The Nexus between External Debt and Growth Convergence: Evidence from Asian Countries

Abstract

This paper aims to investigate the relationship between growth and external debt in selected Asian economies during the period from 2000 to 2019. To this aim, panel data collected from the World Development Indicators (WDI) of the World Bank are analyzed by the conditional beta convergence framework. Three indicators of external debt (namely total debt service, debt stock and public and publicly guaranteed debt service) are incorporated in the model regressing the average growth rate of income on the natural logarithm of the initial level of GDP per capita. Results of the fixed effect estimations show an inverse relationship between external debt ratios and economic growth. The role of external debt in the convergence process is further examined by including debt interaction terms in the conditional convergence model. We found that a higher debt service level is associated with a higher rate of convergence. These findings reveal that over the past two decades the economic convergence among Asian countries has been much debt-led. Our findings inform policymakers of the effectiveness of government borrowings as a source for economic growth.