From Debt Trap to Economic Prosperity: Solow Model Analysis of the Impact of External Debt on Indonesia's Growth

Abstract

Indonesia, like many developing countries, has been grappling with the issue of external debt. This study uses the Solow Growth Model approach to examine the relationship between external debt and economic growth in Indonesia. The study utilizes time-series data from 1970 to 2022. It includes Gross Domestic Product (GDP) as the dependent variable, while Debt Service, External Debt, Exports, Imports, Gross Capital Formation, and Population Growth are the independent variables. The ARDL method is used to analyse the data to determine whether there is a statistically significant relationship between the independent and dependent variables. The findings of this study reveal that External Debt, Debt Service, Exports, Imports, and Gross Capital Formation have a significant positive relationship with GDP, indicating that increased external debt can contribute to economic growth in the country. This suggests that the government can use external borrowing to increase investments, exports, and imports and ultimately drive GDP growth. These results have important implications for policymakers looking for strategies to promote economic growth in Indonesia. By focusing on measures that stimulate foreign investment, increase exports and imports, and enhance gross capital formation, policymakers can help the country move from a debt trap to economic prosperity. Using the Solow Growth Model approach, this study also provides a framework for other developing countries to examine the relationship between external debt and economic growth.