A structural analysis of external debt and economic growth: some evidence from selected countries in Asia and the Pacific

In an attempt to resolve the existing controversy about the cause and effect relationship between external dept and economic slowdown, Granger causality tests are conducted with data on indebted developing countries of Asia and Pacific. The results of these tests indicate that the Bulow–Rogoff proposition that the external debts of developing countries are a symptom rather than a cause of economic slowdown is rejected. They also indicate that the Dornbush–Krugman proposition that external dept leads to economic slowdown is also rejected. Moreover, a feedback-type relationship is not rejected for two countries. In view of the mixed results, this paper also estimates the nexus of inter-relationship between public and private external dept accumulation, capital accumulation and production within a simultaneous equation system. The estimation results indicate that the full effects of the public and private external depts on GNP are small and of an opposite sign, whereas an increase in the GNP level raises substantially the public and private external depts. These findings support Bulow–Rogoff's proposition that the external debts of developing countries are not a primary cause of economic slowdown.