Financial liberalisation, crisis, andrestructuring A comparative study of bank performance and bank governancein South East Asia UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY TH[.]
UNIVERSITY OF ECONOMICS STUDIES HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS RELATIONSHIP BETWEEN EXTERNAL DEBT AND ECONOMIC GROWTH IN SELECTED DEVELOPING COUNTRIES BY NGUYEN THANH THAI CHAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2014 UNIVERSITY OF ECONOMICS STUDIES HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS RELATIONSHIP BETWEEN EXTERNAL DEBT AND ECONOMIC GROWTH IN SELECTED DEVELOPING COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THANH THAI CHAN Academic Supervisor: Ph.D Pham Khanh Nam HO CHI MINH CITY, December, 2014 TABLE OF CONTENT Chapter 1: INTRODUCTION 1 Problems statement Research objectives Scope of study Structure of thesis Chapter 2: LITERATURE REVIEWS Theorectical reviews 1.1 External debt’s concept 1.2 Economic Growth Theories and Models 1.3 Theories and hypothesis on the relationship between external debt and economic growth Empirical Literature Reviews 14 Chapter 3: RESEARCH METHODOLOGY 20 Overview of external debt and economic growth in developing countrieS 20 Analytical Framework 23 The Econometric Model 25 Data 27 4.1 Data Description 27 4.2 Summary table of variables and data source 27 Estimation Approach 29 Chapter 4: RESULTS 30 Descriptive Statistic Data 30 Econometric Results 31 Results Expression 33 3.1 Linear equation: Yi,t = αXi,t + γDi,t + ui,t 33 3.1.1 All coefficients are constant across time and individual 33 3.1.2 Using Fixed-effects Technique 34 3.1.3 Using Random-effects Technique 34 3.1.4 Choosing between Fixed –effects (FEM) and Random-effects Model (REM) 35 3.2 Quadratic equation: Yi,t = αXi,t + γDi,t + δD2i,t + ui,t 36 3.3 Tests for correcting the chosen model – FEM 37 3.4 Analyzing the estimation results and economic meanings of chosen model - FEM (eq3) 38 3.5 Discussion 42 Chapter 5: CONCLUSIONS 46 Conclusions 46 Policy Implications 48 Limitation of thesis 50 REFERNCES 51-54 APPENDIX 55 TABLES & FIGURES Figure 1.1 Solow Model Production Function ………………………………….8 Figure 1.2 Laffer Debt Curve ………………………………………………13 Figure 1.3 Debt Threshold Curve 18 Table 3.1 External debt and GDP in main areas of developing countries …… 20 Figure 3.1 Extenal Debt and Economic Growth Framework …………… 24 Table 3.2 Summary of Descriptive Variables ………………………………28 Table 4.1 Summary Statistics of Variables ………………………………… 30 Table 4.2 Summary of Regresssion Result 32 APPENDIX EXTERNAL DEBT OVERVIEW 55-59 DETAILED POLICIES ON EXTERNAL DEBT ISSUE 60-64 TABLE 1: OLS RESULT ………………………………………………………65 TABLE 2: OLS WITH DUMMY VARIABLE ……………………………… 66 TABLE 3: FIXED-EFFECTS MODEL RESULT …………………………… 67 TABLE 4: RANDOM-EFFECTS MODEL RESULT …………………… 68 TABLE 5: HAUSMAN TEST ………………………………………………….69 TABLE 6: FIXED-EFFECTS MODEL RESULT FOR EQUATION ………70 TABLE 7: TESTING FOR MULTICOLLINEARITY …………………… .71 TABLE 8: TESTING FOR HETEROSKEDASTICITY ……………………….72 Chapter INTRODUCTION Problems statement During three last decades from 1950s, the issue of financial deficit remained its normal level of acceptance and debts from external sources were considered as an indispensable solution for the national shortage of capital Many countries in the world had different motivation to borrow the foreign source of capital to enhance their economy For developing countries, the deficit in current account due to a big lack of “savings and investment” has approached the foreign capital and become external indebted inevitably However, in 1982, Mexico claimed the unserviceableness of its debt and remarked the time of severe debt crisis in the history (Buffie, 1989) This is the condition when the external debt of one country exceeds the capability of repaying the interest and the principal of its loans Up till now, the issue of external debt as well as its serving has become critical and widespread in the world, which has made its impact on economic growth more and more questionable and catchy Policy makers and economists have paid a great attention to investigate the relationship between external debt and economic growth to evaluate the impact of external debt on economic growth and find out the reasons Under the present economic circumstances, the more developing countries approach their globalization and interrogation, the higher risk of debt crisis they have to bear due to the easy accession to the external sources of foreign loans Khan and Ul Haque (1985) considered this risk as an explosive one to emphasize its potential threat to the whole economy Therefore the issue of external debt has always kept a significant concern related to development economics and become the never old topic of various researches from the economists to policy makers Any economy which experienced a fiscal deficit can finance the public deficit by borrowing domestically from a private sector through financial institutions or from other international sources For developing countries, due to the lack of the strong private sectors and well-established banking system, the available source of domestic capital input are almost insufficient all the time Facing the nonstop demands for investment and development, many developing countries have no way but borrowing extensively from international lenders and other external sources This is also the reason why the relationship between external debt and economic growth has an outstanding correlation in developing countries and many studies also choose developing countries as main object of research If the government or policy makers not have a correct and comprehensive evaluation on this relationship as well as its impact, the issue of economic growth can be a big puzzle Some countries believe in the positive impact of external debt on economic growth and easily get trap in the debt crisis As Amoateng and Amoako-Adu (1996) found that GDP growth shared a positive relationship with debt service Otherwise, the others are scare of debt burden and minimize the external loans but they cannot generate the economic growth due to the shortage of capital According to Maureen (2001), external debt has a negative impact on private investment and hinders the economic growth as a result Practically, the external debt issue which has been widely known for the debt overhang theory and crowding out effect can definitely affect the economic growth in some ways by imposing the threats and vulnerability for the developing economies Specifically, external debt which is larger than the economy scale of borrowing countries can certainly lead to a risky capital deficit to hinder private investment channels, which can result in a retrograde economic growth rate Besides, using export to service the debt of developing countries may make a negative impact on economic growth through drawing the income from the service activities But it cannot be denied that external debt can provide the physical capital input that helps to boost the economic growth rate Therefore, finding the linkage between external debt and economic growth can give best tool for developing countries to adjust and boost their economic growth with the reasonable policies 2 Research objectives The study aims to explore whether there is a relationship between the external debt and economic growth or not by using the panel data of selected developing countries in the fixed period Focusing on the tests to answer the question if there is a linkage, how the relationship can turn out Under the specific collected data, this study aims to answer the questions if the relationship is positive or negative This relationship is expected to be linear but with reference to previous empirical researches, this study also attempts to find out whether a nonlinear relationship exists or not Scope of study Since developing countries are striving for sustainable economic growth, they likely need to deal with the problem of debt most of the time, especially the level of external debt There are many researches on the impact of the external debt on economic growth of a specific country with time series or a group of countries in the same area but there are few ones covering the range of many areas Moreover, many existing researches have focused on evaluating the impact of external debt on investment and saving levels rather than the analysis of the relationship between the external debt and economic growth itself Although there are many studies on this topic with sample of different developing countries in previous period far back then, there are still few researches focusing on this issue at the recent time with detail This is the reason why this study chooses to explore the nature of relationship and cover the sample of representative developing countries which are equally distributed in Africa; Latin America and Asia as: South Africa, Nigeria; Mexico, Brazil; Vietnam and India for the period of 20 years from 1990 to 2009 Structure of thesis This thesis will consist of chapters and each chapter will cover the following content Chapter gives the general introduction about the research topic including the problem statement to explain the importance of external debt in relationship with economic growth; the main research objectives to find out what should be studied in this relationship and the scope of study to limit the research sample Then, chapter which is named literature review presents two main parts As the first part, theoretical review covers the theories and hypothesis about relationship between external debt and economic growth Some models or citation can be used to illustrate for the theories and the determinants The second part mainly focuses on empirical reviews on this relationship as well as the related determinants with the citation and brief findings drawn from the previous researches Next, chapter aims at explaining the methodology of research A brief overview of practical problem can be reminded, then the main part focuses on the building of econometric model The data is then described in detail and the variables in function can be clarified Chapter presents the results from regression with a descriptive statistic dataset Some discussions can be generated in the process of looking back and comparing with the literature review And finally, chapter gives a conclusion for what has been found and raises some policy implications for what to when determining the relationship as well as the impact of external debt on economic growth Chapter LITERATURE REVIEWS Theoretical reviews 1.1 External debt’s concept Before entering the literature review focusing on relationship between the economic growth and external debt, a brief definition of external debt should be included to present a clear overview External debt which is also called as foreign debt is known as the part of the total debt in a country that is owed to creditors outside the country The governments, corporations or private households are able to become the debtors under the circumstance In the other ways, “total external debt is a debt owed to non-residents repayable in foreign currency, goods or services” (World Bank World Indicators Definition, 2000) To sum up, total external debt is the sum of public, publicly guaranteed, and private nonguaranteed long-term debt, use of IMF credit, and short-term debt Short-term debt includes all debt having an original maturity of one year or less and interest in arrears on long-term debt Total external debt is the debt at any given time, as total loans of liabilities at that time, not including debt service reserve, requires the borrower to pay the original debt with or without interest, in the future, and this debt is owed by residents with no residence in the country, according to the definition of eight international statistical analytical organizations of external debt, including Bank for International Settlements, the Commonwealth Secretariat, the European Statistical Organization, International Monetary Fund, the Organization for Cooperation and Development Economics, Secretariat of the Paris Club, Conference on Trade and Development United Nations The external debt of the country's balance comprise of all current liabilities (excluding debt service reserve) to pay the principals and interest in respect of external debt in the country Besides,eExternal debt can also be defined by national loans for creditors who reside outside the country (including the national debt by a non-resident in that country holds) According to the Glossary of banking and Finance Peter Collin ... Theories and hypothesis on the relationship between external debt and economic growth There are various theories and hypothesis relating to the relationship between external debt and economic. .. international lenders and other external sources This is also the reason why the relationship between external debt and economic growth has an outstanding correlation in developing countries and many studies... literature review focusing on relationship between the economic growth and external debt, a brief definition of external debt should be included to present a clear overview External debt which is also