Email this article 1.jpg){kind=logo}
The Relationship between Public Debt, Budget Deficit, and Sustainable Economic Development in Developing Countries: The Role of Corruption Control
Abstract
This study investigates the effects of public debt and budget deficits on the sustainable economic development of developing countries, taking into account the role of control of corruption. The two-step GMM method was applied for unbalanced panel data of 59 developing countries from 2004 to 2015. The study found that public debt and the budget deficit had negative effects on sustainable development, while the effect of control of corruption was positive. Moreover, using interaction terms between control of corruption and public debt and budget deficit, respectively, empirical results showed that controlling corruption limited these adverse effects. Thus, if the objective is to achieve sustainable economic development, developing countries should not see raising public debt or maintaining budget deficits as a strategy for economic development. The study contributes empirical evidence to the theory of debt overhang, crowded effects, and institutional theory in the context of developing countries. The implications are also discussed in this paper.
Keywords
Full Text:
PDFReferences
Abbas, S. M. A., & Christensen, J. E. (2009). The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries and Emerging Markets. IMF Staff Papers, 57(1), 209-255. https://doi.org/10.1057/imfsp.2009.24
Abed, G. T., & Davoodi, H. R. (2000). Corruption, Structural Reforms, and Economic Performance in the Transition Economies. IMF Working Papers, 00(132), 1. https://doi.org/10.5089/9781451855371.001
Afonso, A., & Alves, J. R. (2014). The Role of Government Debt in Economic Growth. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2468805
Agnello, L., & Sousa, R. M. (2013). Political, Institutional, and Economic Factors Underlying Deficit Volatility. Review of International Economics, 21(4), 719-732. https://doi.org/10.1111/roie.12066
Alesina, A., Mirrlees, J., & Neumann, M. J. M. (1989). Politics and Business Cycles in Industrial Democracies. Economic Policy, 4(8), 55. https://doi.org/10.2307/1344464
Ali, R., & Mustafa, U. (2012). External Debt Accumulation and Its Impact on Economic Growth in Pakistan. The Pakistan Development Review, 51(4II), 79-96. https://doi.org/10.30541/v51i4iipp.79-96
Al-Marhubi, F. A. (2000). Corruption and Inflation. Economics Letters, 66(2), 199-202. https://doi.org/10.1016/s0165-1765(99)00230-x
Alshahrani, S., & Alsadiq, A. (2014). Economic Growth and Government Spending in Saudi Arabia: An Empirical Investigation. IMF Working Papers, 14(3), 1. https://doi.org/10.5089/9781484348796.001
Anita, Č. Č., Ana, A. B., & Martina, B. S. (2014). Public Debt and Growth: Evidence from Central, Eastern and Southeastern European Countries. Zb. rad. Ekon. fak. Rij., 32(1), 35-51. Retrieved from https://ideas.repec.org/a/rfe/zbefri/v32y2014i1p35-51.html
Bal, D. P., & Rath, B. N. (2014). Public Debt and Economic Growth in India: A Reassessment. Economic Analysis and Policy, 44(3), 292-300. https://doi.org/10.1016/j.eap.2014.05.007
Baldacci, E., Cui, Q., Clements, B. J., & Gupta, S. (2004). Social Spending, Human Capital, and Growth in Developing Countries: Implications for Achieving the Mdgs. IMF Working Papers, 04(217), 1. https://doi.org/10.5089/9781451875140.001
Barişik, S., & Baris, A. (2017). Impact of Governance on Budget Deficit in Developing Countries. Theoretical and Applied Economics, XXIV(2), 111-130. Retrieved from http://store.ectap.ro/articole/1272.pdf
Barro, R. (1995). Inflation and Economic Growth. NBER Working Paper, National Bureau of Economic Research Cambridge. Retrieved from http://dx.doi.org/10.3386/w5326
Barro, R. J., & Lee, J. W. (2013). A New Data Set of Educational Attainment in the World, 1950–2010. Journal of Development Economics, 104, 184-198. https://doi.org/10.1016/j.jdeveco.2012.10.001
Baum, A., Checherita-Westphal, C., & Rother, P. (2013). Debt and Growth: New Evidence for the Euro Area. Journal of International Money and Finance, 32, 809-821. https://doi.org/10.1016/j.jimonfin.2012.07.004
Benhabib, J., & Spiegel, M. M. (2009). Moderate Inflation and the Deflation-Depression Link. Journal of Money, Credit and Banking, 41(4), 787-798. https://doi.org/10.1111/j.1538-4616.2009.00232.x
Blackburn, K., Bose, N., & Emranul Haque, M. (2006). The Incidence and Persistence of Corruption in Economic Development. Journal of Economic Dynamics and Control, 30(12), 2447-2467. https://doi.org/10.1016/j.jedc.2005.07.007
Brunetti, A., & Weder, B. (2003). A Free Press Is Bad News for Corruption. Journal of Public Economics, 87(7-8), 1801-1824. https://doi.org/10.1016/s0047-2727(01)00186-4
Bruno, M., & Easterly, W. (1998). Inflation Crises and Long-Run Growth. Journal of Monetary Economics, 41(1), 3-26. https://doi.org/10.1016/s0304-3932(97)00063-9
Buiter, W. H. (1977). Crowding out’ and the Effectiveness of Fiscal Policy. Journal of Public Economics, 7(3), 309-328. https://doi.org/10.1016/0047-2727(77)90052-4
Calderón, C., & Fuentes, J. R. (2013). Government Debt and Economic Growth. Inter-American Development Bank. Retrieved from: https://publications.iadb.org/publications/english/document/Government-Debt-and-Economic-Growth.pdf
Campos, J. E., Lien, D., & Pradhan, S. (1999). The Impact of Corruption on Investment: Predictability Matters. World Development, 27(6), 1059-1067. https://doi.org/10.1016/s0305-750x(99)00040-6
Cerra, V., Rishi, M., & Saxena, S. C. (2008). Robbing the Riches: Capital Flight, Institutions and Debt. The Journal of Development Studies, 44(8), 1190-1213. https://doi.org/10.1080/00220380802242453
Chowdhury, A. (2001). External Debt and Growth in Developing Countries. In (Vol. 2001). Helsinki, Finland: UNU-WIDER.
Chowdhury, S. D., & Michael Geringer, J. (2001). Institutional Ownership, Strategic Choices and Corporate Efficiency: Evidence from Japan. Journal of Management Studies, 38(2), 271-292. https://doi.org/10.1111/1467-6486.00236
Clements, B., Gupta, S., & Inchauste, G. (2004). Fiscal Policy for Development: An Overview. In Helping Countries Develop: The Role of Fiscal Policy. Retrieved from https://www.imf.org/external/pubs/nft/2004/hcd/ch01.pdf
Cohen, K. J., Hawawini, G. A., Maier, S. F., Schwartz, R. A., & Whitcomb, D. K. (1983). Friction in the Trading Process and the Estimation of Systematic Risk. Journal of Financial Economics, 12, 263-278. https://doi.org/10.1016/0304-405x(83)90038-7
Cooray, A., Dzhumashev, R., & Schneider, F. (2017). How Does Corruption Affect Public Debt? An Empirical Analysis. World Development, 90, 115-127. https://doi.org/10.1016/j.worlddev.2016.08.020
DiPeitro, W. R., & Anoruo, E. (2012). Government Size, Public Debt and Real Economic Growth: A Panel Analysis. Journal of Economic Studies, 39(4), 410-419. https://doi.org/10.1108/01443581211255620
Dort, T., Méon, P.-G., & Sekkat, K. (2014). Does Investment Spur Growth Everywhere? Not Where Institutions Are Weak. Kyklos, 67(4), 482-505. https://doi.org/10.1111/kykl.12064
Eberhardt, M., & Presbitero, A. F. (2015). Public Debt and Growth: Heterogeneity and Non-Linearity. Journal of International Economics, 97(1), 45-58. https://doi.org/10.1016/j.jinteco.2015.04.005
Égert, B. (2015). Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality? Journal of Macroeconomics, 43, 226-238. https://doi.org/10.1016/j.jmacro.2014.11.006
Égert, B. (2016). Regulation, Institutions, and Productivity: New Macroeconomic Evidence from Oecd Countries. American Economic Review, 106(5), 109-113. https://doi.org/10.1257/aer.p20161026
Elmendorf, D. W., & Mankiw, N. G. (1999). Government Debt. In Handbook of Macroeconomics (pp. 1615-1669): Elsevier.
Fatima, G., Ahmed, M., & Rehman, W. U. (2012). Consequential Effects of Budget Deficit on Economic Growth of Pakistan. International Journal of Business and Social Science, 3(7), 203-208.
Figuières, C., Masclet, D., & Willinger, M. (2012). Vanishing Leadership and Declining Reciprocity in a Sequential Contribution Experiment. Economic Inquiry, 50(3), 567-584. https://doi.org/10.1111/j.1465-7295.2011.00415.x
Gaber, S. (2010). Economic Implications from Deficit Finance. Working Paper. Bamberg University. Retrieved from https://www.econstor.eu/bitstream/10419/38828/1/617386072.pdf
Gochoco, M. S. (1990). Financing Decisions and the ‘Crowding out’ Effect. Economics Letters, 32(4), 331-333. https://doi.org/10.1016/0165-1765(90)90024-u
Grossman, M. (2000). The Human Capital Model. In A. J. Culyer & J. P. Newhouse (Eds.), Handbook of Health Economics (Vol. 1, pp. 347-408): Elsevier.
Ha, N. T. T., & Quyen, P. G. (2018). Monetary policy, bank competitiveness and bank risk-taking: Empirical evidence from Vietnam. Asian Academy of management Journal of Accounting and Finance, 14(2), 137–156. https://doi.org/10.21315/aamjaf2018.14.2.6
Ha, N. T. T., Van, V. T. T., Thu, P. A., & Anh, L. T. H. (2019). Institutional Environment, Government Ownership and Firm Profitability: Empirical Evidence from Vietnam. Academy of Accounting and Financial Studies Journal, 23(3), 1-11. Retrieved from https://www.abacademies.org/articles/institutional-environment-government-ownership-and-firm-profitability-empirical-evidence-from-vietnam-8283.html
Harcourt, G. C., & Coddington, A. (1984). Keynesian Economics: The Search for First Principles. Economica, 51(202), 207. https://doi.org/10.2307/2554213
Heutel, G. (2012). Crowding out and Crowding in of Private Donations and Government Grants. Public Finance Review, 42(2), 143-175. https://doi.org/10.1177/1091142112447525
Hussain, M. E., Haque, M., & Igwike, R. S. (2015). Relationship between Economic Growth and Debt: An Empirical Analysis for Sub-Saharan Africa. Journal of Economics and Political Economy, 2(2), 262-276. Retrieved from http://kspjournals.org/index.php/JEPE/article/view/222
Hwang, J.-T., Chung, C.-P., & Wang, C.-H. (2010). Debt Overhang, Financial Sector Development and Economic Growth. Hitotsubashi Journal of Economics, 51(1), 13-30. Retrieved from https://www.researchgate.net/publication/44930086_Debt_overhang_financial_sector_development_and_economic_growth
Karras, G. (1994). Macroeconomic Effects of Budget Deficits: Further International Evidence. Journal of International Money and Finance, 13(2), 190-210. https://doi.org/10.1016/0261-5606(94)90015-9
Kaufman, D. (2010). Can Corruption Adversely Affect Public Finance in Industrialized Countries? : Brookings Institution Opinions.
Khan, M. A., Khan, M. Z., & Zaman, K. (2012). Measuring the Impact of Fiscal Variables on Economic Growth in Pakistan: New Light on an Old Problem. Journal of Economic and Social Research, 14(2), 53-82.
Kim, E., Ha, Y., & Kim, S. (2017). Public Debt, Corruption and Sustainable Economic Growth. Sustainability, 9(3), 433. https://doi.org/10.3390/su9030433
Krugman, P. (1988). Financing Vs. Forgiving a Debt Overhang. Journal of Development Economics, 29(3), 253-268. https://doi.org/10.1016/0304-3878(88)90044-2
Lambsdorff, J. G. (2003). How Corruption Affects Productivity. Kyklos, 56(4), 457-474. https://doi.org/10.1046/j.0023-5962.2003.00233.x
Liaqat, Z. (2019). Does Government Debt Crowd out Capital Formation? A Dynamic Approach Using Panel Var. Economics Letters, 178, 86-90. https://doi.org/10.1016/j.econlet.2019.03.002
Madni, G. R., & Chaudhary, M. A. (2017). Economic Growth in Context of Institutions and Fiscal Policy. Pakistan Economic and Social Review, 55(1), 79-98. Retrieved from http://pu.edu.pk/images/journal/pesr/PDF-FILES/5-v55_1_17.pdf
Matiti, C. (2013). The Relationship between Public Debt and Economic Growth in Kenya. International Journal of Social Sciences and Project Planning Management, 1(1), 1-21. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwjU6dOB6Z7pAhXWbCsKHTx-APMQFjAAegQIAxAB&url=http%3A%2F%2Ferepository.uonbi.ac.ke%2Fbitstream%2Fhandle%2F11295%2F92361%2FMatiti_The%2520relationship%2520between%2520public%2520debt%2520and%2520economic%2520growth.pdf%3Fsequence%3D1%26isAllowed%3Dy&usg=AOvVaw1qe8Qqw3-bDaNnftgXCbZY
Mauro, P. (1995). Corruption and Growth. The Quarterly Journal of Economics, 110(3), 681-712. https://doi.org/10.2307/2946696
Metwally, M. M., & Tamaschke, R. (1994). The Interaction among Foreign Debt, Capital Flows, and Growth: Case Studies. Journal of Policy Modeling, 16(6), 597-608. https://doi.org/10.1016/0161-8938(94)90010-8
Morrissey, O., & Udomkerdmongkol, M. (2012). Governance, Private Investment and Foreign Direct Investment in Developing Countries. World Development, 40(3), 437-445. https://doi.org/10.1016/j.worlddev.2011.07.004
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.
Okelo, S. O., Momanyi, G., Othuon, L., & Fredrick, O. A. (2013). The Relationship between Fiscal Deficits and Economic Growth in Kenya: An Empirical Investigation. Greener Journal of Social Sciences, 3(6), 306-323. https://doi.org/10.15580/gjss.2013.6.051113603
Panizza, U., & Presbitero, A. F. (2013). Public Debt and Economic Growth in Advanced Economies: A Survey. Swiss Journal of Economics and Statistics, 149(2), 175-204. https://doi.org/10.1007/bf03399388
Panizza, U., & Presbitero, A. F. (2014). Public Debt and Economic Growth: Is There a Causal Effect? Journal of Macroeconomics, 41, 21-41. https://doi.org/10.1016/j.jmacro.2014.03.009
Pattillo, C., Poirson, H., & Ricci, L. A. (2011). External Debt and Growth. Review of Economics and Institutions, 2(3) 1-30. https://doi.org/10.5202/rei.v2i3.45
Pezzey, J. (1992). Sustainable Development Concept: The World Bank.
Phung, T. D., Van, V. T. T., Thuong, T. T. H., & Ha, N. T. T. (2019). Innovation and Economic Growth: The Contribution of Institutional Quality and Foreign Direct Investment. Asian Economic and Financial Review, 9(11), 1266-1278. https://doi.org/10.18488/journal.aefr.2019.911.1266.1278
Rapach, D. E. (2003). International Evidence on the Long-Run Impact of Inflation. Journal of Money, Credit and Banking, 35(1), 23-48. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwj81aqI6p7pAhXMF3IKHSEGDoEQFjAAegQIAhAB&url=https%3A%2F%2Feconpapers.repec.org%2FRePEc%3Amcb%3Ajmoncb%3Av%3A35%3Ay%3A2003%3Ai%3A1%3Ap%3A23-48&usg=AOvVaw1qNKNQhyMjxeEM-jUGCINA
Reinhart, C. M., Reinhart, V. R., & Rogoff, K. S. (2012). Public Debt Overhangs: Advanced-Economy Episodes since 1800. Journal of Economic Perspectives, 26(3), 69-86. https://doi.org/10.1257/jep.26.3.69
Rodrik, D. (2005). Growth Strategies. In Handbook of Economic Growth (pp. 967-1014): Elsevier.
Roodman, D. (2009). How to Do Xtabond2: An Introduction to Difference and System Gmm in Stata. The Stata Journal, 9, 86-136. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwiGlZme6p7pAhWWV30KHQ2YD8EQFjAAegQIAxAB&url=https%3A%2F%2Fjournals.sagepub.com%2Fdoi%2F10.1177%2F1536867X0900900106&usg=AOvVaw3J2knpDuviSTR9wGqK2fl9
Savvides, A. (1992). Investment Slowdown in Developing Countries During the 1980s: Debt Overhang or Foreign Capital Inflows? Kyklos, 45(3), 363-378. https://doi.org/10.1111/j.1467-6435.1992.tb02121.x
Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New Estimates for the Shadow Economies All over the World. International Economic Journal, 24(4), 443-461. https://doi.org/10.1080/10168737.2010.525974
Sen, S., Kasibhatla, K. M., & Stewart, D. B. (2007). Debt Overhang and Economic Growth–the Asian and the Latin American Experiences. Economic Systems, 31(1), 3-11. https://doi.org/10.1016/j.ecosys.2006.12.002
Šimić, V., & Vinko, M. (2012). Debts (Public and External) and Growth – Link or No Link? Croatian Operational Research Review, 3(1), 91-102. Retrieved from https://hrcak.srce.hr/96805
Tanzi, V., & Davoodi, H. (2001). Corruption, Growth, and Public Finances. Routledge Contemporary Economic Policy Issues: Routledge. https://doi.org/10.4324/9780203468388.pt3
Tanzi, V., & Zee, H. H. (1997). Fiscal Policy and Long-Run Growth. Staff Papers, 44(2), 179-209. https://doi.org/10.2307/3867542
Tarek, B. A., & Ahmed, Z. (2017). Institutional Quality and Public Debt Accumulation: An Empirical Analysis. International Economic Journal, 31(3), 415-435. https://doi.org/10.1080/10168737.2017.1354906
Tung, L. T. (2018). The Effect of Fiscal Deficit on Economic Growth in an Emerging Economy: Evidence from Vietnam. Journal of International Studies, 11(3), 191-203. https://doi.org/10.14254/2071-8330.2018/11-3/16
Van, V. B., & Sudhipongpracha, T. (2015). Exploring Government Budget Deficit and Economic Growth: Evidence from Vietnam's Economic Miracle. Asian Affairs: An American Review, 42(3), 127-148. https://doi.org/10.1080/00927678.2015.1048629
Wahab, N. S. A., & Holland, K. (2012). Tax Planning, Corporate Governance and Equity Value. The British Accounting Review, 44(2), 111-124. https://doi.org/10.1016/j.bar.2012.03.005
Wei, S.-J. (2000). How Taxing Is Corruption on International Investors? Review of Economics and Statistics, 82(1), 1-11. https://doi.org/10.1162/003465300558533
Woo, J. (2003). Economic, Political, and Institutional Determinants of Public Deficits. Journal of Public Economics, 87(3-4), 387-426. https://doi.org/10.1016/s0047-2727(01)00143-8
Woo, J., & Kumar, M. S. (2015). Public Debt and Growth. Economica, 82(328), 705-739. https://doi.org/10.1111/ecca.12138
Wright, A., & Grenade, K. (2014). Determining Optimal Public Debt and Debt-Growth Dynamics in the Caribbean. Research in Applied Economics, 6(2), 87-115. https://doi.org/10.5296/rae.v6i2.5577
Wrigley, E. A. (1988). The Limits to Growth: Malthus and the Classical Economists. Population and Development Review, 14(1), 30-48 https://doi.org/10.2307/2808089
Zouhaier, H., & Fatma, M. (2014). Debt and Economic Growth. International Journal of Economics and Financial Issues, 4(2), 440-448. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwjMsrLU657pAhUIcCsKHeWoCHIQFjAAegQIARAB&url=https%3A%2F%2Fwww.econjournals.com%2Findex.php%2Fijefi%2Farticle%2Fview%2F759&usg=AOvVaw0Ww5sURmPFA5bbIJ4-rMxV
DOI: https://doi.org/10.18196/jesp.21.1.5033
Refbacks
- There are currently no refbacks.
Copyright (c) 2020 Jurnal Ekonomi & Studi Pembangunan
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Office:
Redaksi JESP UMY, Gedung E2 Lantai 2, Fakultas Ekonomi dan Bisnis, Universitas Muhammadiyah Yogyakarta
Jalan Brawijaya, Tamantirto, Kasihan, Bantul, Daerah Istimewa Yogyakarta 55183
Telp: (0274) 387656 ext.184
Fax: (0274) 387646
Email: jesp@umy.ac.id
Jurnal Ekonomi & Studi Pembangunan (JESP) is licensed under Creative Commons Attribution-ShareAlike 4.0 International.