Does External Debts Affect Economic Growth: The Case of E7 Countries

Abstract

Developing countries, which mostly face financing problems, often have to use external debt. On the one hand, external debt stands out as an important source of financing investments, but on the other hand, due to inefficient use or administrative failures, it may harm the macroeconomic indicators of countries, rather than benefit, with parameters such as exchange rate, bad governance and corruption. One of these macroeconomic indicators is undoubtedly economic growth. In this context, the effect of external debt on growth is discussed for the E7 countries in the 1992-2020 period. First of all, the relationship between external debt growth was examined using Westerlund cointegration analysis. According to, there is a long term co-integration relationship between foreign debt and economic growth in E7 countries. Common Correlated Effects Estimator (CCE) and Augmented Mean Group Estimator (AMG) models were used for the coefficient estimation. The findings obtained from both models indicate that external debt negatively affects growth.When the findings are analyzed by country, according to the AMG model, foreign aid affects growth negatively in China, India, Russia, Brazil and Mexico. According to the CCE model findings, foreign aid negatively affects growth in India, Brazil, Mexico and Indonesia. However, according to the findings of both models, the effect of foreign aid on growth in Turkey is statistically insignificant. Panel group analysis results support the debt overhang hypothesis for E7 countries