investment and economic growth in the southern Mediterranean countries. For this reason, the remaining part of this paper is organized as follows. Section one presents a literature review. The second section discusses the methodology and the econometric specification. Section third reports and discusses the results and finally presents the conclusion and the implications.

LITERATURE REVIEW

Public Debt and Economic Growth

The link between economic growth and public debt has been widely studied. The lack of a consensus in the results of studies about the same country or the same geographical area is related to the methodological differences, which are generally very diverse and often contradictory. …

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