External Debt, Institutions and Economic Growth: New Evidence from Emerging Markets and Low-Income Countries

In this paper, we employ the system GMM dynamic panel estimation approach on a sample of 86 countries evenly distributed across both EMEs and LICs and obtain robust evidence that institutions play a crucial role in unlocking the growth impact of external debt. Without quality institutions, our results indicate that external debt accumulation would hurt economic growth. However, we found that the ability to effectively control corruption, especially in LICs, as well as the ability to promote political stability by effectively combating the incidence of terrorism and other related violence, are crucial in enhancing the positive impact of external debt on economic growth. The study also reveals that external debt, mainly when regulatory quality is robust, can have negative long-term growth implications. The paper recommends effective fighting of corruption and terrorism in the EMEs and LICs and the need to foster synergy across the countries in combating rising terrorism and other violent crimes. Furthermore, the study advocates for the promotion of private sector development to spur domestic resource mobilisation, as this would bridge the financing gap and reduce the appetite for external debt and its associated long-term vulnerabilities. JEL Classification : F34, N20, O43