Attaining Economic Growth Through Financial Development and External Debts: Evidence from Emerging Economies

Abstract

Current study examines whether in emerging countries, financial development (FD) and external debts (EXD) has an impact on the economic growth (EG) collectively by focusing on two main debt theories i.e., debt overhang theory by Krugman & Debt-Laffer curve. Annual data on external debts (EXD), financial development (FD), trade openness, inflation, capital formation, debt servicing, population growth and economic growth are derived from the “World Development Indicators” (WDI) from the year 1980 to the year 2019 for the emerging countries: Brazil, China, Indonesia, Mexico, South Africa, Turkey, Nigeria, Pakistan, Poland, Russia, Thailand. Autoregressive distributed lag (ARDL) model is used to estimate the long-run relationships among the variables in the model, and the effect of EXD on EG is determined using the pool mean group (PMG) model. This study shows the negative and significant relationship between external debt (EXD) and GDP growth and positive and significant relationship is found between financial development (FD) and EXD in the long-run. Similarly, in the long-run, Debt servicing, trade openness and inflation have a significant and negative relationship with GDP growth While population growth and gross capital formation has significant and positive correlation with GDP growth.