Analyzing the Relationship Between Public Debt and Poverty Reduction in Developing Countries: An Empirical Study

Abstract

Purpose: The goal of this current research is to investigate the link between public debt and poverty reduction in developing countries. The study aims to examine the influence of public debt on poverty reduction while considering other contributing factors such as economic growth, population, inflation, human development index, and institutional quality.   Theoretical framework: The theoretical framework of this research on the impact of public debt on poverty reduction in developing countries is grounded in two key theories: Debt Overhang Theory and Fiscal Space and Poverty Reduction theories.  The first theory posits that high levels of public debt can lead to negative consequences for economic growth and poverty reduction. The second theory emphasizes the importance of fiscal space in poverty reduction efforts. Fiscal space refers to the financial resources available for a government to fund public goods and services without jeopardizing debt sustainability.   Method/design/approach: In this research, a panel data approach is utilized to investigate the correlation between public debt and poverty reduction in developing countries. The panel dataset encompasses a 21-year period, from 2000 to 2021, and includes data from 20 developing countries.   Results and conclusion: The study shows that public debt has a significant and positive correlation with poverty, indicating that high levels of public debt can lead to an increase in poverty in developing countries.   Research implications: Because high levels of public debt can lead to an increase in poverty in developing countries, countries need to exercise caution when taking on debt and prioritize debt sustainability to avoid negative effects on poverty levels. In contrast, economic growth and human development have a significant and negative correlation with poverty, suggesting that these factors can contribute to poverty reduction in developing countries.   Originality/value: The analysis highlights the complex relationship between public debt and poverty reduction in developing countries. Although the results are mixed, they emphasize the need for policymakers to adopt a comprehensive approach to poverty reduction that addresses not only reducing public debt but also promoting economic growth, enhancing institutional quality, and addressing other poverty-contributing factors.