The impact of external debt on economic growth in emerging economies: investigating the role of capital formation

Abstract

The emerging economies rely on external debt for their economic development (Hawkins and Turner, 2000). We investigate capital formation as one of the channels through which external debt impacts the economic growth of emerging economies. The study utilises unbalanced panel data estimation models on economic data of 24 emerging economies1 for the period 1990 to 2019. Unbalanced panel data regression models are developed to identify the impact of: 1) growth of external debt stock (EDS) on GDP growth; 2) capital formation growth on GDP growth; 3) growth of EDS on capital formation growth in these economies. The findings indicate that EDS growth in the emerging economies had a negative impact on GDP growth, while capital formation growth had a significant positive impact on GDP growth. Further, the EDS growth had a significant negative impact on capital formation. Findings indicate that the debt raised has hindered capital formation in emerging economies.