Is Public Debt Good or Bad for Economic Growth? Fresh Evidence in Emerging Economies45306

EDESUS Proceeding 2019 (147 of 1531) Yeoh, B S A., & Lam, T (2016) Immigration and Its (Dis)Contents: The Challenges of Highly Skilled Migration in Globalizing Singapore American Behavioral Scientist, 60(5–6), 637–658 Is Public Debt Good or Bad for Economic Growth? Fresh Evidence in Emerging Economies Le Thanh Tung (1),(*) (1) Ho Chi Minh City Open University, HCM City, Vietnam * Correspondence: tung.lt@ou.edu.vn Abstract: This paper empirically investigates the impact of public debt on economic growth in the case of twelve emerging economies in 1980-2015 Our study maybe is the first one which focuses only on emerging countries Unlike many previous studies, our result clearly shows that public debt has a positive impact on economic growth This evidence also presents an important role of public debt which should be robustly motivated in the coming period Besides, our result finds both domestic investment and remittances have positive impacts on economic growth in the studying time However, inflation is pointed out that this variable can harm economic growth The trade openness has a negative effect on economic growth because many countries have deficits in their trade balance in the study period Finally, our research result is useful information for policy makers to promote economic growth in emerging countries in the near future Keywords: Public debt; economic growth; emerging economy Introduction Public debt is popularly known as any financial obligation (including bonds or loans) assumed by the governments, where they agree to make interest and principal payments on certain times Public debt maybe is one of the popular research topics of economic development in the past decades In many countries, public debt is an important source of finance for governments to promote economic growth as well as implement socioeconomic goals Therefore, public debt is always associated with government activities in many countries Besides serving public investment, sometimes, public debt is also a financial source to serve the state system when tax revenue is not enough to compensate So there is a concern that the increasing public debt will also raise the pressure on repayment of the government in the future There are some different kinds of arguments about the role of public debt on economic growth Firstly, some results suggest that public debt has an active role in EDESUS Proceeding 2019 (148 of 1531) promoting economic growth (Jayaraman & Lau 2009; Pescatori et al 2014) When governments raise their debts (for example, issue bonds to get money), this activity helps them to avoid raising taxes and provides fresh financial resources to stimulate the economy through public expenditures Theoretically generating, it is a way which able to have additional tax revenue from prosperous businesses as well as taxpayers in the next period However, in the other hand, there are empirical results suggest that public debt affects negatively economic growth or gross out-put growth (Schclarek 2004; Reinhart & Rogoff, 2010; Furceri & Zdzienicka 2012; Ncanywa & Masoga 2018) These studies note that the negative impact of government on the growth performance of the developing countries in the medium-term and long term Furthermore, a lower growth can also result in a higher ration of public debt divide gross domestic product (GDP) They conclude that the rising public debt is among the biggest macro-economic risks facing developing economies which making more difficult for the governments to control the economy heading towards high growth Thirdly, there are some empirical results which conclude that there is no relationship between these two important macro variables (e.g., Panizza & Presbitero 2014) or find no evidence for a long-run reverse impact of debt on growth (Lof & Malinen 2014) Finally, there are both positive and negative impacts of public debt on economic growth in the recipient economies (Smyth & Hsing 1995; Kumar & Woo 2010; Baum et al 2013; Mencinger et al 2015) Therefore, it is necessary to focus on a specific group of countries Because this topic is studied on a large scale of countries which have many different socioeconomic backgrounds, it is too difficult to conclude about the real relationship Besides, the result might difficult to successfully use in a country at a specific level of economic development In recent decades, there are some economic crises have occurred and maybe relating to public debt So public debt has become an obsession, fear and there are many arguments which concluded that is the main cause of the economic crisis in countries, regions or globally level Fears of public debt are gradually making countries become afraid of this financial source in the context of lack of investment capital flows as well as narrowing demand stimulus capital flows during periods of declining aggregate demand Therefore, the research results related to public debt are valuable sources of information for policymakers in order to stabilize and promote economic growth in the coming period In two previous decades, a group of countries with rapid economic growth is called emerging economies On the other hand, an emerging economy can be described as a national economy that is progressing toward becoming a more advanced platform An emerging economy always is understood relating to rapid growth and industrialization Besides, these economies are expanding role both in the world economy and on the political frontier in their region For the first time, a group of eleven emerging countries is called 'the Next Eleven' by some economists of Goldman Sachs The Next Eleven has eleven fastgrowth economies including Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam (Wilson & Stupnytska 2007) On the other hand, Goldman Sachs also predicts this group of emerging economies will have huge economies of scale in the near future Emerging countries are analyzed based on EDESUS Proceeding 2019 (149 of 1531) outstanding criteria for macroeconomic stability, political stability, and openness of investment and trade policies Although not homogeneous in terms of economic structure, human resource, and management quality or other factors, this emerging economy group has one item in common: they have many conditions for rapid economic growth in the long term This group of countries is forecasting to become the world's largest economies in the 21st century (Wilson & Stupnytska 2007) More recently, in 2009, the Economist Intelligence Unit (EIU) also announced another group of emerging countries, named ‘CIVETS’ This group has six economies including Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (McGregor 2011) Although there are many research results focus on the impact of public debt on economic growth in the region level such as the Pacific region (Jayaraman & Lau 2009), OECD countries (Panizza & Presbitero 2014; Mencinger et al 2015), the euro area countries (Checherita-Westphal & Rother 2012; Baum et al 2013), developing and industrial countries (Schclarek 2004), developed countries (Lof & Malinen 2014) However, as far as we know, there is no research going into the emerging group of countries, for example, the Next Eleven defined by the economists of Goldman Sachs Therefore, our research results will provide new evidence of the impact of public debt on economic growth in the context of emerging countries In addition, the results of our research are also expected to be a good reference source used for policymakers in these countries in the coming period This paper has four main sections including: first, we have an introduction and a fast literature review on the relationship between public debt and economic growth Second, we present the methodology and data source which will be employed to examine the impact of public debt on economic growth in the case of emerging economies Third, there is a section which shows the results of the panel analysis and some discussions Finally, conclusions and policy implications are provided Methodology 2.1 Econometric methodology In our research model, the dependent variable is economic growth represented by the growth of GDP per capita Besides the most important explanatory variable is public debt, there are some explanatory variables are included in the research function: foreign direct investment, remittance inflow, inflation, and trade openness The trade openness variable will represent for international trade of the economies The research model is presented in the form as follows: GGDPPERi,t = φ0 + φ1Public_debti,t + φ2Investment,t + φ3Inflationi,t + φ4Remittencesi,t + φ5Opennessi,t + εi,t (1) Where: GGDPPER is measured by the growth of GDP per capita, Investment is the domestic investment, Public debt is the rate of public debt in GDP, Inflation is the inflation rate, and Openness is the trade openness which measures the international trade of the economy and εi,t is the error term Besides, t denotes time periods, and i is cross-sectional EDESUS Proceeding 2019 (150 of 1531) units with i ϵ [1, N] Besides, we have a defined list of the variables which is shown in table Table Definition of the variables Variable symbol Definition Unit Source GGDPPER Growth of GDP per capita % World Bank International Public debt Central government debt (% of GDP) % Monetary Fund Investment Gross capital formation (% of GDP) % World Bank Inflation Inflation, GDP deflator (annual %) % World Bank Remittances Personal remittances, received (% of GDP) % World Bank % World Bank Openness Calculated by the sum of exports and imports divides by GDP Source: Calculates from the research data According to suggestions from economists, there is a technical problem which can make a bias in the estimation result It is titted endogenous phenomenon between some variables in the function Besides, the problem also leads to violating the assumptions of a good linear regression model To solve this problem, the instrumental variables will be used to replace the endogenous variables in the function The Panel Generalized Method of Moments (PGMM) method is mention as a good choice to pass the endogeneity in the econometric model (Arellano & Bover 1995) Besides, the Pooled, Fixed effects and the Random effects model continuously use for estimated progress Following the comments of Vella and Verbeek (1999), the instrumental variables will replace the endogenous variables in the econometric function by their lag values After that, the PGMM regressions will help the estimated results which are good information for the policymakers in the future In our paper, three estimated models will be regressive with the PGMM technique to analyse the real impact of public debt on economic growth in the case of emerging economies 2.2 Data Our paper uses an annual data form which is collected in the period of 1980-2015 The study sample has twelve emerging countries including Bangladesh, Egypt, India, Indonesia, Iran, Mexico, Nigeria, Malaysia, Pakistan, Philippines, Thailand, and Vietnam The data of the growth rate of GDP per capita, investment, inflation are directly downloaded from the World Development Indicators database of the World Bank The data of trade openness is calculated by the sum of export and import value divide GDP in the same period Finally, public debt information is sourced from the International Monetary Fund The short description of the variables is shown in the below table Table A statistical summary of the variables Variable Max Min Mean Std Dev Obs GGDPPER 18.306 -24.461 2.6221 4.0174 427 EDESUS Proceeding 2019 (151 of 1531) Public debt Investment Inflation Remittances Openness 279.49 3.6734 41.530 26.068 370 89.381 11.367 26.488 9.4850 424 219.00 -2.1982 11.615 17.050 409 14.583 0.0048 3.2746 3.2204 388 220.40 9.1358 61.949 43.992 425 Source: Author calculates from the research data Results Following the introduction of our methodology, the PGMM technique is applied to three models including Pooled, Fixed effects, and Random effects The dependent variable is the growth of GDP per capita which is a proxy of economic growth Besides, there are five independence variables including public debt, domestic investment, inflation, remittance inflows, and trade openness However, we can see that all of the estimated results are in the same direction The estimated results are represented in Table First of all, the most important issue is the coefficients which show the real impact of public debt on economic growth All of the estimated results indicate that public debt has a positive impact on economic growth in emerging countries for the study period In detail, the coefficient result of the fixed-effects is statistically significant of 1% level, the randomeffects is 5% and the pooled-result is 10% Thus, our result is robust evidence of the positive role of public debt in promoting economic growth However, this result may be true only for the emerging countries in our study sample Besides, our estimated result is supported by previous studies (e.g., Jayaraman & Lau 2009; Pescatori et al 2014; Lopes da Veiga et al 2016) The positive result of public debt on economic growth in emerging countries may come from the ability to use capital effectively in this group of countries Due to the achievement of sustaining high long-term economic growth for decades, emerging countries have been able to transform the shortage of capital from debt by borrowing from outside This research result is good for emerging countries but not necessarily in developing countries in general Table The PGMM estimation results Dependent variable: Growth of GDP per capita (GGDPPER) Variable Pooled Fixed_effects Fixed_effects Public debt 0.203* (1.940) 0.119*** (5.416) -0.063*** (-3.826) 0.140** (2.175) 0.003 (0.860) 0.052*** (3.014) 0.104*** (3.999) -0.046*** (-2.228) 0.608*** (5.273) -0.016* (-1.781) 0.024** (1.992) 0.119*** (5.059) -0.049*** (-2.728) 0.251*** (3.263) 0.001 (0.374) Investment Inflation Remittances Openness EDESUS Proceeding 2019 (152 of 1531) Constant R-squared Observations -1.013 (-1.112) 0.1813 315 -2.110* (-1.689) 0.2330 315 -1.588 (-.1566) 0.1355 315 Note: *,**,*** significant at 10%, 5%, 1% The t statistical values are in parentheses below the coefficients Source: Author calculates from the research data Besides, the research results confirm that domestic investment has a positive role in economic growth The estimated coefficients of all three models are statistically significant at 1% level, indicating the robustness of the estimated results The results of our research are reinforced by previous studies (e.g., Adams 2009) Thus, policymakers in emerging countries need to continue to promote domestic investment as a major driver of economic growth In addition, remittances also have a positive impact on economic growth in emerging countries during the study period The regression coefficients are statistically significant with all three estimates Thus, the research results also confirm that remittances are an important financial resource to supplement the capital for promoting economic growth in emerging countries Our evidence is also associated by some previous results, for example, the result of Giuliano and Ruiz-Arranz (2009) This is important information for policymakers in the context of remittance being the second-largest source of capital, after foreign direct investment, into the developing countries worldwide Furthermore, the results show that inflation is a negative variable for economic growth in emerging countries over the years The effect of inflation on economic growth is quite robust when the regression coefficients are statistically significant at 1% level Thus, policymakers need to be cautious in regulating the general price level of the economy because this variable can seriously harm economic growth in emerging countries The harm effect of inflation on economic growth has been pointed out by other researchers (e.g., Gylfason & Herbertsson 2001; Giuliano & Ruiz-Arranz 2009; Lopes da Veiga et al 2016) Finally, the impact of trade openness on economic growth is quite faint In detail, regression coefficients of two estimate pooled and random-effects are positive, however, the results are not statistically significant The coefficient of the fixed-effects estimate is negative with a 10% level of statistical significance Thus, our results can not conclude about the role of international trade in promoting economic growth in the emerging economies This can be explained by a large number of emerging countries that have faced trade deficits in the previous years For example, there are nine economies in our research group (including twelve economies) were in the trade deficit in the year of 2005 Therefore, the result of our study is a noteworthy indicator when it shows that trade openness can harm economic growth in emerging countries during the study period In order to further illustrate the quantitative results in the above part, a scatter plot is drawn based on our research data In particular, the vertical axis represents the ratio of public debt to GDP and the horizontal axis paints the growth rate of GDP per capita in the same period In addition, a linear regression line is drawn to illustrate the relationship EDESUS Proceeding 2019 (153 of 1531) between the two variables The scatter plot clearly shows a positive relationship between the ratio of public debt to GDP and the growth rate of GDP per capita in emerging countries for the study period The graph is completely consistent with the result of quantitative analysis by PGMM in the previous section Therefore we can conclude that public debt has a positive impact on economic growth in emerging countries during the study period 300 PUBLIC DEBT 250 200 150 100 50 -30 -20 -10 10 20 GGDPPER Figure Correlation between public debt and economic growth (Source: Author calculates from the research data) Conclusions and policy implications Our paper maybe is one of the first studies using emerging countries to analyse the impact of public debt on economic growth The research sample is collected basing on the emerging countries group ranked by Golman Sachs consisting of countries in the period 1980-2015 Our result shows that public debt has a positive impact on economic growth during the study period In addition, domestic investment and remittances also have positive impacts on economic growth However, inflation is a harm variable which has negatively affect economic growth in these countries Finally, trade openness has a negative impact on economic growth, which can be explained by the trade deficit phenomenon in many countries in the sample Following the research results, policymakers in emerging countries should continue to use public debt as a financial tool to promote economic growth However, in this group of countries, the average value of the public debt ratio is 41.5% of GDP, a relatively high level In addition, a more important aspect is to improve the efficiency of using public debt This is an important issue to enhance the role of public debt in promoting economic growth Nextly, policymakers need to continue to stimulate domestic investment flows as well as attract more remittances They are very effective financial sources for boosting economic EDESUS Proceeding 2019 (154 of 1531) growth, however, they not increase debt burdens as well as pressure to repay the economy Finally, the solutions help to curb inflation as well as balance international trade are necessary to sustainably develop the economies of emerging countries in the coming time Acknowledgment This research is funded by the Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.01-2019.04 References Adams, S (2009) Foreign Direct investment, domestic investment, and economic growth in Sub-Saharan Africa J Poli Mode., 31 (6): 939-949 Arellano, M., Bover, O (1995) Another look at the Instrumental-Variable Estimation of Error-Components Models J Econ., 68(1): 29–51 Baum, A., Checherita-Westphal, C., Rother, P (2013) Debt and growth: New evidence for the 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(2009) This is important information for policymakers in the context of remittance being the second-largest source of capital, after foreign direct investment, into the developing countries worldwide... relatively high level In addition, a more important aspect is to improve the efficiency of using public debt This is an important issue to enhance the role of public debt in promoting economic growth