Volume 9, Issue 4, August 2020, Page: 254-262
The Impact of Domestic and External Public Debt on the Economic Growth of Jordan
Eman Abdel Khalek Fseifes, Department of Business Economics, School of Graduate Studies, University of Jordan, Amman, Jordan
Talib Mohammad Warrad, Department of Business Economics, School of Business, University of Jordan, Amman, Jordan
Received: Jul. 16, 2020;       Accepted: Jul. 29, 2020;       Published: Aug. 10, 2020
DOI: 10.11648/j.ijber.20200904.22      View  78      Downloads  53
Abstract
Since the beginning of the new millennium several developing countries have been making greater use of domestic bond markets, with a corresponding decline in gross and net foreign debt-to-GDP ratios. Jordan was not an exception; the structure of the public debt in Jordan has exhibited a similar shift towards the domestic borrowings after the year 2000. In order to assess the economic consequences of this change in the public debt structure, this study investigates the impact of the structure of the public debt and other determinants of growth on the economic growth in Jordan over the period 1980 – 2018. The analysis of the long-run relationship between the domestic and external public debt and the economic growth is reliant on the theoretical assumptions and the empirical concerns and it is conducted by applying the Fully Modified Ordinary Least Squares (FMOLS) method; the results indicate that the external and domestic public borrowings are negatively associated with economic growth with a greater magnitude of the domestic debt in the long-run; the greater magnitude of the negative implication of domestic debt on economic growth is attributed to the increased trend of domestic debt that has been increasing in excess of the external debt since 2008. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. Accordingly, this study recommends the need to reduce the public debt and budget deficit to moderate levels in the long-run through implementing austerity measures and fiscal discipline that are carefully planned to minimize the potential negative effect on economic growth, where they should be implemented along with fiscal reforms intended for increasing employment and boosting Jordan’s growth potential. It is also recommended that the government should thoroughly revise the debt management strategy, so as to avoid the deterring effects of the increased stock of domestic debt on capital accumulation and economic growth in the long-run.
Keywords
Co-integration, Domestic Debt, Economic Growth, External Debt, FMOLS
To cite this article
Eman Abdel Khalek Fseifes, Talib Mohammad Warrad, The Impact of Domestic and External Public Debt on the Economic Growth of Jordan, International Journal of Business and Economics Research. Vol. 9, No. 4, 2020, pp. 254-262. doi: 10.11648/j.ijber.20200904.22
Copyright
Copyright © 2020 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Reference
[1]
World Bank (2016). Jordan Economic Monitor: Reviving a Slowing Economy, third quarter. A quarterly Publication of Jordan Country Unit. Washington, D. C.: The World Bank.
[2]
Kumar, M. and Woo, J. (2010). Public Debt and Growth. IMF Working Paper 10/174, Washington, D. C.: IMF.
[3]
Tomaselli, M. (2018). Economic Growth and Public Debt: Beyond Debt-Thresholds. Theoretical and Empirical Issues. Unpublished Doctoral Dissertation, University of Trento, Italy.
[4]
Aghion, P. and Kharroubi, E. (2007). Cyclical Macro Policy and Industry Growth: The Effect of Countercyclical Fiscal Policy. Harvard University Working Paper.
[5]
Woo, J. (2009). Why Do More Polarized Countries Run More Procyclical Fiscal Policy? Review of Economics and Statistics, 91 (4), 850-870.
[6]
Hausmann, R. and Panizza, U. (2011). Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium. Journal of Globalization and Development, 2 (1), 1-35.
[7]
DeGrauwe, P. (2011). The Governance of a Fragile Eurozone. Working Document No. 346, CEPS, May.
[8]
Panizza, U. (2008). Domestic and External Public Debt in Developing Countries. United Nations Conference on Trade and Development (UNCTAD) Discussion Papers 188.
[9]
Al-Adayleh, R., Al-Amro, H., & Al-Gralleh, H. (2015). The Structure of Public Debt in Jordan and its Impact on Economic Growth (1980-2012). Dirasat: Administrative Sciences, 42 (2), 515-530.
[10]
Alshyab, N. (2016). Domestic versus External Public Debt in Jordan: An Empirical Investigation. Journal of Economic Sciences, 3 (1), 81-98. https://doi.org/10.12816/0029858
[11]
Reinhart, C. Rogoff, K. and Savastano, M. (2003). Debt Intolerance. Brookings Papers on Economic Activity, 34 (1), 1-74.
[12]
Goldstein, M. and Turner, P. (2004). Controlling Currency Mismatches in Emerging Markets, Peterson Institute for International Economics, Washington DC.
[13]
Agénor, P. R. and Montiel, P. (1996). Development Macroeconomics. Princeton, New Jersey: Princeton University Press.
[14]
Serven, L. (1997). Uncertainty, Instability, and Irreversible Investment: Theory, Evidence and Lessons for Africa. World Bank Policy Research, Working Paper No. 1722, Washington, D. C., World Bank.
[15]
Rodrik, D. (2008). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity, 39 (2), 365–439.
[16]
Presbitero, A. (2012). Domestic debt in low income countries. Economics Bulletin, 32 (2), 1099-1112.
[17]
Abbas, A. S. M. and Christensen, J. (2010). 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.
[18]
Mehrotra, A. N. Miyajima, K. and Villar, A. (2012). Developments of domestic government bond markets in EMEs and their implications. Fiscal Policy, Public Debt and Monetary Policy in Emerging Market Economies, 67, 31–50. Bank for International Settlements.
[19]
Bacchiocchi, E. and Missale, A. (2012). Multilateral indexed loans and debt sustainability. UNCTAD Discussion Papers No. 209.
[20]
Reinhart, C. M. and Rogoff, K. S. (2011). The forgotten history of domestic debt. The Economic Journal, 121 (552), 319-350.
[21]
Checherita-Westphal, C. and Rother, P. (2012). The impact of high government debt on economic growth and its channels: an empirical investigation for the euro area. European Economic Review, 56 (7): 1392-1405.
[22]
Were, M. (2001). The impact of external debt on economic growth and privateinvestments in Kenya: An empirical assessment, Working Paper, Kenya Institute for Public Policy Research and Analysis, Nairobi.
[23]
Schclarek, A. (2004). Debt and economic growth in developing and industrial countries. Working Paper 2005, 34, Department of Economics, Lund University.
[24]
Arnone, M., Bandiera, L., and Presbitero, A. F. (2005). External Debt Sustainability: Theory and Empirical Evidence. Catholic University of Piacenza Economics Working paper 33, 1-47.
[25]
Adofu, I. and Abula, M. (2010). Domestic Debt and the Nigerian Economy. Current Research Journal of Economic Theory, Vol. 2 (1), 22-26.
[26]
Umaru, A., Hamidu, A. A., and Musa, S. (2013). External debt and domestic debt impact on the growth of the Nigerian economy. International Journal Educational Research, 1 (2), 70 – 85.
[27]
Almeida, R. and Fernandes, A. (2008), Openness and technological innovations in developing countries: evidence from firm-level surveys. The Journal of Development Studies, 44 (5), 701–727.
[28]
Bond, E. W. Jones, R. W. and Ping, W. (2005), Economic takeoffs in a dynamic process of globalization. Review of International Economics, 13 (1), 1–19.
[29]
Reinhart, C. M. and Rogoff, K. S. (2009). The Aftermath of Financial Crisis. American Economic Review, 99 (2), 466-472.
[30]
Reinhart, C. M. and Rogoff, K. S. (2010). Growth in a Time of Debt. American Economic Review, 100 (2), 573-578.
[31]
Eberhardt, M. and Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics, 97 (1), 45-58.
[32]
Swamy, V. (2015). Government Debt and Economic Growth – Decomposing the Cause and Effect Relationship. Institute of Economic Growth, Delhi, Delhi, Online at http://mpra.ub.uni-muenchen.de/64105/ MPRA Paper No. 64105.
[33]
Shrestha, M. B. and Bhatta, G. R. (2018). Selecting appropriate methodological framework for time series data analysis. The Journal of Finance and Data Science, 4, 71–89.
[34]
Wei, W. S. (2006). Time series analysis: Univariate and multivariate. Boston: Pearson.
[35]
Philips, P. C. B. and Hansen, B. E. (1990). Statistical Inference in Instrumental Variables Regressions with I (1) Processes. The Review of Economic Studies, 57, 99-125.
[36]
Philips, P. C. B. (1995). Fully modified least squares and vector autoregression. Econometrica, 63 (5), 1023-1078.
Browse journals by subject