[

A PANEL ANALYSIS TO UNDERSTAND WHETHER DEBT IS A

BURDEN OR GROWTH DRIVER IN HIGHLY INDEBTED COUNTRIES
Amin Ullah Khan1, Sadia Mustafa2, Dr. Bilal Alam3, Muhammad Zeeshan*4
1
PHD Scholar School of Economic and Management Chang'an University, Xi'an, China., 2Senior Lecturer
Department of Economics, Institute of southern Punjab Multan, 3Associate Professor Government Post
Graduate College, Mandian, Abbottabad, 4M.Sc. Economics University of Science and technology Bannu
1
2022023923@chd.edu.cn, 2sadiahashmi228@gmail.com, 3bilal.alam868@gmail.com,
*4zk9090100@gmail.com
4
Corresponding Author: *
Received: 1 9 August, 2023 Revised: 24 September, 2023 Accepted: 27 September, 2023 Published: 30 September, 2023

ABSTRACT
This research paper delves into the intricate relationship between external debt and economic growth
across 56 countries, identified as the most indebted among those with available data. Utilizing a
comprehensive dataset spanning from 1990 to 2021, sourced from World Development Indicators
(WDI) and Worldwide Governance Indicators (WGI), the study employs a multifaceted analytical
approach. It combines the power of Panel Autoregressive Distributed Lag (ARDL) to provide both
short-term and long-term insights into the nexus between external debt and economic growth.
Simultaneous Quantile Regression is employed to explore the influence and relationships between
countries, offering a deeper and more comprehensive understanding of the dynamics at play. The
analysis also encompasses economic and governance variables, including gross fixed capital
formation (GFCF), government consumption (GOVCONS), inflation (INFL), rule of law (RULE),
and voice and accountability (VOICE). Findings reveal that high external debt levels can hinder
long-term economic growth, emphasizing the importance of prudent debt management. Investments
in fixed capital exhibit a consistently positive impact on GDP growth across different segments,
highlighting the need to foster capital accumulation and infrastructure development. Governance
indicators such as the rule of law and voice and accountability, while not directly causal, remain
pivotal for societal well-being and economic development. The research offers essential policy
recommendations, urging fiscal responsibility, enhanced investment promotion, and governance
improvements to ensure sustainable economic growth in an interconnected global economy. This
study contributes valuable insights to policymakers, economists, and researchers, advancing the
discourse on financial sustainability and the role of external debt in shaping the destinies of nations.

Keywords: External debt, GDP growth, PARDL, Simultaneous Quantile Regression

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INTRODUCTION including public and private sector borrowings,

External debt serves as a critical tool for multilateral loans, and commercial debts.
countries to secure the necessary capital for Effective management of external debt
vital investments in infrastructure, human becomes paramount as countries seek to strike
capital, technology, and overall economic a delicate balance between financing essential
growth, as well as to address balance of development projects and averting the potential
payments challenges. It plays a pivotal role in adverse consequences of excessive
supporting development initiatives and crisis indebtedness (Acharya et al., 2015). Sound debt
mitigation strategies. IMF member countries, in management practices are essential to ensure
particular, leverage external debt to finance that borrowed resources are channeled
strategic projects in sectors such as education, efficiently, thereby minimizing risks and
technology, and infrastructure, all of which are maximizing the positive impact of external debt
instrumental in propelling economic expansion, on a nation's economic growth and long-term
job creation, and competitiveness. However, it development goals.
is paramount to exercise prudent debt In today's global economy, understanding the
management to ensure that borrowed resources intricate interplay between external debt and
are allocated efficiently and that fiscal economic growth is of paramount importance
sustainability is upheld. This approach not only for policymakers, economists, and financial
minimizes potential risks associated with institutions. Developed nations, characterized
excessive debt but also maximizes the positive by robust financial systems and advanced
impact of external borrowing on the economic infrastructure, leverage external debt
growth trajectories of IMF member nations. strategically to fund major developmental
Effective debt management safeguards against projects, drive innovation, and enhance human
overburdening future generations and capital. However, careful examination is vital
contributes to achieving long-term due to potential risks, as highlighted by seminal
development goals (Osano et al., 2016). research like Reinhart and Rogoff's (2010).
Furthermore, by striking a careful balance Conversely, in developing countries, where
between external debt and economic growth, economic progress often contends with
countries can harness the benefits of debt resource limitations, external debt plays a
financing while mitigating its potential crucial role in bridging funding gaps for critical
downsides (Mupunga et al., 2015). development initiatives in areas such as
In an increasingly interconnected and globally healthcare, education, and infrastructure. Yet,
interdependent economy, the intricate prudent debt management is key to prevent
relationship between external debt and adverse effects on growth, particularly in
economic growth has risen to the forefront of contexts of weak institutions and policies
concerns for policymakers, economists, and (Easterly, 2001; Chowdhury & Mavrotas,
international financial institutions alike. The 2006). As nations grapple with striking a
nexus between a nation's external debt levels balance between utilizing external debt for
and its overall economic performance has growth-promoting activities and averting the
become a focal point of extensive scholarly risks of over-indebtedness, responsible debt
research, policy discourse, and practical management remains fundamental for
significance. As countries engage in sustainable development and economic
international trade, investment, and financial prosperity (Barro, 1990; Aghion & Bolton,
transactions, the accumulation of external debt 1997). This study aims to contribute to this
has become an integral facet of their economic understanding by conducting a systematic
landscape (Salvatore, 2019). This convergence analysis of IMF member countries, discerning
of factors influencing a nation's economic patterns, threshold levels, and causal
growth and development is multifaceted, relationships between external debt and
encompassing not only domestic policies and economic growth to inform effective policy
institutions but also international financial discourse and decision-making.
flows and obligations. External debt, we undertake a thorough investigation into the
representing a country's obligations to foreign intricate relationship between external debt and
creditors, can manifest in various forms, economic growth across 56 nations designated

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as the most indebted based on World growth. One such perspective is the
Development Indicators (WDI). Recognizing neoclassical theory, which suggests that
the multifaceted nature of this connection, we external borrowing is a rational choice driven
employ a dual-method approach to gain a by a nation's need for investment capital.
comprehensive understanding. Initially, we Proponents of this view argue that external debt
utilize the Panel Autoregressive Distributed can facilitate faster economic growth by
Lag (ARDL) method to probe both short-term allowing a country to finance investments that
and long-term links between external debt and would be unattainable through domestic
economic growth, capturing the evolving savings alone. They emphasize that the benefits
dynamics over time. This method unveils of external borrowing outweigh the
temporal dimensions, distinguishing transient disadvantages and that any negative outcomes,
from enduring effects. Complementing our such as debt crises, result from imprudent
analysis, we implement Simultaneous Quantile borrowing and lending practices. In contrast,
Regression, partitioning data based on quantiles the endogenous growth theory suggests that an
of the dependent variable to unveil variations in increase in public debt can hinder future
the impact of external debt on countries at generations by lowering the growth rate. While
different stages of economic growth. Moreover, reducing public debt may boost long-term
we enrich our study by incorporating a range of growth, it can be detrimental to the current
economic and social variables, including generation, making it potentially Pareto
institutional quality, human capital, optimal. This theory highlights the
infrastructure development, and trade intergenerational trade-offs associated with
openness, to deepen our comprehension of the external debt.
intricate factors shaping the nexus between The dependency theory takes a different stance,
external debt and economic growth. positing that external debt represents a form of
Additionally, we explore causality among these economic exploitation. According to this
key variables using the PAIRWISE perspective, developed nations lend to
DUMITRESCU HURLIN test, shedding light developing ones to maintain their economic
on directional relationships. Through this dominance. Advocates of dependency theory
comprehensive methodology, our research aims argue that external debt perpetuates
to unravel the complex dynamics between underdevelopment in developing nations by
external debt and economic growth across diverting resources from domestic investments
diverse nations, offering valuable insights for and perpetuating a cycle of debt and poverty.
policymakers, economists, and researchers and On the other hand, Keynesian theory suggests
contributing to the global discourse on financial that external debt can be beneficial in the short
sustainability and the role of external debt in term by stimulating economic growth through
shaping national destinies. increased aggregate demand. However, it may
lead to long-term issues such as inflation,
LITERATURE REVIEW balance of payments crises, and challenges
In this section, we conduct a comprehensive related to debt sustainability. Keynesian
review of pertinent research to identify the key proponents emphasize the trade-offs between
determinants associated with external debt and short-term economic gains and potential long-
its impact on economic growth. External debt term consequences associated with external
theories represent economic models aimed at borrowing. Lastly, the structuralist theory
elucidating the factors influencing a nation's emphasizes the importance of domestic
choice to secure foreign loans and the resulting structural factors, such as income inequality,
implications for its economic performance. A market dynamics, and political instability, in
variety of external debt theories and empirical shaping the impact of external debt. Proponents
investigations have been conducted, and we of this view argue that external debt can
delve into some of the most noteworthy ones in exacerbate existing structural issues and trigger
the following discourse. economic crises, including hyperinflation and
There are several theoretical perspectives that currency devaluation. This perspective
provide different insights into the relationship underscores the need to consider a country's
between external debt and a country's economic unique structural conditions when assessing the

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implications of external debt on its economic disparities in infrastructure development, and

development. various stages of economic development. These
In line with the conventional perspective, inquiries have revealed that the beneficial
external debt is perceived as a potential obstacle impact of external debt on economic growth is
to economic growth due to its propensity to particularly pronounced in low-income
deplete a nation's resources. The servicing of countries that have made significant
debt obligations necessitates the allocation of a investments in infrastructure, alongside
country's resources, leaving fewer resources increased levels of financial development and
accessible for productive investments and other institutional quality (Mugumisi, 2021).
economically advantageous activities. Nonetheless, Reinhart and Rogoff's seminal
Additionally, an excessive debt burden can work in 2010 reveals a contrasting narrative,
erode foreign creditors' confidence, further establishing a negative association between
impeding a nation's economic advancement. external debt and economic growth, especially
Debt overhang theory advances the notion that in advanced economies. Their extensive
a substantial external debt load can dissuade analysis spanning 44 countries from 1800 to
foreign investment and stifle economic growth. 2008 posits that elevated external debt levels
According to this viewpoint, when a country may engender a state of debt overhang,
carries a hefty external debt burden, prospective diminishing incentives for investment and
investors exhibit reluctance to invest, fearing ultimately leading to reduced economic growth.
that any profits generated may be redirected Similarly, findings by Asteriou et al. (2021)
toward servicing the country's debt rather than underscore the detrimental impact of high
being reinvested within the domestic economy. external debt levels on economic growth,
This can trigger a detrimental cycle where particularly in nations characterized by feeble
diminished investment contributes to sluggish institutions and limited human capital.
economic growth, subsequently resulting in Furthermore, several studies highlight the
heightened external debt. Contrary to these adverse consequences of excessive external
views, debt neutrality theory asserts that debt on economic growth, notably in countries
external debt exerts no influence on economic plagued by high levels of corruption (Dey &
growth. According to this perspective, external Tareque, 2020; Gunarsa et al., 2020;
debt represents a straightforward resource Madhuhansi & Shantha, 2021; Makun, 2021;
transfer from one country to another and does Manasseh et al., 2022).
not impact a nation's long-term growth On one hand, external debt can furnish nations
prospects. In essence, a country's growth with vital capital for investment, infrastructure
potential is contingent on its domestic policies development, and economic activities, thereby
and institutional framework, rather than the fostering economic growth and advancing
extent of its external debt. overall development. This can result in
Numerous studies have emphasized the increased employment opportunities, higher
favorable influence of external debt on incomes, and an enhanced quality of life.
economic growth, especially in countries Conversely, an undue burden of external debt
characterized by factors such as high levels of can usher in a range of detrimental outcomes,
human capital, effective governance, strong including elevated interest payments, curtailed
institutional quality, economic freedom, and government expenditure on essential public
advanced human development (Asante et al., services and goods, and an augmented risk of
2023; Giri et al., 2023; Kumar & Batra, 2023; default. These factors collectively obstruct
Mtar & Belazreg, 2023; Öncel et al., 2023). economic growth and development, potentially
Additionally, investigations into the impact of exacerbating poverty and hardship among the
concessional loans on economic growth populace. This study aims to scrutinize the
indicate that concessional external debt tends to impact of external debt on economic growth
have a more substantial positive effect and ascertain whether it exerts a positive or
compared to non-concessional external debt negative influence. Additionally, it will explore
(Asongu et al., 2018; Kasili, D. W. 2020; Yoon whether the effects of external debt are short-
& Mah, 2020). Researchers have also explored term or long-term in nature.
the intricate relationship between external debt,

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A collection of diverse studies has provided potential risks, underscoring the need for a
valuable insights into the intricate relationship balanced approach to achieve sustainable
between external debt and economic growth economic development.
across various regions and time periods. In the
ECOWAS region, N’Zue (2020) identified a METHODOLOGY
nuanced dynamic, revealing that external debt Data
can have a positive impact on economic This study employs a dataset spanning from
performance up to specific thresholds but may 1990 to 2021, drawing from reputable sources
become detrimental beyond those points. such as the World Development Indicators
Meanwhile, Ale et al. (2023) uncovered a (WDI) and the Worldwide Governance
significant negative correlation between Indicators (WGI). The dataset encompasses 56
external debt and economic growth in South countries identified as the most indebted among
Asian countries, emphasizing the importance of the 90 nations for which relevant data is
promoting domestic savings and investment to accessible. It includes key variables vital to our
reduce reliance on foreign debt. Omodero's analysis, such as GDP growth rate (GDPG),
(2019) study in Nigeria highlighted the adverse external debt (EXTDEBT), gross fixed capital
impact of foreign debt on economic growth, formation (GFCF), government consumption
underlining the need for a strategic approach to (GOVCONS), and inflation rate (INFL), each
borrowing and revenue generation. Finally, of which plays a pivotal role in elucidating the
Ohiomu (2020) delved into the Nigerian intricate relationship between external debt and
context, revealing that debt overhang and economic growth. By leveraging this rich
crowding-out effects can hamper investment dataset, our research endeavors to unravel the
levels and, consequently, economic growth. multifaceted dynamics that underlie this
These findings collectively underscore the relationship, providing valuable insights to
complex interplay between external debt and policymakers, economists, and researchers and
economic growth, emphasizing the significance contributing to the broader discourse on
of prudent borrowing strategies and domestic financial sustainability and the impact of
economic policies to achieve sustainable external debt on a nation's economic trajectory.
development.
In conclusion, the literature review provides a Econometric Model
comprehensive overview of the multifaceted GDPGit = 𝜷𝟎 + 𝑬𝑿𝑻𝑫𝑬𝑩𝑻𝒊𝒕 𝜷𝟏 +
relationship between external debt and 𝑮𝑭𝑪𝑭𝒊𝒕 𝜷𝟐 + 𝑮𝑶𝑽𝑪𝑶𝑵𝑺𝒊𝒕 𝜷𝟑 +
economic growth, drawing from various 𝑰𝑴𝑷𝑶𝑹𝑻𝒊𝒕 𝜷𝟒 + 𝑰𝑵𝑭𝑳𝒊𝒕 𝜷𝟓 + 𝑹𝑼𝑳𝑬𝒊𝒕 𝜷𝟔 +
economic theories and empirical studies. While 𝑽𝑶𝑰𝑪𝑬𝒊𝒕 𝜷𝟕 … … (𝟏)
neoclassical and endogenous growth theories GDPG = Gross domestic product annual
suggest potential benefits of external borrowing growth rate
for economic growth, dependency theory, EXTDEBT = External debt stock
Keynesian theory, and structuralist theory GFCF = Gross fixed capital formation
underscore the risks and negative consequences GOVCONS = General government final
associated with high levels of external debt, consumption expenditure
particularly in the context of weak institutions IMPORT = Import of goods and services
and economic disparities. Empirical evidence INFL = Consumer price index
presents a mixed picture, with some studies RULE = Rule of law
highlighting the positive impact of external debt VOICE = Voice and accountability
on growth, especially in countries with
favorable governance and human capital Unit Root Test
conditions, while others emphasize the A panel unit root test is a statistical method used
detrimental effects, particularly in cases of to evaluate whether time series data in panel
excessive debt and corruption. The nuanced datasets, which combine cross-sectional and
findings emphasize the importance of prudent time series observations, exhibit unit root
debt management, strategic borrowing, and behaviour, indicating non-stationarity. Non-
domestic policy initiatives to maximize the stationary data can complicate econometric
benefits of external debt while mitigating its analysis and modelling. These tests, including

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the Levin-Lin & Chu (LLC) test and others, remaining tests, such as the panel ADP test and
assess the stationarity of individual series the panel PP-test, are within the dimension,
within the panel, which is crucial for reliable while the last three tests operate outside the
statistical analyses. dimensions. Regression within the dimension is
based on pooling, whereas outside the
The Levin-Lin & Chu test (LL&C) dimension regression relies on averaging.
The Levin-Lin & Chu test, commonly known as
"Levin-Lin and Chu," is a prominent panel unit KAO Cointegration Test
root test that was introduced by economists The Kao (Kao 1997) cointegration test is an
Andrew Levin and Chien-Fu Lin in 1992 and alternative approach employed to detect
subsequently extended with the contribution of cointegration in panel data, emphasizing the
Chia-Shang James Chu in 2002. This test is a existence of long-term relationships among
significant advancement from the Dickey- variables across various entities and
Fuller (DF) unit root test, offering a more timeframes. This test evaluates cross-sectional
comprehensive approach to evaluating interdependence and individual-specific
stationarity in data. It employs a two-step differences within panel data
procedure to assess stationarity. In the first step,
the analysis focuses on unit-specific fixed Lag Selection
effects, while in the second step, it delves into In the fixed lag selection, the same lag length is
unit-specific time trends. The initial step applied to both independent and dependent
involves the evaluation of divergence and lag variables, whereas in the automatic lag
coefficient patterns of the dependent variable selection, the lag length is determined
across various units, making this method automatically, typically by selecting the first
particularly valuable in the assessment of maximum lag for both types of variables.
stationarity within a predominantly cross- Automatic lag selection allows for the
sectional model possibility of different lag selections for
dependent and independent variables. In this
Cointegation study, we employ automatic lag selection,
Panel cointegration is a statistical concept and specifically using the Schwarz criteria for lag
technique used in econometrics to analyze the determination.
long-term relationships or associations among
variables in panel datasets, which combine Panel ARDL
cross-sectional and time series data. Pesaran et al. (1997, 2004) introduced the
Cointegration implies that two or more non- ARDL approach as a method for conducting
stationary time series variables have a stable cointegration analysis in single equation
long-run relationship, even if individually they models. This approach involves a two-step
may not be stationary. In the context of panel process to estimate long-term relationships.
data, panel cointegration suggests that there is a Firstly, it examines whether there is a
cointegrating relationship that holds across cointegrated relationship among all the
multiple cross-sectional units over time. variables. If such a relationship is identified, the
ARDL results are used to estimate the long-run
PEDRONI COINTEGRATION TEST coefficients. This approach underscores the
Pedroni introduced the panel cointegration test importance of imposing cross-equation
in (Pedroni 1999, 2004), which assesses restrictions on long-run parameters, which are
whether variables within a model exhibit long- determined using maximum-likelihood
term relationships by considering the results of estimation and validated by the Hausman test.
their stationarity and unit root tests. Panel The estimation is carried out using the PMG
cointegration possesses several characteristics Estimator, which averages unrestricted
and allows for cross-sectional interdependence coefficients from individual countries. It serves
due to its diverse individual outcomes. as a robust alternative to other panel estimators
Pedroni's framework comprises seven like DOLS and FMOLS. The Panel ARDL
cointegration tests, grouped into two categories model is an extension of the ARDL (p, q) model
the panel-v statistic, the panel rho-statistic The introduced by Pesaran et al., and it is employed

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to establish a standard log-linear functional distribution of data points. Quantile regression

specification for estimating long-run offers a holistic view of how an independent
relationships between variables (Fatima, M., variable influences a dependent variable at
Naz, S., & Khan, S. U. 2023). various quantile levels. In this study, we utilize
∆𝐺𝐷𝑃𝐺 simultaneous quantile regression, a method
𝑚−1 proposed by certain researchers, to precisely
= 𝑎𝑖 + ∑ 𝛽𝑖𝑗 ∆𝐸𝑋𝑇𝐷𝐸𝐵𝑇𝑖,𝑡−𝑗 gauge the effects of our variables and validate
𝑓=1
𝑛−1 their expected significance.
+ ∑ 𝛽𝑖𝑗 ∆𝐺𝐹𝐶𝐹
𝑔=0
0−1 ESTIMATION OUTCOMES
+∑ 𝛽𝑖𝑗 ∆𝐺𝑂𝑉𝐶𝑂𝑁𝑆𝑖,𝑡−𝑗 Table 1
ℎ=1 Correlation Matrix
𝑝−1
+∑ 𝛽𝑖𝑗 ∆𝐼𝑀𝑃𝑂𝑅𝑇𝑖,𝑡−𝑗 Variables GDPG EXTDEBT GFCF GOVCONS IMPORT INFL RULE VOICE
𝑖=1 GDPG 1.000
𝑞−1
+∑ 𝛽𝑖𝑗 ∆𝐼𝑁𝐹𝐿𝑖,𝑡−𝑗 EXTDEBT -0.063 1.000
𝑗=1 GFCF 0.203 -0.058 1.000
𝑞−1
GOVCONS -0.154 0.154 -0.044 1.000
+∑ 𝛽𝑖𝑗 ∆𝑅𝑈𝐿𝐸𝑖,𝑡−𝑗
𝑗=1 IMPORT 0.0132 0.089 0.290 0.056 1.000
𝑞−1 INFL -0.119 0.041 -0.022 0.0380 0.001 1.000
+∑ 𝛽𝑖𝑗 ∆𝑉𝑂𝐼𝐶𝐸𝑖,𝑡−𝑗 ∅1 𝐺𝐷𝑃𝐺𝑖,𝑡−𝑗 RULE 0.066 -0.101 0.135 0.0857 0.280 -0.070 1.000
𝑗=1
VOICE 0.0391 -0.060 0.113 0.019 0.238 -0.0807 0.661 1.000
+ ∅2 𝐸𝑋𝑇𝐷𝐸𝐵𝑇𝑖,𝑡−𝑗 + ∅3 𝐺𝐹𝐶𝐹𝑖,𝑡−𝑗
The correlation table reveals the relationships
+ ∅4 𝐺𝑂𝑉𝐶𝑂𝑁𝑆𝑖,𝑡−𝑗 + ∅5 𝐼𝑀𝑃𝑂𝑅𝑇𝑖,𝑡−𝑗 among several economic and governance
+ ∅6 𝐼𝑁𝐹𝐿𝑖,𝑡−𝑗 + ∅7 𝑅𝑈𝐿𝐸𝑖,𝑡−𝑗 indicators. Notably, GDP growth rate (GDPG)
+ ∅8 𝑉𝑂𝐼𝐶𝐸𝑖,𝑡−𝑗 + ɛ𝑖𝑡 … (2) is positively correlated with gross fixed capital
formation (GFCF) and imports (IMPORT),
Panel Causality Test suggesting that higher investment and increased
Dumitrescu and Hurlin (2012) introduced a imports tend to be associated with economic
statistical test for analyzing causality in panel growth. Conversely, government consumption
data. This test represents an extension of the (GOVCONS) shows a negative correlation with
Granger causality test and is formulated as GDP growth, indicating that a larger share of
follows in the regression equation: government spending relative to the economy's
Y ᵢ,ₜ = α₀+ Σᴷₖ₌₁ +ɣᵢₖ xᵢ, ₜ₋ₖ + ℇᵢ, ₜ size may hinder growth. Additionally, external
In the equation mentioned above: debt (EXTDEBT) exhibits no strong correlation
xᵢ,ₜ and yᵢ,ₜ represent observations of two with GDP growth. The table also demonstrates
stationary variables for an individual i at a given weak correlations between rule of law (RULE)
time period t.The coefficients in the equation and voice and accountability (VOICE) with the
can vary across individuals but are assumed to economic variables, highlighting the relatively
remain constant over time.K represents the lag low impact of these governance indicators on
order, which is assumed to be the same for all economic performance. Inflation (INFL) shows
individuals, leading to the requirement for a a mixed correlation pattern, with weak negative
balanced panel dataset. correlation with GDP growth, suggesting that
moderate inflation may not significantly hinder
Simultaneous Quantile Regression economic growth.
Simultaneous linear quantile regression
(Tokdar, S. T., & Kadane, J. B. 2012), unlike
ordinary least squares (OLS) regression, doesn't
treat all cross-sectional units the same and isn't
limited to estimating the conditional mean. In
response to the limitations of pooled OLS,
researchers developed quantile regression as an
alternative approach. It goes beyond predicting
the mean and provides insights into the

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Table 2 properties, such as mean and variance, remain

Descriptive Statistics constant over time. The table shows the test
GDPG EXTDEBT GFCF GOVCONS IMPORT INFL RULE VOICE
Mean 3.196 63.257 20.829 13.781 37.910 68.890 -0.596 -0.482
Median 3.907 48.324 20.384 13.625 34.51 5.836 -0.560 -0.470
Maximum 35.224 1111.270 93.547 91.419 115.42 23773.13 0.911 1.151
Minimum -51.021 -61.409 -18.291 -36.27 -57.99 -146.72 -2.3516 -2.973
Std. Dev. 5.707 68.954 8.241 7.009 18.091 818.42 0.587 0.6803
Observations 1792 1792 1792 1792 1792 1792 1792 1792
Authors Calculation

The descriptive statistics table provides a results for the variables at their original level
summary of key statistical measures for the and after taking their first differences. For GDP
variables in the dataset. For instance, it reveals growth rate (GDPG), external debt
that the mean GDP growth rate (GDPG) is (EXTDEBT), government consumption
approximately 3.196%, with a median value of (GOVCONS), imports (IMPORT), inflation
3.907%. The data also indicates a wide range of rate (INFL), rule of law (RULE), and voice and
values, as evidenced by the minimum and accountability (VOICE), the p-values for the
maximum values for each variable. Notably, tests at the first difference level are all less than
external debt (EXTDEBT) exhibits substantial 0.05 (typically the significance level),
variation, with a minimum of -61.409 and a indicating that after differencing, these
maximum of 1111.270. Gross fixed capital variables become stationary. This suggests that
formation (GFCF) and government these variables are integrated of order 1 (I(1)),
consumption (GOVCONS) have relatively meaning they have a unit root in their original
lower standard deviations, suggesting less form but not in their differenced form. Overall,
dispersion around their means compared to the unit root test results imply that for these
other variables like inflation (INFL) and voice economic and governance indicators, taking the
and accountability (VOICE). Additionally, the first difference is necessary to achieve
negative values for rule of law (RULE) and stationarity, which is a prerequisite for many
voice and accountability (VOICE) imply that time series modeling techniques and
these variables are likely measured on a scale econometric analyses.
where higher values indicate better governance.
Table 4
Table 3 Pedroni Cointegration test
Unit Root No Intercept or
Tests II and IT
Trend
st Outcom
At Level At 1 Difference P-v-S -3.2184(0.999) -0.88736(0.812)
es
Variable P-rho-S 0.26578(0.604) -2.64274(0.004)
II*** II & T** II*** II & T**
10.6545 7.87649 - - P-PP-S -24.8390(0.000) -20.7.033(0.000)
GDPG (0.0000) ** (0.000) I (0) P-ADF-S 10.5878(0.000) 9.53188(0.000)
**
3.10890 0.2292 - 16.0407
G-rho-S 2.4746(0.993) 0.7912(0.2144)
EXTDEBT I (0) G-PP-S -36.34985(0.000) -28.4536(0.000)
(0.0009) (0.4093) (0.000)
5.46785 1.87709 - - G-ADF-S 8.39351(0.000) 8.7753(0.000)
GOVCONS I (0)
(0.000) (0.0303) In this table, P, G and S indicate panel, group and statistic. Therefore,
5.09978 4.17690 - - II and IT shows individual intercept and trend respectively.
IMPORT I (0)
(0.000) (0.000)
INFL
11.0804 9.5843 - -
I (0)
Authors Calculation
(0.000) (0.000)
3.4966 2.4245 - -
RULE I (0)
(0.000) (0.007
6.33412 2.3694 - -
The Pedroni cointegration table assesses the
VOICE I (0)
(0.000) (0.008 presence of cointegration among the variables,
II* II& T** represent individual intercept and intercept and trend respectively.
which indicates a long-term relationship
Authors Calculation between them. Cointegration suggests that even
though the variables may individually have unit
The unit root test table provides insights into the roots (non-stationary), there exists a linear
stationarity properties of the variables, which is combination of them that is stationary,
crucial in time series analysis. In this context, implying a stable long-term connection. In this
stationarity implies that a variable's statistical

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[

table, the "P," "G," and "S" categories and concise model for the given data, crucial for
correspond to different cointegration tests: accurate subsequent modeling and forecasting
panel, group, and statistic, respectively. "II" and procedures.
"IT" represent individual intercept and trend
terms, respectively. For the economic and Table 5
governance indicators such as GDP growth rate Kao Residual Cointegration Test
(GDPG), external debt (EXTDEBT), Intercept and
government consumption (GOVCONS), Test
Trend
inflation rate (INFL), rule of law (RULE), and ADF t-statistic Prob.
voice and accountability (VOICE), the results -11.50805 0.0000
indicate cointegration, especially when Residual
considering panel statistics (P) and group variance 34.93448
statistics (G). The p-values associated with the HAC
panel statistics (P) for both individual intercept variance 15.44838
and trend terms (II and IT) are all significant at Authors calculation
a 0.05 significance level (p < 0.05), suggesting
evidence of cointegration. Similarly, the group The Kao Residual Cointegration Test table
statistics (G) and their associated p-values also provides important information regarding the
suggest the presence of cointegration. The presence of cointegration among the variables,
Pedroni cointegration table indicates the including GDP growth rate (GDPG), external
likelihood of long-term relationships or debt (EXTDEBT), gross fixed capital formation
cointegration among these indicators. (GFCF), government consumption
(GOVCONS), inflation rate (INFL), rule of law
(RULE), and voice and accountability
(VOICE). The key test statistic, the ADF
(Augmented Dickey-Fuller) t-statistic, has a
highly significant value of -11.50805 with a
probability (Prob.) of 0.0000, indicating strong
evidence of cointegration. This suggests that
these variables share a stable long-term
relationship, which is essential information for
Table 6 conducting meaningful and robust econometric
Lag Length Criteria: analyses.
Lag LogL LR FPE AIC SC HQ
0 -41584.07 NA 6.33e+12 55.01729 55.04897 55.02909
1 -28272.83 26446.41 158907.6 37.51697 37.83371* 37.63492
2 -27976.58 585.0473 119535.8 37.23225 37.83405 37.45636
3 -27783.95 378.1396 103128.3 37.08458 37.97145 37.41484*
4 -27657.21 247.2689* 97079.14* 37.02409* 38.19602 37.46050
Authors Calculation

based on the Schwarz Criterion (SC), which

balances model goodness of fit and complexity,
a lag length of 1 appears to be the optimal
choice for the time series analysis involving
GDP growth rate (GDPG), external debt
(EXTDEBT), gross fixed capital formation
(GFCF), government consumption
(GOVCONS), inflation rate (INFL), rule of law
(RULE), and voice and accountability
(VOICE). This choice signifies that a single lag
in the analysis is likely to provide a well-fitted

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[

Table 7
CD Test results
TEST GDPG EXTDEBT GFCF GOVCONS IMPORTS INFL RULE Voice
Breusch-
Pagan LM 3872.3*** 15141.*** 8932.1*** 9506.77 7666.59*** 8789.9*** 12504.61** 12011.63***
Pesaran
scaled
LM 41.017*** 244.07*** 132.18*** 142.54*** 109.38*** 129.62*** 196.5*** 187.67***
Bias-
Corrected
scale LM 40.113*** 243.17*** 131.28*** 141.63*** 108.4*** 128.72*** 195.65*** 186.7***
Pesaran
CD 36.07*** 44.44*** 26.55*** 4.796*** 19.97*** 62.9*** 0.582*** 9.63***
Authors Calculation The long-run panel ARDL results provide
insights into the equilibrium relationships
The cross-section dependency (CD) tests among the variables, indicating how they
consistently demonstrate substantial and collectively influence the GDP growth rate
significant cross-sectional dependencies among (GDPG) in the long term. External debt
the analyzed variables. The Breusch-Pagan LM (EXTDEBT) has a statistically significant
tests reveal pronounced cross-sectional negative coefficient of -0.005506, suggesting
heteroskedasticity, particularly notable for that in the long run, a higher level of external
GDP growth rate (GDPG), external debt debt negatively impacts GDP growth rate. This
(EXTDEBT), gross fixed capital formation implies that excessive reliance on external
(GFCF), imports (IMPORTS), inflation rate borrowing can hinder a country's economic
(INFL), rule of law (RULE), and voice and growth over time. Gross fixed capital formation
accountability (VOICE), emphasizing varying (GFCF) exhibits a positive and highly
variances across different cross-sectional units. significant coefficient of 0.089624. This
The Pesaran scaled LM and Bias-Corrected indicates that increased investments in fixed
scale LM tests further affirm this dependency, capital have a positive impact on GDP growth
indicating that variances are not uniform across rate in the long run, emphasizing the
units. The Pesaran CD test provides additional importance of capital accumulation for
compelling evidence of cross-sectional sustained economic growth. Government
dependence across all variables, underlining the consumption (GOVCONS) has a coefficient of
necessity to consider and address this -0.046361, although it is statistically significant
interdependence when interpreting and at the 10% significance level (p-value of
analyzing these economic and governance 0.0866). This suggests that government
indicators. Accounting for cross-sectional consumption may have a negative influence on
dependencies is crucial for ensuring accurate long-term GDP growth. Imports (IMPORT)
model specifications and robust empirical have a positive and statistically significant
conclusions in the context of this data. coefficient of 0.037663, indicating that higher
levels of imports can positively impact GDP
Table 8 growth rate in the long run, possibly reflecting
Long Run results by using Panel ARDL the benefits of international trade and market
technique: access. Inflation (INFL) shows a statistically
Long Run Equation significant negative coefficient of -0.005345,
Series Coefficients Std. Error t-Statistic Prob. implying that persistent high inflation rates can
EXTDEBT -0.005506 0.001804 -3.052062 0.0023
have a detrimental effect on long-term
GFCF 0.089624 0.016445 5.449922 0.0000
GOVCONS -0.046361 0.027037 -1.714760 0.0866 economic growth. Voice and accountability
IMPORT 0.037663 0.009425 3.995895 0.0001 (VOICE) do not appear to have a statistically
INFL -0.005345 0.001340 -3.988551 0.0001 significant impact on long-term GDP growth,
VOICE 0.071548 0.245845 0.291030 0.7711 as indicated by the non-significant coefficient
RULE 0.702311 0.296138 2.371566 0.0179 of 0.071548. Rule of law (RULE) has a positive
Authors Calculation and statistically significant coefficient of
0.702311, suggesting that a stronger rule of law

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[

is associated with higher long-term GDP statistically significant across most quantiles,
growth. indicating that an increase in external debt
generally exerts a negative influence on GDP
Table 9 growth at various points in its distribution. This
Short run results suggests that high external debt levels are
Short Run Equation associated with lower GDP growth across
Series Coefficients Std. Error t-Statistic Prob. different percentiles. IMPORT Imports show
Cointeg01 -0.829411 0.042332 -19.59296 0.0000 mixed effects. At some quantiles (e.g., 10th and
EXTDEBT -0.104772 0.015861 -6.605710 0.0000
20th), they have a negative impact on GDP
GFCF 0.200011 0.061454 3.254647 0.0012
GOVCONS -0.489974 0.109033 -4.493819 0.0000
growth, while at others (e.g., 70th, 80th, and
90th), they have a positive and significant
IMPORT 0.059760 0.036159 1.652683 0.0987
effect. This suggests that the relationship
INFL -0.001404 0.020728 -0.067746 0.9460
between imports and GDP growth varies along
VOICE 0.466279 1.437112 0.324455 0.7456
the distribution of GDP growth rates. INFL
RULE 1.607029 1.279897 1.255593 0.2095 Inflation's impact on GDP growth appears to be
C 1.433439 0.204583 7.006644 0.0000 largely insignificant across quantiles, with
Authors Calculation coefficients close to zero at all levels.
The short-run panel ARDL results indicate GOVCONS Government consumption
several key relationships among the variables. negatively affects GDP growth across most
Notably, external debt (EXTDEBT) exhibits a quantiles, with statistically significant
significant negative effect on short-term GDP coefficients. This implies that higher
growth, implying that an increase in external government consumption tends to have an
debt has an adverse immediate impact on adverse effect on economic growth, regardless
economic growth. Conversely, gross fixed of the position in the GDP growth rate
capital formation (GFCF) exerts a positive distribution. GFCF exhibits a consistently
influence on short-term GDP growth, positive and statistically significant effect on
suggesting that higher investments in fixed GDP growth at various quantiles. This indicates
capital contribute positively to economic that higher investments in fixed capital tend to
expansion in the short run. Government boost economic growth across different
consumption (GOVCONS) is found to have a segments of the distribution. RULE The impact
negative impact on short-term GDP growth, of the rule of law varies. While it is positive and
indicating that increased government spending statistically significant at some quantiles (e.g.,
may temporarily hinder economic growth. 90th), it is not significant at others (e.g., 10th
Other variables, including imports (IMPORT), and 20th). This suggests that the rule of law
inflation (INFL), voice and accountability may have a more pronounced effect on GDP
(VOICE), and rule of law (RULE), do not growth in certain segments of the distribution.
exhibit statistically significant short-run effects VOICE The coefficients for voice and
on GDP growth. These findings offer valuable accountability are generally not statistically
insights into the immediate dynamics of the significant across most quantiles, indicating
analyzed economic and governance indicators. that this variable may not strongly influence
The cointeg01 is ecm value which is negative GDP growth at different points in its
and lies between 0-1 which also suggest that distribution. The constant term represents the
there is long run raltionship . intercept. It is positive and statistically
The Simultaneous Quantile Regression results significant, indicating that there is a baseline
table provides insights into how changes in the level of GDP growth across all quantiles.
independent variables impact the conditional
quantiles of GDP growth rate (GDPG) at
various points in its distribution. This type of
analysis is particularly useful for understanding
how the determinants of GDP growth may vary
across different quantiles, revealing potential
heterogeneity in the relationships. EXTDEBT
The coefficient for external debt is negative and

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 [

Table 10
Simultaneous Quantile regression
(1) (2) (3) (4) (5) (6) (7) (8) (9)
VAR. q10 q20 q30 q40 q50 q60 q70 q80 q90

extdebt 0.000946 -0.00585 -0.00639*** -0.00312* -0.00227*** -0.00298*** -0.00415*** -0.00337*** -0.00456**
(0.00643) (0.00359) (0.00235) (0.00189) (0.000796) (0.000972) (0.000944) (0.00123) (0.00186)
import -0.0421** -0.00786 0.00110 -0.00154 -0.000675 -0.000358 0.0135** 0.0195*** 0.0346***
(0.0182) (0.00933) (0.00929) (0.00594) (0.00543) (0.00571) (0.00580) (0.00508) (0.0117)
infl -0.00968 -0.00431 -0.00266 -0.00118 -0.00125 -0.000325 -0.000357 0.000622 0.000504
(0.00599) (0.00378) (0.00182) (0.00120) (0.000876) (0.000664) (0.000816) (0.000900) (0.000894)
govcons -0.154*** -0.146*** -0.0945*** -0.0999*** -0.103*** -0.0868*** -0.0773*** -0.0575*** -0.0573**
(0.0409) (0.0256) (0.0255) (0.0157) (0.0123) (0.0154) (0.0184) (0.0135) (0.0274)
gfcf 0.0808* 0.0632*** 0.0903*** 0.0938*** 0.0965*** 0.0892*** 0.0783*** 0.0651*** 0.0685***
(0.0413) (0.0226) (0.0224) (0.0141) (0.0136) (0.0129) (0.0170) (0.0152) (0.0248)
rule 1.632*** 1.430*** 0.665** 0.304* 0.131 0.143 -0.0561 0.0579 -0.362
(0.519) (0.354) (0.267) (0.166) (0.241) (0.236) (0.332) (0.284) (0.464)
voice 0.633 -0.286** -0.175* -0.145 -0.208* -0.349** -0.458 -0.520** -0.744*
(0.496) (0.141) (0.103) (0.0965) (0.120) (0.176) (0.287) (0.236) (0.388)
Constant 1.937 3.132*** 2.385*** 2.963*** 3.484*** 4.001*** 4.269*** 4.938*** 5.443***
(1.202) (0.592) (0.643) (0.326) (0.337) (0.338) (0.480) (0.437) (0.754)

Pseudo R2 0.0979 0.0621 0.0464 0.0439 0.0413 0.0378 0.0363 0.0330 0.0411

Obs. 1,792 1,792 1,792 1,792 1,792 1,792 1,792 1,792 1,792

Note: Standard errors are in the parenthesis.

*,** and *** show significant level at 1%, 5%
and 10% respectively.
Authors calculation

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[

Table 11 external debt (EXTDEBT), government

Pairwise Dumitrescu Hurlin Causility: consumption (GOVCONS), gross fixed capital
Null hypothesis T-statistic Prob formation (GFCF), imports (IMPORT), and inflation
5.6315 0.000
EXTDEBT GDPG (INFL) exhibit unidirectional causality effects on
8.8928 0.000
GOVCONS GDPG 4.4877 0.000 GDP growth rate (GDPG), indicating that changes in
GDPG ----- GOVCONS 0.9781 0.328
3.5298 0.000 these variables can significantly influence economic
GFCF GDPG
10.9933 0.000 growth. Meanwhile, the rule of law (RULE) and
3.9855 0.000
IMPORT GDPG
4.6194 0.000 voice and accountability (VOICE) do not display
INFL GDPG
8.6119 0.000 significant causal relationships with GDPG.
6.6049 0.000
1.5372 0.124 Additionally, there are bidirectional causal links
RULE ----- GDPG
1.1536 0.248 observed between some economic indicators like
VOICE GDPG 5.9164 0.000
GDPG ----- VOICE 0.5543 0.579 GFCF and imports, highlighting the complex
GOVCONS EXTDEBT
10.7109 0.000 interplay between these variables. These results
6.5741 0.000
5.8267 0.000 provide important insights into how changes in
GFCF EXTDEBT
5.6628 0.000 economic and governance factors can impact GDP
12.417 0.000
IMPORT EXTDEBT
2.1061 0.035
growth in the studied context.
11.716 0.000
INFL EXTDEBT
10.309 0.000
7.8995 0.000
CONCLUSION AND POLICY
RULE EXTDEBT
6.5067 0.000 RECOMMENDATIONS:
11.7624 0.000
VOICE EXTDEBT
6.5825 0.000
In summary, the panel ARDL analysis provides
GFCF GOVCONS
8.6799 0.000 valuable insights into the long-term equilibrium
6.9924 0.000
9.1785 0.000
relationships among economic and governance
IMPORT GOVCONS
7.9426 0.000 indicators and their impact on GDP growth rate
INFL GOVCONS 12.4639 0.000
7.8527 0.000
(GDPG). External debt (EXTDEBT) emerges as a
RULE GOVCONS 12.463 0.000 crucial factor, indicating that excessive reliance on
7.8527 0.000 external borrowing can exert a detrimental influence
VOICE GOVCONS 7.2678 0.000
4.1220 0.000 on economic growth over time. In contrast, gross
IMPORT GFCF 7.2516 0.000 fixed capital formation (GFCF) underscores the
4.545 0.000
INFL GFCF 5.9207 0.000 significance of investments in fixed capital,
10.920 0.000 highlighting their positive and substantial impact on
RULE GFCF 8.0307 0.000
3.5936 0.000 long-term GDP growth. Government consumption
VOICE GFCF 2.5243 0.011 (GOVCONS) appears to have a potentially negative
5.277 0.000
INFL IMPORT 3.343 0.000 influence, although the statistical significance is
11.509 0.000 modest. Imports (IMPORT) demonstrate a nuanced
RULE IMPORT 6.0982 0.000
4.9263 0.000 relationship, impacting GDPG differently across
VOICE IMPORT 3.0754 0.000 various quantiles of its distribution. Inflation (INFL)
5.4877 0.000
RULE ----- INFL 1.4203 0.155 does not exhibit a consistent influence on GDPG,
0.9359 0.349 while voice and accountability (VOICE) and the rule
VOICE INFL 4.7548 0.000
2.2412 0.025 of law (RULE) appear to have limited significance in
VOICE RULE 3.0817 0.000 shaping long-term economic growth. These findings
3.2249 0.000
collectively emphasize the multifaceted nature of
Notes: →, ↔, and ---- represent unidirectional economic growth determinants and their varying
causality, bidirectional causality, and no causality
effects across different aspects of the GDP growth
respectively rate distribution. The causality analysis, on the other
Authors calculation hand, reveals directional relationships between the
variables. External debt, government consumption,
The Pairwise Dumitrescu-Hurlin Causality test GFCF, imports, and inflation are seen as influential
results reveal various causal relationships among the
factors that can drive changes in GDP growth rate.
economic and governance indicators. Notably, However, the rule of law and voice and

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[

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