Impact of External Debt on Economic Growth: The Role of Institutional Quality

Abstract

Utilizing GMM panel data analysis, covering twenty-three samples of countries from 2011 to 2014, this study examines the nexus between external debt and economic growth where institutional quality acts as a moderator. The samples for the study are divided into two groups consisting of low and high governance groups of countries. Findings report the importance of institutional quality as a moderator in the relationship between external debt and economic growth for both samples of study. The results confirm that, despite the importance of good governance practices, as indicated by the significant effect of high scores in governance indicators such as voice and accountability (samples from low governance countries) and regulatory quality (samples from high governance countries), prescribing the right policy is crucial to avoid the negative impact of the wrong policy prescription on economic growth. The results are dissected into two groups, for low governance and high governance countries respectively. Overall, the study suggests good debt management and feasible policy prescriptions are the keys to controlling external debt.