A systematic review is aimed to recognize, combine and evaluate all accessible quantitative data obtained from previous literature. In both lower-middle-income-economies, public debt in Sri Lanka and Nigeria were found to give adverse effect to the economic growth of these countries. The annual data series over the period 1972-2010 has been used. In this paper we have analyzed the impact of debt servicing on economic growth, i.e. 2018; Kim et al., 2017). The non-linear relationship exists in the European countries (Brida, Gómez, & Seijas, 2017; Gómez-Puig & Sosvilla-Rivero, 2017b; Pegkas, 2018, 2019) and emerging economies (Shkolnyk & Koilo, 2018). Growing debt also has a direct effect on the economic opportunities available to every American. The economy has been affected negatively with debt accumulation and debt is a causing factor for poor growth and limited investment. a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Also, the public is directly affected with debt burden when the unemployment rates rise. Government borrowing can act as an economic stimulus. Increase in national output. The findings from these articles were grouped into two main themes in order to answer the objective. However, if not managed properly, public debt could also harm the economy. However, if the government borrowing is to finance transfer payments e.g. A conceptual gap was noted in which all the research publications ignored the impact of intervening variables on the relationship between the predictor variables and the output variables. If it continues to increase in the long run, the effect can switch to becoming negative. However, if fiscal policy is tight and reducing inflationary pressure in the economy, it can enable interest rates to stay lower and this expansionary monetary policy may offset the deflationary fiscal policy. Once the identification stage is successfully completed, the populated articles were subjected to screening based on the inclusion and exclusion criteria. Our site uses cookies so that we can remember you, understand how you use our site and serve you relevant adverts and content. In ensuring the quality of the review, the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) was used as publication standard due to its ability to classify previous literature in a specific database based on certain requirements. rrowing on growth stress the importance of deficits, not debt, a number of economic observers have made the claim that rising debt levels can affect economic performance in non-standard ways. Imposing higher taxes to replace debt might not be a good move for all countries especially for low and middle-income economies. From the literature on debt overhang and its effects on growth it is evident that debt relief might have a stimulating effect on investment and economic growth. This paper intends to examine whether there exists a mutual consensus on the effects of public debt on the economic growth of a country or group of economies. Public Debt is basically debt incurred by the Government that the citizens of the country are responsible for, which is all of it. The threshold for each country depends on their current economic situation, the period of studies, the method and the proxies used to test the relationship. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70 to 80% of GDP. Moreover, there is no single threshold for debt ratios that can delineate the “bad” from the “good.”. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The threshold can range from 15% (Butkus & Seputiene, 2018) up to 2000% (Pegkas, 2018). Usually, the amount of debt to be borrowed is measured using the debt-to-GDP ratio. In order to account for the impact of the level of the debt-to-GDP ratio on the real growth rate of GDP, we employed a generalized theoretical economic growth model augmented with a debt variable. Both UK and US finished the Second World War with high levels of national debt – but this did not prevent rapid economic growth in the 1950s and 1960s. By fitting a production function model to annual data for the period 1980-2011, the study examines the dynamic effect of debt service, capital stock and labour force on the economic growth of the country. A country with high debt but with low income should consider to reduce their debt level up to a condition in which the national income is sufficient to pay back the debt. Another complication is that low growth and recession – causes rising national debt (fall in cyclical tax returns). However, this relationship is only applicable in the short-run. If interest rates do rise because of high government debt, this will make borrowing more expensive and reduce debt levels. Theoretically, it can be explained by using the conventional view of debt by Elmendorf and Gregory Mankiw (1998). At the same time, both positive and negative relationship can also occur if a threshold for the debt-to-GDP exists. When testing the existence of the non-linear relationship, two main findings emerged. One possible reason is the inefficiency of the country to manage the borrowed funds (Shkolnyk & Koilo, 2018). Economic growth also plays a role in reducing debt to GDP ratios. pensions and health care to an ageing population then there will be no boost to productive capacity from government borrowing, and the borrowing will be less sustainable. How does the economic cycle affect government borrowing? This is because with high levels of debt – higher interest rates will be required to attract people to buy government debt. In deriving the answers, a systematic review was conducted on selected articles that discussed the relationship between public debt and economic growth. This systematic review is focused on reliable articles that are related to this subject matter. negative relationship between external debt and economic growth. The sub-themes were coded with (0) indicating no non-linear relationship, (1) debt-to-GDP threshold less than 20%, (2) threshold of 21% to 50%, (3) threshold 51% to 70%, (4) threshold 71% to 90% and (5) debt-to-GDP threshold exceeding 90%. It is proposed that the future research should be conducted on how the public debt affects the economic growth of the low, lower-middle-income and upper-middle-income economies. Overall, 24 of 33 articles which were investigated revealed a linear relationship between public debt and economic growth. We have use regression test and find out that debt servicing is positively effecting the growth of Pakistan. Different studies employed different methods based on the number of cross sections and year for each analysis. Without these important investments, the economic growth will be stagnant and the countries will become less competitive with investments being channeled into traditional production methods (World Economic Forum, 2017). Impact of rising external debt on economic growth To reduce reliance on debt, industrial and agricultural sectors need to be strengthened JUNAID ZAHID August 07, 2017 Future studies should investigate the effects of public debt on the economic growth in the upper-middle-income economies. In order to analyze the economic impact of public debt on economic growth, we have considered data from 2005-2016. The economic condition then is totally different from the scenario in the last thirty to fifty years. whether debt servicing positively or negatively affect the economic growth. A systematic review, Department of Finance and Economics, Universiti Teknologi MARA , Melaka, Malaysia, Public debt and economic growth – Economic systems matter, Growth in a time of austerity: Evidence from the UK, Public debt and economic growth Conundrum: Nonlinearity and inter-temporal relationship, Factors hindering economic development: evidence from the mena countries, Crowding-out or crowding-in? The period of the 1950s, when national debt was over 200% of GDP was not a barrier to the post-war economic boom. Thus government might just as well pay for such projects out of income. By referring to Table 4, this relationship exists in highly indebted countries such as Sri Lanka and Nigeria (lower-middle-income economies), South Africa (upper-middle-income economies) as well as high-income economies such as Japan, United States, United Kingdom and European countries. A systematic review on related articles from SCOPUS database was conducted by adopting a standard procedure in the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA), namely identification, screening and eligibility. For As a result, 33 articles were selected for the systematic review since they suited to the objective of this study. The debt level that is beyond 90% of the GDP indicates that the countries are among the highly indebted countries. 2018; Butkus & Seputiene, 2018), least square dummy variable (Butkus & Seputiene, 2018) and so on. Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment benefit. For this study, only journal articles published in English (in the final stage) from 2017 to 2019 were included. Apart from that, the linear negative relationship can also be explained theoretically using the debt overhang (Krugman, 1988). The literature too revealed a lack of agreement on the overall impact of public debt components on economic growth. The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. This article is very relevant to the macroeconomics I studied in my AP Economics class. Recommended articles lists articles that we recommend and is powered by our AI driven recommendation engine. Linear relationship means public debt affects economic growth in a positive or negative way. There is a flaw in this argument, as follows. Revisiting the Bi-directional causality between debt and growth: Evidence from linear and nonlinear tests, National debt in a neoclassical growth model, Cambridge: National Bureau of Economic Research, Public debt and economic growth in Spain, 1851–2013, The impact of Sovereign debt on growth: An empirical study on GIIPS versus JUUSD countries, Public debt and economic growth: Further evidence for the Euro Area, Heterogeneity in the debt-growth nexus: Evidence from EMU countries, On the Time-varying nature of the debt-growth nexus: Evidence from the Euro Area, An investigation of nonlinear effects of debt on growth, Unbundled debt and economic growth in developed and developing economies: an empirical analysis, Spillover effects of debt and growth in the euro area: evidence from a gvar model, Public debt, corruption and sustainable economic growth, Testing for a debt-threshold effect on output growth, Does government debt crowd out capital formation? Among them were the European countries (Gómez-Puig & Sosvilla-Rivero, 2017b) and advanced economies such as Belgium, Canada, United Kingdom and United States (Lee, Park, Seo, & Shin, 2017). Égert (2015a), on a sample of 20 advanced economies uses nonlinear threshold models to examine debt threshold effects on growth. The literature too revealed a lack of agreement on the overall impact of public debt components on economic growth. Based on the above findings, it cannot be concluded that the debt-to-GDP threshold for the advanced economies is below 50% while for the highly indebted countries is 90% and above. Hence, the articles explaining the relationship between public debt and economic growth were selected. There were also studies that found the threshold to be lower than 50%. Thus, the objective of this paper was to examine the impact of external debt on the economic growth performance of Tanzania for the period of 1990-2010. Thus, the policy recommendation to achieve higher economic growth for a country should not be applied to the other country or group of economies (Balaguer-Coll, Prior, & Tortosa-Ausina, 2016). Hi: Domestic debt has significant impact on economic growth in Nigeria. It was found that there is no mutual consensus on the relationship between public debt and economic growth. Based on Table 3, very limited research on the relationship between public debt and economic growth have been conducted specifically on the low-income economies, lower-middle-income economies and upper-middle-income economies. 5 Howick Place | London | SW1P 1WG. Traditional theorists consider that in the long run, domestic debt has a negative impact on economic growth. The government should carefully analyze the economic condition of the country by considering the purposes of the borrowings, the sources of the borrowings along with the ability of the country to pay back. 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