(Tiểu luận) factors influencing public debt in aseancountries during the period of 2002 2021 – an empirical study

FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS  MID-TERM GROUP PROJECT FACTORS INFLUENCING PUBLIC DEBT IN ASEAN COUNTRIES DURING THE PERIOD OF 2002-2021 – AN EMPIRICAL STUDY Subject: Econometrics Code: KTEE309 Class: KTEE309(HK1-2324)2.2 Group number: 11 No 01 02 03 04 05 Full name Lê Phan Thế Nguyễn Phong Vũ Phạm Mai Trang Đặng Ngọc Duy Võ Thị Linh Chi Student ID Hùng 2212150161 2212150137 Contribution 22.5% 18.75% 2212150170 2212150048 2212150041 21% 19% 18.75% Lecturer: Vũ Thị Phương Mai, Ph.D H; Nôi= – 12/2023 TABLE OF CONTENTS ABSTRACT INTRODUCTION CHAPTER I LITERATURE REVIEW AND THEORETICAL FRAMEWORK Literature Review Theoretical Framework 2.1 Public debt (Government debt) 2.2 Determinants of Public Debt 2.2.1 Factors positively affecting Public debt 2.2.2 Factors negatively affecting Public debt 10 CHAPTER II MODEL SPECIFICATION AND DATA 11 Methodology 11 1.1 Method used to derive the model 11 1.2 Method to Collect and Analyze Data 11 1.2.1 Collecting data 11 1.2.2 Analyzing data 11 Theoretical Model Specification 12 2.1 Econometric Model 12 2.2 Population Regression Model: 12 2.3 Sample Regression Model: 13 Variable Explanations 14 Data 16 4.1 Data Sources 16 4.2 Descriptive Statistics 17 4.3 Correlation Matrix between Variables and Interpretations .17 CHAPTER III Estimation Results, Model Testing and Statistical Inference 19 OLS Regression and Model Testing 19 1.1 Testing the Overall Significance Level of Model 19 1.2 Testing the Significance Level of Each Independent Variable 19 1.3 Testing Specification Error 20 Testing the Model’s Defect 20 2.1 Testing Multicollinearity Error 20 2.2 Testing Heteroskedasticity Error 20 2.3 Testing Normal Distribution of the Residuals .21 2.4 Testing Autocorrelation 21 Sample Regression Model and Results Interpretation .23 CONCLUSION AND RECOMMENDATIONS 25 Conclusion 25 Recommendations 26 REFERENCES 28 ABSTRACT The influence of public debt on economic growth has been taken into consideration throughout years as one of the key factors of national development, especially after the Global Financial Crisis (2007-2008) and the recent European sovereign debt crisis Thus, it is significant to have further understanding about public debt and which factors have an influence on public debt This study investigates the nuanced relationship among the factors influencing public debt in ASEAN countries over the period 20022021, by including a set of control variables such as government expenditure, GDP growth, interest rate, net FDI inflows, trade openness, inflation Regression analyses based on OLS (Ordinary Least Squares) estimation, reveal significant factors impacting public debt upon the real GDP per capita growth rate The study identifies a positive relationship between gross fixed capital formation (growth) and public debt, indicating that as the economy grows and more capital is invested in fixed assets, public debt also increases The study also reveals that higher interest rates negatively contribute to the accumulation of public debt It further demonstrates that government expenditure plays a crucial role in shaping the trajectory of public debt, as an increase in expenditure leads to an increase in public debt The findings suggest that net FDI inflows, trade openness and inflation substantially influence public debt levels in ASEAN countries As a result, the study highlights the need for policies that promote debt sustainability and transparency to manage public debt effectively INTRODUCTION The evolution of public debt in the Association of Southeast Asian Nations (ASEAN) countries over the period from 2002 to 2021 represents a dynamic interplay of various factors that have shaped the economic landscapes of these nations This timeframe spans a critical period marked by both remarkable economic growth and significant challenges, including global financial crises and the unprecedented impacts of the COVID-19 pandemic Understanding the intricate factors influencing public debt in the ASEAN region during these two decades is essential for policymakers, economists, and researchers alike The choice of this topic stemmed from its offering of a comprehensive understanding of the complex dynamics that have shaped the economic landscapes of ASEAN nations This period was characterized by remarkable economic growth as well as significant challenges, such as global financial crises and the unprecedented impacts of the COVID-19 pandemic By examining the intricate factors influencing public debt in ASEAN during these two decades, we can provide valuable insights for policymakers, economists, and researchers This research aims to unravel the multifaceted factors that have played pivotal roles in shaping the fiscal landscapes of member countries, including the influence of economic policies, external shocks, the domestic landscape, international financial institutions, and trade dynamics By understanding these factors, we can contribute to the formulation of effective strategies for sustainable economic growth and public debt management in the ASEAN region The ASEAN community has undergone substantial economic transformation since the turn of the century The pursuit of economic development, infrastructure projects, and social welfare initiatives has driven governments to resort to borrowing, resulting in varying levels of public debt across the region Against this backdrop, this paper aims to unravel the complexities surrounding public debt in ASEAN by examining the multifaceted factors that have played pivotal roles in shaping the fiscal landscapes of member countries One of the central themes explored in this analysis is the influence of economic policies on public debt The diverse economic strategies adopted by ASEAN nations have impacted their fiscal positions differently Some countries pursued expansionary fiscal policies to spur economic growth, while others focused on fiscal consolidation to maintain stability These policy choices, coupled with their effectiveness and implementation, contributed to the fluctuations in public debt levels observed across the region Document continues below Discover more Business from: Economics KTEE312 Trường Đại học… 618 documents Go to course BÁO CÁO THỰC TẬP 31 44 TẠI NGÂN HÀNG… Business Economics 100% (33) Giải bài tập môn Kinh tế kinh doanh thầy… Business Economics 100% (9) Các yếu tố ảnh hưởng 29 tới số hạnh phúc… Business Economics 100% (8) Đề cương Hướng dẫn 56 17 ôn tập môn Kinh tế… Business Economics 100% (6) Business Economics C1,2,3 Business Economics 100% (4) Burger King Case 34 Study Analysis Business 100% External shocks have also been instrumental in shaping public debt trajectories in (4) Economics ASEAN The global financial crisis of 2008 had profound implications for the region, leading to economic contractions and necessitating fiscal stimulus packages Similarly, the COVID-19 pandemic in 2020 posed unprecedented challenges, compelling governments to incur additional debt to finance healthcare responses, economic relief measures, and social support programs The impact of these external shocks on public debt varied, reflecting the resilience and adaptability of individual ASEAN countries Moreover, the domestic landscape, characterized by political stability or instability, governance structures, and institutional frameworks, significantly influenced public debt management Political uncertainties are often translated into fluctuations in fiscal policies, hindering effective debt management Conversely, countries with stable governance structures were better positioned to implement sound fiscal policies and manage public debt more prudently International financial institutions played a dual role in influencing public debt dynamics While providing financial assistance to countries in need, these institutions often imposed stringent conditions that influenced the fiscal policies of borrowing nations The terms and conditions attached to loans impacted the debt sustainability of ASEAN countries, shaping their approaches to debt management and economic governance Trade dynamics and economic diversification also emerged as critical factors influencing public debt in the ASEAN region Countries heavily dependent on exports faced vulnerabilities to global economic fluctuations, affecting their revenue streams and, consequently, their ability to service debts In contrast, nations successfully diversifying their economies demonstrated greater resilience and flexibility in managing their public debts CHAPTER I LITERATURE REVIEW AND THEORETICAL FRAMEWORK Literature Review Public debt typically refers to the government's obligations and consists mostly of debt instruments and loans According to the International Monetary Fund (2013), public debt refers to the contractual financial commitments the central government has pledged to repay to creditors at a future period, including both the principal amount and accumulated interest In particular, public debt is subdivided into domestic public debt and foreign public debt, based on the location of debt holders, the currency in which the debt is denominated, and whether the debt was issued on the international debt market or the domestic debt market (Elmendorf & Mankiw, 1999) The debt crisis in the 1980s and the currency crises in the 1990s has led to some Asian economies (for example, Japan, Philippines and Indonesia) struggling economically and politically in the aftermath But we also see strong growth dynamism too (for example, China, Vietnam and Thailand) Thus, it is hard to assert that the Asian crisis considerably reduced the growth prospects of the region Recently, the consequences of the sovereign debt crisis in Europe once again caused concern for policymakers and researchers and most for studies concentrating on developed economies, for instance, Ferreire, 2009; Kumar & Woo, 2010; Checherita & Rother, 2010; Reinhart & Rogoff, 2010; Cecchetti et al., 2011; Baun et al., 2013 In brief, although this issue has been mentioned largely in the existing literature, the results are different, depending on the groups of countries, the time framework, and the methodology of the analysis Therefore, it is essential to have thorough research on determinants of public debt in ASEAN countries throughout the years to state the various impacts of it on the economy Different theories have been proposed to explain the determinants of public debt This research contributes to enriching related literature with multiple perspectives Firstly, it develops and validates an integrated model, namely Ricardian Equivalence Secondly, it analyzes Keynesian Economics Finally, it provides a rich understanding of the phenomenon in the context of the political economy models During the last three decades, the Ricardian Equivalence Hypothesis (REH) has been a major theoretical and applied issue in many industrial countries According to the REH, increases in government expenditure, and consequently public indebtedness, result in equivalent changes in the whole economy This means that tax cuts and debt financing will have no real impact on the economy because investors and consumers understand that the debt will eventually have to be repaid through future taxes Under certain conditions, the real economy, according to Ricardo's logic, is independent of the government's means of obtaining income, whether through taxation or debt issuance REH states that government debt can explain only the transfer of financial resources among economic agents (Barro, 1989) Buchanan, John (1976) For example, contends that public sector debt has a direct influence only on private consumption and savings decisions, without contributing to the likelihood of net economic growth This implies that changes in domestic and foreign public debt stocks are invariant with changes in important real macroeconomic variables, such as output and gross investment, and are, therefore, on the growth path of the economy (Barro, 1989) Because taxpayers will save to pay the expected future taxes, the macroeconomic effects of higher government spending will be mitigated Keynesian Economics Theory, based on the ideas of John Maynard Keynes, proposes that increasing government expenditure stimulates economic activity and spending (Elmendorf & Mankiw, 1999) In terms of public debt, Keynes theory states that government borrowing reduces national savings and capital accumulation, as tax cuts are offset by debt Although inflation may be higher, the current generation is encouraged to consume more and the rate of unemployment tends to decrease However, borrowing leaves the debt burden on future generations; thus, future generations may live in a country with larger foreign debt and smaller internal capital accumulation A growth in government debt resulting from deficit-financed fiscal policy is thought to stimulate income, money demand, and exchange rates (Fischer, 1993; Ncanywa et al., 2018) The political economy models explain the country’s indebtedness trend as well Indeed, the strategic behavior of a given political system can lead to inefficiently high public deficits and finally contribute to debt accumulation According to the notion of strategic debt accumulation, present authorities can limit future policymakers' spending by increasing existing debt levels There is a political game that can lead to debt accumulation over the ideal level when governments in office at different times take advantage of their strategic position (Alesina & Tabellini, 1990) This model suggests that the deficit in emerging nations is necessary to achieve long-term economic growth (Nikoloski & Nedanovski, 2018), leading to the accumulation of foreign debt (Antwi & Atta Mills, 2013; Root, 1990) In summary, extensive research has examined the key factors of public debt accumulation in various countries and periods The literature highlights the role of economic variables such as interest rates, economic growth, public expenditure, and openness The findings reveal factors that both positively and negatively affect public debt In addition, factors such as trade openness, net FDI inflows, inflation, GDP growth, and fiscal adjustment emerge as significant contributors to the accumulation of public debt in different contexts Based on the table, the following patterns can be observed:  The correlation between gov debt and gov exp : r(gov debt , gov exp ¿=−0.5210 , which is the lowest correlation coefficient and a negative effect on the dependent variable  The correlation between gov debt and gdp growth : r(gov debt , gdp growth ¿=0.4301, which is the highest correlation coefficient and a positive effect on the dependent variable  The correlation between gov debt and interest rate: r(gov debt , interest rate ¿=0.2661 , which proves to be a high correlation coefficient and positive effect on the dependent variable  The correlation between gov debt and trade : r(gov debt , trade ¿=0.0112, which is a low correlation coefficient and a positive effect on the dependent variable  The correlation between gov debt and ln (infl) : r(gov debt , ln (infl) ¿=0.3391 , which is a high correlation coefficient and positive effect on the dependent variable  The correlation between gov debt and ln (foreigninv ): r(gov debt , ln (foreigninv )¿=−0.2105 , which is a negative coefficient and negative effect on the dependent variable  All independent variables have correlation with the dependent variable and are up to expectation Therefore, we should include all variables in the regression model 19 III Estimation Results, Model Testing and Statistical Inference OLS Regression and Model Testing We run a regression model having one dependent variable (gov_debt) and independent variables (gov_exp, gdp_growth, interest_rate, lninfl, lnfor_inv, trade) on Stata 17 Run the command reg gov_debt gov_exp gdp_growth interest_rate lninfl lnfr_inv trade, we got the result: Table 4.1 Source SS df MS Number of obs = 140 F (6, 133) = 29.24 Model 29591.544 4931.9241 Prob > F = 0.0000 Residual 133 R-squared = 0.5688 22431.678 168.65923 Adj R-squared = 0.5494 Root MSE = 12.987 Total 52023.223 139 374.26779 gov_debt gov_exp Coef -.413611 gdp_growth 2.150136 interest_rate 8144133 lninfl 4.078184 lnfor_inv 7.036903 trade 1280802 _cons 23.47154 Std Err t P> | t | [95% conf interval] 0591836 -6.99 0.000 -.530679 -.2965431 5008037 4.29 0.000 1.159566 3.140707 1647274 4.94 0.000 4885889 1.140238 1.1885 3.43 0.001 1.727378 6.42899 1.39992 -5.03 0.000 -4.267916 9.805891 0280856 4.56 0.000 0725279 1836325 4.349783 5.40 0.000 14.86784 32.07524 1.1 Testing the Overall Significance Level of Model To test the overall significance level of the model, at 1%, 5%, and 10% significance level, we use p-value (F) testing, we got the result: p-value (F) = 0.0000 < 0.01, 0.05 and 0.1 respectively Thus, R-squared does not equal This means that the model has statistical significance at 1%, 5% and 10% significance level 1.2 Testing the Significance Level of Each Independent Variable At the significance level 5%, if an independent variable has P-value < α=0.05, it means that this independent variable affects the dependent variable From the Table 4.1, we got the result: Variable P-value Affect/do not affect dependent variable (gov_debt) 20 gov_exp 0.00 gdp_growth 0.00 interest_rate 0.00 lninfl 0.00 lnfor_inv 0.00 trade 0.00