ECONOMICS

THE IMPACT OF EXTERNAL DEBT ON ECONOMIC

GROWTH: EMPIRICAL EVIDENCE FROM HIGHLY
INDEBTED POOR COUNTRIES

by

Abu Siddique
Business School
University of Western Australia
E A Selvanathan
Griffith Business School
Griffith University
and
Saroja Selvanathan
Griffith Business School
Griffith University

DISCUSSION PAPER 15.10

THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH:

EMPIRICAL EVIDENCE FROM HIGHLY INDEBTED POOR
COUNTRIES

Abu Siddique, Business School, The University of Western Australia

E A Selvanathan, Griffith Business School, Griffith University, and
Saroja Selvanathan, Griffith Business School, Griffith University

27 March 2015

DISCUSSION PAPER 15.10

ABSTRACT
During the 1970s and 1980s, the external debt levels of poor countries rose to a level
constituting a debt crisis. The main source of the supply of external debt was the surplus
revenue generated by the OPEC through significant increases in the price of oil during the
1970s. Unfortunately, many of the countries failed to use the external debt wisely and
prudently. When the revenue from oil sales started to decline due to low oil prices during the
1980s, heavily indebted countries experienced difficulty servicing the debt. This paper
analyses the extent to which the external debt burden impacts on a countrys gross domestic
product (GDP) using data from HIPC over the period 1970-2007. The findings of empirical
analysis suggest that, in the short-run as well as in the long-run, a reduction in debt stock
would have significantly increased the growth performance of the indebted nations.

Key words: External debt, Economic growth, Highly indebted poor countries, Debt relief.
JEL Codes: O10, F34, H12, H63, O47, O55

1. Introduction
External debt is an important source of finance mainly used to supplement the domestic
sources of funds for supporting development and other needs of a country. Usually external
debt is incurred by a country which suffers from shortages of domestic savings and foreign
exchange needed to achieve its developmental and other national objectives. However, if the
external debt is not used in income-generating and productive activities, the ability of a
debtor nation to repay the debt is significantly reduced. It is often argued that the excessive
debt constitutes an obstacle to sustainable economic growth and poverty reduction
(Berensmann, 2004; and Maghyereh and Hashemite, 2003). Over the 1970s and 1980s, the
external debt levels of highly indebted poor countries (HIPC) 1 rose to a level constituting a
debt crisis. The bulk of this debt is made up of public and publicly guaranteed debt (PPG).
The main source of the supply of external debt was the emergence of the Eurodollar market
resulting from the surplus revenue generated by the OPEC through significant increases in
the price of oil between 1973 and 1979. Cheap petrodollars were recycled to the countries
which needed external debt. Unfortunately, many of the countries failed to use the external
debt wisely and prudently. A number of interrelated factors contributed to the rise in external
debt including macroeconomic policy, increases in the price of a number of primary
commodities encouraging countries to borrow, low real interest rates and a favourable world
environment. Unfortunately, the favourable conditions were short-lived and when they did
change over the 1980s, heavily indebted countries experienced difficulty in servicing the debt
(for details, see Abbott, 1993; Abrego and Ross, 2001; Altvater, 1991; Barro, 1989; Barro
and Lee, 1994; Clements et al, 2003; and Siddique, 1996).

In 1996, the International Monetary Fund (IMF) launched the HIPC initiative in an attempt to
reduce the external debt burden of low-income countries to sustainable levels in a reasonably
short period of time 2. The HIPC initiative has generated a lot of attention and has been hailed

HIPC countries have 3 main common characteristics: (a) they incurred heavy debt mainly in the 1970s but the
symptoms of HIPCs emerged in 1980s; (b) debt ratio of these countries is much higher than other low income or
developing countries; and (c) they are poor countries with a lower economic growth (Birdsall et al., 2002).
2
In order to qualify for HIPC Initiative assistance, a country must meet the following four conditions:
1. Be eligible to borrow from the World Banks International Development Agency, which provides interestfree loans and grants to the worlds poorest countries, and from the IMFs Poverty Reduction and Growth Trust,
which provides loans to low-income countries at subsidized rates;
2. Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms;
3. Have established a track record of reform and sound policies through IMF- and World Bank-supported
programs; and

by many as a significant event, promising economic opportunities for the debt ridden poor
countries. How much benefit did this Initiative bring for the HIPC? Literature examining the
relationship between reduction in external debt and economic growth gives mixed signals to
the policy makers in both the developed and the developing countries. Claessens (1990)
concludes that the actions taken by creditors to reduce a debtors burden of debt will benefit
both parties. But Clements et al. (2003) suggest that debt relief may have detrimental effects
on indebted countries and that reform may be more effective than relief. Similarly,
Berensmann (2004) argues debt relief is a necessary but not a sufficient condition for
development.

The main objective of this paper is to examine the influence of a change in external debt on
economic growth in the HIPC countries over the period 1970 to 2007 using recent
developments in time series and cross-sectional analysis. Standard growth accounting process
by decomposing the sources of economic growth will be employed for this purpose. In
addition, the paper will analyse the extent to which the external debt held by heavily indebted
poor countries has impacted on their economic growth. This will involve an analysis of
various debt ratios over time.

2.

The Relationship between External Debt and Economic Growth: A Brief Review

In this section we briefly review the literature examining the impact of external debt on
economic growth. As discussed in Section 1, the results are inconclusive.

In an IMF Working Paper, Pattillo et al. (2002) analyse the effect debt burden has on
developing economies. Their empirical work covers 93 developing countries over the period
1969 to 1998. They estimate both linear and non-linear regressions controlling for a set of
variables common in the growth literature, including trade openness, schooling, population
and government budget. For robustness, they use four different definitions of debt burden,
namely the ratios of nominal and net present values of external debt to both exports and gross
domestic product. They conduct estimations by ordinary least squares, two-stage least
squares, fixed effects and system generalised method of moments, and their results are
appropriately consistent throughout. In summary, they find that for a country with average
4. Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in
the country. (IMF, 2014).

indebtedness, a doubling of the debt ratio would reduce annual per capita growth by between
a half and a full percentage point. They find that the average impact of debt only becomes
negative at debt ratios above 160-170 percent of exports or 35-40 percent of gross domestic
product, and that the marginal impact of debt starts becoming negative at about half of these
levels. Their results are robust to different period length samples, the inclusion of time
effects, and the removal of both investment as a control variable and outliers of observations.
The removal of investment as an explanatory variable also implies that high debt levels
appear to reduce growth by lowering the efficiency of investment more so than the volume of
investment.

In another IMF Working Paper, Clements et al. (2003) seek to analyse the channels through
which external debt impacts economic growth in low-income countries. They estimate a
reduced form growth equation for 55 low-income countries from 1970 to 1999, using both
fixed effects and system generalised method of moments. Like their colleagues at the IMF,
Pattillo et al. (2002), Clements et al. adjust their sample into 3 year averages to net out any
short-term fluctuations and also try four different definitions of debt burden (nominal debt
over exports and gross domestic product, and net present value debt over exports and gross
domestic product). Both estimation procedures and all four debt burden definitions give
broadly similar results. Namely, their estimation results support the debt overhang
hypothesis; however they estimate a threshold level of debt to exports of 100-105 percent and
a threshold level of debt to gross domestic product of 20-25 percent. Clements et al. also seek
to examine the relationship investment has on raising per capita growth. They first
disaggregate the investment control variable in their initial growth equation into private and
public investment, and find that it is public investment that impacts growth in low-income
countries. They then run a separate regression with pubic investment as the dependent
variable and assess the impact that debt service has on it. Essentially, they conclude that a
reduction in debt service of about 6 percentage points of gross domestic product would raise
public investment by between 0.75 and 1 percentage point of gross domestic product, which
would hence raise per capita income growth by about 0.2 percentage points.

Contrary to the above findings, Jayaraman and Lau (2009) find that higher debt levels can
promote higher economic growth. Their study involves six Pacific island countries between
1988 and 2004 and is based on regressing external debt stock, exports and the budget deficit
(all as a percentage of gross domestic product) against gross domestic product. Jayaraman
3

and Lau estimates a regression model by the panel group mean fully modified ordinary least
squares, and find that a 1 percent increase in the external debt stock leads to a 0.25 percent
increase in national output. Jayaraman and Lau also test for causality by a panel-based vector
error correction model with a dynamic error correction term, and find that whilst there is no
Granger causality relationship between real gross domestic product and external debt in the
long-run, there is a significant causal relationship running from external debt to gross
domestic product in the short-run.

Hameed et al. (2008) analyse the relationship between external debt and economic growth in
Pakistan. By using a production function model for time series data of gross domestic
product, debt service, capital stock and labour force from 1970 to 2003, the study examines
the dynamic effects that these variables have on economic performance. Multiple
cointegration procedures were employed to identify long-run relationships between the
variables. The long-run relationship shows that debt service affects gross domestic product
negatively, most likely through its adverse impacts on capital and labour productivity.
Granger causality was also estimated through a vector error correction model, and further
indicates that short-run and long-run negative causality runs from debt service to gross
domestic product.

In another single country study, Adegbite et al. (2008) investigate the impact that Nigerias
huge external debt stock had on its economic growth between 1975 and 2005. They use a
Solow-type neoclassical growth model to regress the ratio of external debt to gross domestic
product (along with several other macroeconomic and external sector exogenous variables)
against the annual gross domestic product growth rate. Using both ordinary least squares and
generalised least squares and estimating both linear and non-linear relationships, they study
the debt overhang theory for Nigeria. Their results find that external debt contributes
positively to growth up to a certain point, after which its contribution becomes negative. They
also investigate the crowding out effect of debt servicing by regressing debt service
requirements against private investment and find that Nigerias large debt burden did indeed
crowd out private investment.

Fonchamnyo (2009) studies the effect of economic and social performance in 60 low-income
countries to assess the relative effectiveness of the HIPC Initiative. He divides the 60 lowincome countries into four groups based on their 2005 HIPC status: non HIPCs, pre-decision
4

point, decision point and completion point HIPCs. He hypothesises that those countries
included in the HIPC Initiative will show better improvement in economic and social
development than those countries not included. To regress this he estimates an investment
function and an economic growth function, both by generalised method of moments, and
finds that his HIPC dummy is positive and significant in both. Thus, he concludes that this
shows that investment and growth have improved in HIPCs since the institution of the HIPC
Initiative, and there is also evidence that health care and education enrolment experienced
some improvement in countries that had reached the completion point of the HIPC Initiative.

Fosu (1999) studies the effect of external debt on the growth of 35 countries in sub-Saharan
Africa using World Bank data for the period 1980 to 1990. By regressing GDP growth on the
growth rates of labour, capital, exports, and external debt, Fosu shows that net outstanding
debt has a negative effect on economic growth (for given levels of production inputs).
Furthermore, he also finds that growth across these sub-Saharan African nations would have
been 50% higher during the period of study in the absence of the debt burden. Fosu also finds
little evidence of a negative correlation between external debt and investment levels.

Faini and de Melo (1990) assess the success of adjustment packages to developing countries
supported by loans from the World Bank and IMF, which focus on a series of microeconomic
reforms to assure supply-side improvement whilst simultaneously pursuing sharp real
exchange rate depreciation. The authors find that high external debt burdens, in conjunction
with macroeconomic instability, impede investment in developing countries. They argue that,
for such adjustment packages to result in the levels of investment necessary for the packages
to succeed, appropriate relief of external debt is required.

Froot (1989) compares different market-based debt reduction schemes, and argues that the
optimal approach to debt relief is a package that is part debt forgiveness, and part new
lending. In particular, Froot finds that debtor nations that finance buybacks using current
resources can impede incentives for new investment, and can therefore prolong the debt relief
process.

Fry (1989) examines the effect of foreign debt accumulation on the balance of the current
account using data from 28 countries identified to be heavily indebted to the World Bank in
1986. He argues that as long as an increase in foreign debt increases investment by less than
5

it increases saving or reduces investment by more than it reduces saving then the current
account will enter a state of equilibrium with a maintainable ratio of foreign debt to gross
national product. In particular, Fry identifies public and publically guaranteed debt as
reducing saving by more than it reduces investment, hence worsening the current account
deficit over time.

Hofman and Reisen (1991) compare responses to debt overhang from countries facing
liquidity constraints to those with access to new investment opportunities. They find that
direct debt reduction from the creditor would lead to a greater boost to the debtor nation than
new investment, but note that countries constrained by liquidity require new sources of funds
to be able to take advantage of profitable investment opportunities when they arise. They
conclude that in such circumstances, reducing the stock of external debt without
compensating with new lending will not lead to a tangible improvement to investment.

Krugman (1988) examines the choice of creditors to either finance or forgive a debt overhang
as a trade-off. He argues that while financing provides creditors with an option value should
the debtor nation do well in the future, it also weakens the incentive for the debtor nation to
attempt to improve the size of its debt stock, as the potential positive benefits would go
largely to the creditors. Krugman also finds that the trade-off is improved if both approaches,
financing and forgiving, are made contingent on factors that are beyond the direct control of
the debtor nation, such as prices of relevant commodities or world interest rates.

3. Emergence of the Debt Problem

3.1

Factors Contributing to the Emergence of the HIPC Countries

The emergence of unsustainable debt in the HIPC countries can be analysed from both the
demand and supply side. From the demand side, the group of countries which are now
classified as HIPCs needed external debt to meet their development and other needs. Most of
these countries were poor with relatively lower economic growth and lower per capita
income. Hence national rates of savings were also very low with domestic savings being
insufficient to finance their developmental and national goals. Moreover, as most of these
countries were dependent on the exports of primary commodities, their export earnings were
not enough to finance import bills as they mostly imported capital intensive goods which
were relatively more expensive. Hence, there arose the need for external borrowing.
6

Fortunately (or, unfortunately) due to the significant increase in the price of oil between 1973
and 1979, the foreign reserve of the oil exporting countries dramatically increased with
deposited being mainly with the European banks. Thus there sprung a market for external
debt or borrowing from overseas sources.

During the 1970s most of the governments of the developing and poor countries heavily
borrowed money primarily to finance their industrial and infrastructure development. There
was a popular belief amongst many of the developing nations that the economic success
depended on industrial development which needed protection from overseas competition
during the initial stages of development. Thus industrial development was pursued with the
aid of the import substitution industrialisation strategy. Unfortunately, many of these
countries, especially the sub-Saharan African countries failed to invest their borrowed funds
in income generating activities and hence failed to enhance their ability to repay their
accumulated debt.

Based on the results reported in Siddique (1996), which analyses the external debt problem
facing 32 sub-Saharan African nations over the period 1971 to 1990, the following three
major interdependent factors were found to be contributing to the accumulation of external
debt.

The first is the trade policy. It is argued that governments seeking to address burgeoning
external debt should pursue trade policies that would result in significantly large export
earnings to meet additional debt obligations or to reduce the total stock of external debt in the
long term. Otherwise, the trade policy is considered inappropriate. Siddique (1996) finds that
approximately 21% of growth in the stock of external debt among the low-income countries
in question was due to inappropriate trade policy for the period 1971 to 1979.

The second is macroeconomic policy. Unsustainable expansionary monetary policy can result
in a chronic current account deficit and fiscal imbalance leading to a build-up of external
debt. Furthermore, Krueger (1987) identifies unrealistic macroeconomic policy as having the
potential to induce capital flight, forcing countries to engage in further borrowing not just to
meet existing debt obligations, but also to offset the impact of capital flight. Siddique (1996)
identifies a number of countries during the period 1971 to 1979 for which poor
macroeconomic policy was almost solely responsible for growth in net debt, but also
7

identifies cases in which macroeconomic policy designed to achieve high economic growth
enhanced the ability of debt-stricken low-income countries to meet their debt obligations.

The third is external and global shocks. This accounts for the contribution to external debt
from factors beyond the direct control of policymakers in low-income countries, such as real
interest rates, the onset of anti-inflationary monetary policy resulting in recession, and other
global economic conditions.

Giersch (1985) identified the following three factors which contributed to the emergence of
HIPCs:

The 1973 oil price increase led to an increase in import bills of the indebted oil importing
countries which led to balance of payment deficit, causing the need for adjustment of the
production and consumption structures.

Interest rates remained relatively lower in the 1960s and the 1970s which prompted the
developing countries to borrow more than they could afford once interest rates went up.

The second oil shock in 1979 led to global recession in the early 1980s. Export incomes
of the indebted nations shrank considerably resulting in an increase in the need for more
borrowing for oil importing countries.

3.2 Trends and Patterns of the External Debt of the HIPCs

To understand the movements in the overall trade and debt of the heavily indebted poor
countries (HIPCs), we aggregate the annual data for the 40 HIPCs for each of the sample
periods from 1970 to 2007. For selected years, columns 2-5 of Table 1 present the aggregate
total of Public and Public Guaranteed Debt (PPG Debt), Service Debt, Other Debt and the
Total Debt. As can be seen, a large share of the total debt is made up of the PPG debt. The
data shows strong growth in total debt from 1974 onwards, before peaking in 1998 and then it
is on a declining path but with a slight increase in 2007. The last two columns of the table
present the Total Merchandised Exports (TME) and the Gross Domestic Product (GDP)
aggregated over the 40 HIPCs. As can be seen, there is significant improvement in the
Merchandise Exports and GDP of the HIPCs during the last four decades.

Table 1 Debt, Output and Export Statistics of HIPCs, 1970-2007, selected years
($US millions, current)
PPG Debt
Year
(1)
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2007

(2)
5403.1
12338.4
27521.0
49704.4
80593.8
111657.5
128268.7
130308.8
124355.9
92973.6
95704.6

Service Debt
(3)
240.4
606.0
1568.2
3622.7
4220.2
4734.7
3870.9
4253.1
3802.3
3123.1
3879.9

Other Debt
(4)
558.4
1585.0
7630.7
13293.7
17350.2
24296.1
30443.6
31034.5
25515.4
23890.9
24403.0

Total Debt
(5)
6201.9
14529.3
36719.9
66620.9
102164.2
140688.3
162583.2
165596.5
153673.7
119987.6
123987.5

Total
Gross
Merchandise
Domestic
Exports (TME) Product (GDP)
(6)
(7)
5971.8
10909.3
13458.7
15787.0
16291.0
20133.0
19199.4
25443.0
29010.6
66584.9
75522.1

26259.4
44846.8
73668.8
96816.1
115507.4
133790.1
105721.4
141116.2
149686.8
265230.0
311411.7

Figure 1 plots the complete time series data of the variables listed in Table 1 for the whole
sample period. As can be seen, the total GDP, merchandise exports as well as the total debt of
the HIPCs, all continue to increase until the late 1990s and, since 2000, while TME and
GDP has taken a sharp upward trend, PPG debt and total debt of the HIPCs has been on the
decline.

350000
300000

US$ millions

250000
200000
150000
100000
50000

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

PPG Debt

Service Debt

Other Debt

Total Debt

TME

GDP

Figure 1 Aggregate PPG Debt, Service Debt, Other Debt, Total Debt, Merchandise Exports and GDP of
HIPCs, 1970-2007 ($US millions, current)

To analyse the depth of the debt problem, we convert the data for the debt variables listed in
Table 1 in the form of relative measures with respect to GDP and merchandise exports. In
columns 2-3 of Table 2, we provide the ratios of PPG debt and total debt to GDP and
9

columns 4-5 of the table presents the PPG debt and total debt to exports for selected years
between 1970 and 2007. The associated diagram, Figure 2, shows the complete time series
plot of these ratios from 1970 to 2007. As can be seen, the ratios of the PPG debt and total
debt to GDP (columns 2-3) and PPG debt and total debt to exports (columns 4-5), all rose to a
peak in the mid-1990s, before declining to close to their 1970 levels in 2007. Clearly, it
appears that some progress has been made by the HIPCs in reducing their debt level as a
percentage of GDP over the last century.
Table 2 External Debt to GDP and Exports Ratios of HIPCs, 1970-2007, selected years
PPG Debt/
GDP
(2)
0.206
0.275
0.374
0.513
0.698
0.835
1.213
0.923
0.831
0.351
0.307

Year
(1)
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2007

Total
Debt/GDP
(3)
0.236
0.324
0.498
0.688
0.884
1.052
1.538
1.173
1.027
0.452
0.398

PPG
Debt/Exports
(4)
0.905
1.131
2.045
3.148
4.947
5.546
6.681
5.122
4.287
1.396
1.267

10

1.8
1.6

1.4

Debt to Exports ratio

1.2
1.0
0.8
0.6
0.4

7
6
5
4
3
2

PPG Debt/GDP

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

0.0

1970

0.2

1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006

Debt to GDP ratio

Total
Debt/Exports
(5)
1.039
1.332
2.728
4.220
6.271
6.988
8.468
6.509
5.297
1.802
1.642

PPG Debt/Exports

Total Debt/GDP

Total Debt/Exports

Figure 2 External Debt to GDP and External Debt to Exports Ratios of HIPCs, 1970-2007

In Table 3, we present the average annual growth rate of aggregated PPG debt, total debt,
GDP and exports in the 40 HIPC counties during four subsample periods and over the whole

10

Table 3 Average Annual Growth Rates of PPG Debt, Total Debt, GDP and Exports in HIPCs,
1970-2007
Merchandise
PPG Debt
Total Debt
GDP
Period
Exports
(1)
(2)
(3)
(4)
(5)
1971-1979
22.15
24.15
13.49
12.70
1980-1989
12.06
11.55
4.85
1.95
1990-1999
2.22
2.35
0.49
3.04
2000-2007
-2.36
-2.47
11.66
15.39
1971-2007

8.74

9.10

7.25

7.76

sample period. During the sub-period 1971-1979, PPG debt, total debt, GDP and exports, all
had a positive double-digit growth, while during 1980-1989, the PPG and total debts grew at
a higher rate but below the 1971-1979 level, and the GDP and exports had a positive but
much smaller growth rate. During 1990-1999, the debts, GDP and exports, all had
experienced a lower but positive growth ratio, but the sign has changed during 2000-2007.
The growth rates for the debts were negative but the growth rates of GDP and exports had
recovered and were in the double-digit level of the 1970s. Figure 3 plots the annual growth
rate of aggregated debt over the complete sample period. As is clearly evident, the growth
rate of total debt has been declining since the late 1970s, from high double digit growth to
negative growth in the 2000s, while the GDP and export growth has been excellent
throughout the whole sample period.

40
30
20
10
0
1971

1975

1979

1983

1987

1991

1995

-10
-20
-30
Total Debt

Trend, Total Debt

Figure 3 Annual Growth Rates of Total Debt in HIPCs, 1970-2007

11

1999

2003

2007

4. Preliminary Data Analysis

The data on the following variables for the 40 HIPCs for the period 1970-2007 were obtained
from the World Development Indicators, World Bank. The variables used in our analysis are:
gross domestic product; gross capital formation; total debt; total trade; expenditure on
education and population. All the variables, except population, are in current $US. We
consider the following form of the above variables, (1) per capita GDP (GDP); (2) gross
capital formation per unit GDP (CF); (3) total debt per unit GDP (DB); (4) total trade per unit
GDP (TR); and (5) population (P) for our analysis 3.

Data Summary
Table 4 presents a summary of the panel data set (40 HIPCs over the 38 year period, 19702007) of the variables defined above. As can be seen, per capita GDP ranges between
US$57.2 and US$2095.6 with a sample mean of US$375.7 per annum, average gross capital
formation per dollar GDP is US$0.178 (range: US$-0.238 US$0.603), average debt per
dollar GDP is US$1.046 (range: US$0 US$15.98), average trade per dollar GDP is
US$60.82 (range: US$6.32 US$280.36) and the average population of the HIPCs is about
9.5 million (range: 0.07 million 79.1 million). The corresponding standard deviations are,
US$254.3, US$0.089, US$1.298, US$32.88 and 10.9 million, respectively.
Table 4: Summary statistics for the variables, 40 HIPCs, 1970-2007

Variable
(1)
GDP (in $)

Mean
(2)
375.7

Standard
deviation
Median
(3)
(4)
302.8
254.3

Min
(5)
57.2

Max
(6)
2095.6

Capital formation (CF in $)

0.179

0.177

0.089

-0.238

0.603

Debt (DB in $)

1.046

0.731

1.298

0.000

15.982

Trade (TR in $)

60.82

52.21

32.88

6.32

280.36

9505998

6080340

10900000

73728

79100000

Population (P in '000)

Test for stationarity and cointegration of the model variables

Before estimation, we investigate the time series properties of each time series variable at the
individual country level and as a panel.

We also included Education as a variable in our analysis, however, due to reasons given in footnote 4,
Education was dropped from the analysis.

12

Individual country unit root test and test of cointegration

First we apply Augmented Dicky Fuller (ADF) test (Dickey and Fuller, 1979; 1981) to test
the stationarity of each of the five variables GDP, CF, DB, TR and P. The null hypothesis of
the ADF test is that the time series has a unit root (or the time series is non-stationary). Table
5 presents the unit root test results. As can be seen, the p-value for testing the null hypothesis
of the existence of a unit root is mostly less than the level of significance, = 0.05, thus we
reject the null hypothesis. This means that, almost all time series are stationary, that is I(0),
except GDP for Kyrgrz Republic and Tanzania; capital formation for Liberia; debt for
Eritrea, Madagascar and So Tom and Prncipe; and, population for Benin and Comoros.

Panel unit root test and test of co-integration

Now we test for the existence of a unit root in each panel data time series variable. We
present here, the results from five such panel unit root tests known as LLC test, IPS test, ADF
test, PP test and Hadri test, developed by Levin, Lin and Chu (2002); Im, Pesaran and Shin
(2003); Dickey and Fuller (1981); Phillips and Perron (1988); and Hadri (2000), respectively.
The null hypothesis of all these tests is that the panel series has a unit root (or the time series
is non-stationary), except for the Hadri test which tests the opposite hypothesis of the series
and has no unit roots (or the time series is stationary). These test results are presented in
Table 6. As can be seen, the results indicate that capital formation and trade variables are
stationary in level form (that is, I(0)), whilst all the remaining variables are stationary in their
first differences, that is, I(1). In addition, we also use the Kao Residual co-integration test to
test for cointegration between GDP, capital formation, debt, trade and population. The value
of the test statistic to test the null hypothesis of no co-integration is -1.96 with a p-value of
0.0253, indicating that there is some support for co-integration between our variables of
interest. The above results show that an Auto Regressive Distributed Lags (ARDL) approach
would be more suitable to model the relationship between GDP and capital formation, debt,
trade and population.

5. Modelling the Relationship between Economic Performance and External Debt

To examine the influence of external debt on the economic performance of the HIPCs, we
first consider the stationarity and cointegration test results obtained in the previous section.
The results of Tables 5 and 6 suggest that a dynamic model such as an Auto Regressive

13

Distributed Lag (ARDL) model would be most suitable (see, Pesaran and Shin, 1999; and
Pesaran et al, 2001) for our analysis, as some of the variables are I(0) and others are I(1), and
Table 5 Value of the ADF test statistic and its p-value (in parentheses) from the Unit root test
for each variable in each country
Country

GDP

Capital formation

Debt

Trade

Population

Benin

-5.841 (0.000)

-7.910 (0.000)

-7.954 (0.000)

-6.782 (0.000)

-1.832 (0.355)

Bolivia

-4.860 (0.000)

-6.080 (0.000)

-4.560 (0.000)

-5.330 (0.000)

-6.266 (0.000)

Burkina Faso

-6.830 (0.000)

-7.640 (0.000)

-4.890 (0.000)

-7.030 (0.000)

-5.688 (0.000)

Burundi

-6.950 (0.000)

-8.930 (0.000)

-4.500 (0.000)

-5.870 (0.000)

-6.255 (0.000)

Cameroon

-4.350 (0.000)

-6.840 (0.000)

-5.340 (0.000)

-6.080 (0.000)

-5.718 (0.000)

Central African Republic

-6.874 (0.000)

-7.559 (0.000)

-7.190 (0.000)

-6.874 (0.000)

-6.264 (0.000)

Chad

-5.116 (0.000)

-5.004 (0.000)

-4.949 (0.000)

-9.090 (0.000)

-3.768 (0.007)

Comoros

-4.694 (0.000)

-6.827 (0.000)

-4.553 (0.000)

-2.715 (0.009)

0.767 (0.991)

Congo, Dem. Rep.

-6.599 (0.000)

-9.103 (0.000)

-5.777 (0.000)

-8.223 (0.000)

-6.621 (0.000)

10

Congo, Rep.

-5.341 (0.000)

-5.313 (0.000)

-5.222 (0.000)

-6.472 (0.000)

-6.341 (0.000)

11

Cote d'Ivoire

-6.240 (0.000)

-5.513 (0.000)

-2.953 (0.004)

-4.896 (0.000)

-8.735 (0.000)

12

Eritrea

-2.145 (0.035)

-6.018 (0.000)

-1.840 (0.065)

-4.646 (0.000)

-6.250 (0.000)

13

Ethiopia

-6.600 (0.000)

-8.385 (0.000)

-4.315 (0.000)

-2.990 (0.004)

-4.098 (0.000)

14

Gambia, The

-6.609 (0.000)

-5.751 (0.000)

-5.367 (0.000)

-8.218 (0.000)

-6.319 (0.000)

15

Ghana

-5.653 (0.000)

-6.260 (0.000)

-4.733 (0.000)

-4.828 (0.000)

-6.603 (0.000)

16

Guinea

-2.873 (0.006)

-3.936 (0.001)

-4.067 (0.000)

-3.611 (0.001)

-6.231 (0.000)

17

Guinea-Bissau

-8.945 (0.000)

-6.977 (0.000)

-5.602 (0.000)

-6.946 (0.000)

-6.272 (0.000)

18

Guyana

-4.145 (0.000)

-6.102 (0.000)

-5.061 (0.000)

-5.586 (0.000)

-6.530 (0.000)

19

Haiti

-7.104 (0.000)

-5.320 (0.000)

-5.469 (0.000)

-9.381 (0.000)

-6.480 (0.000)

20

Honduras

-4.888 (0.000)

-5.599 (0.000)

-4.420 (0.000)

-6.240 (0.000)

-6.161 (0.000)

21

Kyrgyz Republic

-0.509 (0.480)

-3.112 (0.004)

-2.305 (0.025)

-3.332 (0.003)

-6.288 (0.000)

22

Liberia

-7.494 (0.000)

-0.855 (0.297)

-3.180 (0.002)

-6.478 (0.000)

-6.037 (0.000)

23

Madagascar

-6.189 (0.000)

-7.141 (0.000)

-1.812 (0.067)

-6.108 (0.000)

-6.655 (0.000)

24

Malawi

-7.845 (0.000)

-8.419 (0.000)

-5.463 (0.000)

-7.090 (0.000)

-6.208 (0.000)

25

Mali

-5.392 (0.000)

-9.632 (0.000)

-7.156 (0.000)

-7.956 (0.000)

-6.278 (0.000)

26

Mauritania

-6.127 (0.000)

-9.789 (0.000)

-4.576 (0.000)

-8.257 (0.000)

-6.337 (0.000)

27

Mozambique

-4.889 (0.000)

-7.221 (0.000)

-4.088 (0.000)

-3.167 (0.003)

-6.391 (0.000)

28

Nepal

-6.414 (0.000)

-7.499 (0.000)

-3.045 (0.003)

-5.870 (0.000)

-6.010 (0.000)

29

Nicaragua

-5.893 (0.000)

-7.565 (0.000)

-5.241 (0.000)

-6.015 (0.000)

-6.253 (0.000)

30

Niger

-6.435 (0.000)

-5.957 (0.000)

-5.201 (0.000)

-6.620 (0.000)

-4.797 (0.000)

31

Rwanda

-7.253 (0.000)

-9.864 (0.000)

-6.996 (0.000)

-9.781 (0.000)

-6.204 (0.000)

32

Sao Tome and Principe

-4.317 (0.000)

33

Senegal

-6.517 (0.000)

-7.163 (0.000)

-8.768 (0.000)

-7.537 (0.000)

-6.570 (0.000)

34

Sierra Leone

-7.088 (0.000)

-8.371 (0.000)

-4.767 (0.000)

-7.777 (0.000)

-6.299 (0.000)

35

Somalia

-5.319 (0.000) -10.053 (0.000)

-4.245 (0.000)

-4.658 (0.000)

-5.009 (0.000)

36

Sudan

-3.574 (0.001)

-5.086 (0.000)

-5.692 (0.000)

-5.840 (0.000)

-6.805 (0.000)

37

Tanzania

-1.657 (0.091)

-2.797 (0.009)

-3.167 (0.003)

-3.119 (0.004)

-6.120 (0.000)

38

Togo

-6.088 (0.000)

-5.621 (0.000)

-5.382 (0.000)

-6.565 (0.000)

-6.300 (0.000)

39

Uganda

-5.553 (0.000)

-7.667 (0.000)

-4.827 (0.000)

-5.973 (0.000)

-5.947 (0.000)

40

Zambia

-4.020 (0.000)

-7.190 (0.000)

-5.224 (0.000)

-6.237 (0.000)

-6.349 (0.000)

-1.630 (0.096)

-6.345 (0.000)

a: Insufficient observations; b: near-singular; highlighted cells represent insignificant coefficient estimates at the
5 percent level.

14

we can write an ARDL(p,q,q,,q) dynamic panel specification for country i and period t of
the form

=
yit

'
ij yi,t j + ij Xi,t j + i + it , t=1,2, , T and i =1,2, , N,

=j 1 =j 0

(1)

Table 6 Panel unit root and cointegration test results

LLC
A. Levels
Individual Effects
GDP
5.250
Capital Formation
-4.376
Debt
-1.707
Trade
-1.908
Population
8.759
Individual Effects + Trend
GDP
4.496
Capital Formation
-5.606
Debt
8.601
Trade
-2.745
Population
5.559
B. First Differences
Individual Effects
GDP
-19.023
Capital Formation
-33.096
Debt
-22.533
Trade
-31.008
Population
3.800
Individual Effects + Trend
GDP
-17.206
Capital Formation
-26.041
Debt
-20.929
Trade
-26.202
Population
8.297

Data-based value of the test statistic (p-value in parenthesis)

IPS
ADF
PP

HADRI

Conclusion

(1.000)
(0.000)
(0.044)
(0.028)
(1.000)

3.196
-4.893
-0.372
-2.367
21.705

(1.000) 68.965 (0.806)

(0.000) 165.547 (0.000)
(0.355) 72.866 (0.701)
(0.009) 123.291 (0.001)
(1.000) 69.619 (0.623)

52.346
143.550
58.800
119.453
7.771

(0.993)
(0.000)
(0.964)
(0.002)
(1.000)

14.654
9.337
9.505
12.889
24.479

(0.000)
(0.000)
(0.000)
(0.000)
(0.000)

I(0)
I(0)
-

(1.000)
(0.000)
(1.000)
(0.003)
(1.000)

2.648
-4.615
9.824
-2.681
12.868

(0.996) 70.232 (0.774)

(0.000) 157.729 (0.000)
(1.000) 32.036 (1.000)
(0.004) 131.994 (0.000)
(1.000) 154.118 (0.000)

36.920
137.432
15.303
139.284
28.564

(1.000)
(0.000)
(1.000)
(0.000)
(1.000)

8.065
9.586
10.245
9.097
19.195

(0.000)
(0.000)
(0.000)
(0.000)
(0.000)

I(0)
I(0)
-

(0.000)
(0.000)
(0.000)
(0.000)
(1.000)

-20.094
-31.743
-21.676
-31.172
1.383

(0.000)
(0.000)
(0.000)
(0.000)
(0.917)

539.616
876.490
599.549
855.570
229.581

(0.000)
(0.000)
(0.000)
(0.000)
(0.000)

549.998
1008.72
588.157
974.278
335.473

(0.000)
(0.000)
(0.000)
(0.000)
(0.000)

1.413
-0.213
0.659
3.247
16.798

(0.079)
(0.584)
(0.255)
(0.001)
(0.000)

I(1)
I(1)
I(1)

(0.000)
(0.000)
(0.000)
(0.000)
(1.000)

-17.015
-22.947
-20.374
-27.212
-0.778

(0.000)
(0.000)
(0.000)
(0.000)
(0.218)

419.852
795.185
547.499
729.441
214.845

(0.000) 442.905 (0.000)

(0.000) 2485.330 (0.000)
(0.000) 813.104 (0.000)
(0.000) 2578.390 (0.000)
(0.000) 391.952 (0.000)

9.829
2.891
3.121
12.157
5.221

(0.000)
(0.002)
(0.001)
(0.000)
(0.000)

I(1)
I(1)
I(1)

There exists a cointegrating relationship between the variables, assuming a long-run

relationship of the form

=
yit i' Xi,t + uit ,

t=1,2, , T and i =1,2, , N,

(2)

where T is the number of time periods; N is the number of countries; Xit is a (k1) vector of
explanatory variables for country i; i, is the country-specific fixed effect; ijs are scalars
and ij are (k1) vectors of parameters of the model to be estimated. In addition, if the
variables in equation (2) are (1) and cointegrated, then the error term is a stationary process
for each country equation. This means that an error correction model can be formed in which
short-term dynamics can be combined with an error correction term to take care of the
15

deviation from the long-run equilibrium. Therefore, we can parameterise equation (2) in the
form of an error correction (EC) model given by
p 1
q 1
=
yit i ( yi,t 1 qi' Xit 1 ) + ij* yi,t j + ij'*Xi,t j + i + it ,
=j 1 =j 0

(3)

q
p
*
where i =(1 pj=
=1 ij ); qi j = 0 ij / (1 k ik ); ij = m= j +1 im , j=1,2,,p-1; and

ij* = qm=1j im , j=0,1,,q.

The parameter i is the error correcting speed of adjustment term. If i =0, then there would
be no evidence for a long-run relationship. We would expect the estimated value of i to be
significantly negative as variables are cointegrated implying that the variables should show a
return to long-run equilibrium. The i coefficients measure the long-run relationship between
the variables and, ij* and ij* measure the short-run relationship between the variables.

There are three approaches suggested in the literature (see Pesaran and Smith, 1995; and
Pesaran et al, 1997 and 1999) for the estimation of dynamic heterogeneous panel equation of
the form of equation (3) when both T and N are large.

The first approach is the dynamic fixed effects (DFE) estimation where time series data for
each country are pooled and only the intercept coefficients are allowed to vary across
countries, and the speed of adjustment coefficient and the slope (short-run) coefficients are
treated as equal across countries. It has been shown that if the slope coefficients are in fact
not identical, then such DFE estimation will produce inconsistent estimates and potentially
misleading results. DFE estimation is also subject to a simultaneous equation bias due to the
endogeneity between the error term and the lagged dependent variable (see Baltagi et al,
2000).

The second is the mean group (MG) estimation method proposed by Pesaran and Smith
(1995) in order to resolve the bias due to heterogeneous slopes in dynamic panels. Under this
approach, the model will be estimated separately for each country and a simple unweighted
arithmetic average of the coefficients will be calculated as the final (MG) estimates. MG

16

estimation allows for all intercept and slope coefficients to vary and be heterogeneous (error
variances are allowed to vary across countries) in the long-run as well as in the short-run.

The third approach is the pooled mean group (PMG) estimation introduced by Pesaran et al
(1997; 1999) which combines both pooling and averaging. The PMG estimator, as with the
MG estimator, allows the intercept, short-run coefficients and error variances to differ across
countries, but restricts the long-run (co-integrating) coefficients to be the same across
countries as with the DFE estimation method.

One advantage of the PMG over the traditional DFE is that PMG allows for the short-run
dynamic specification to differ from country to country. In terms of selecting the preferred
estimates between MG and PMG, one could use the Hausman test to see whether there is any
significant difference between the two sets of estimates. The null hypothesis of such a
hypothesis test can be defined as the difference between MG and PMG estimates is not
significant. If the null hypothesis is not rejected then we conclude that there is no significant
difference between the two set of estimates and select PMG estimates as they are efficient
estimates. If the null hypothesis is rejected then we conclude that there is significant
difference between the two set of estimates. One possible solution in this situation is to use
the average of the two estimators.

Model for Estimation

Assuming a long-run relationship between GDP and variables, capital formation (CF), debt
(DB), trade (TR) and population (P), in the form
GDPit = oi + 1iCFit + 2iDBit + 3iTRit + 4iPit + i + it,

(4)

We use an autoregressive distributed lag model, ARDL(p,q,q,q,q) of the form given by

equation (2) for estimation. Initial analysis indicates that an ARDL(1,1,1,1,1) dynamic panel
specification of the following form is suitable for our study:
GDPit = i1GDPit-1 + 10iCFit + 20iDBit + 30iTRit + 40iPit
+ 11iCFit-1 + 21iDBit-1 + 31iTRit-1 + 41iPit-1 + i + it,

17

(5)

where the number of countries, i=1,2,, 40; number of periods, t = 1,2,..., 38; and i is the
country-specific effect.

The re-parameterization of equation (5) into the error correction equation in the form of
equation (3) takes the form
GDPit = i(GDPit-1 - 0i - 1iCFit-1 - 2iDBit-1- 3iTRit-1 - 4iPit-1)
+ i*01 CFit+ i*02 DBit + i*03 TRit + i*04 Pit + i + it-1,

(6)

0i i / (1 i1 ); ki =( k 0i + k1i ) / (1 i1 ), k =1, 2,3, 4;

where i=1,2,, 40; i = -(1-i1);=
ij* = mp =

q 1
*
j +1 im , j=1,2,,p-1; and kli = m = j klm , j=0,1,,q-1, k=1,2,3,4, l=1,2.

The coefficient i is the error correction speed of adjustment parameter, kis (k=1,2,3,4) are
the long-run coefficients, and i*0 j s (j=1,2,3,4) are the short-run coefficients. These
coefficients are of primary interest in this study. The term 0i allows for a non-zero mean
cointegrating relationship.

6.

Empirical Results

Table 7 presents the three sets of alternative pooled estimates, namely, (1) MG estimates
which imposes no restrictions; (2) PMG estimates, which imposes common long-run effects;
and, (3) the DFE estimates which constrains all of the slope coefficients and error variances
to be the same. As can be seen, the signs of the coefficients are mostly the same, however,
some differences can also be noticed between the three sets of estimates; the standard errors
of the estimated long-run coefficients are also generally lower for the PMG estimates than
MG and DFE estimates. Across all three sets of estimates the speed of adjustment (the error
correction term) is negative and statistically significant. As expected, from econometric
theory, the MG error correction estimate presented in Table 7 indicates a much faster
adjustment than the PMG or DEF error correction estimates (-0.253 vs -0.039 and -0.046).
The individual country short-run PMG estimates are given in Table A1, Appendix. For a
long-run relationship to exist, we require i to be non-zero. As can be seen, all but one of the
individual error correction coefficients is negative and less than one in absolute value. This
18

means that, for a majority of the individual countries, the hypothesis of no long-run
relationship would not be rejected (for theoretical results, see Pesaran et al, 1999).

Comparing the long-run standard errors of the three sets of estimates, we could see in the
case of PMG that imposing a long-run homogeneity reduces the standard errors of the longrun coefficients. Furthermore, all of the estimated short-run and long-run debt coefficients are
negative and statistically significant at the 5% level.
Table 7 Panel ARDL Estimation Results from 40 HIPCs, 1970-2007
Variable
Error Correction term
Standard error
p-value
Short-run
Capital formation

Pooled Mean
Group (PMG)
Mean Group (MG)
-0.039
-0.253
(0.01)
(0.06)
(0.00)
(0.00)

Dynamic Fixed
Effect (DFE)
-0.046
(0.02)
(0.01)

Sta nda rd error

p-va l ue

59.78
(34.54)
(0.08)

39.45
(50.55)
(0.44)

-3.35
(35.30)
(0.92)

Sta nda rd error

p-va l ue

-218.36
(25.39)
(0.00)

-180.18
(27.06)
(0.00)

-94.29
(21.38)
(0.00)

Sta nda rd error

p-va l ue

-0.96
(0.32)
(0.00)

-0.95
(0.30)
(0.00)

-0.90
(0.37)
(0.02)

124.00
(287.60)
(0.67)

-107.70
(98.40)
(0.27)

-21.30
(17.00)
(0.21)

Sta nda rd error

p-va l ue

2855.324
(659.76)
(0.00)

2384.174
(1003.36)
(0.02)

1882.189
(835.06)
(0.02)

Sta nda rd error

p-va l ue

-559.224
(118.99)
(0.00)

-393.977
(158.13)
(0.01)

-315.779
(152.45)
(0.04)

Sta nda rd error

p-va l ue

4.778
(2.03)
(0.02)

-1.658
(4.16)
(0.69)

7.829
(5.63)
(0.17)

30.400
(10.20)
(0.00)
17.20
(9.62)
(0.07)

264.900
(147.70)
(0.07)
-25.79
(62.15)
(0.68)

20.900
(18.80)
(0.27)
3.69
(11.81)
(0.76)

Debt

Trade

Population ( x 10 6 )
Sta nda rd error
p-va l ue

Long-run
Capital formation

Debt

Trade

Population ( x 10 6 )
Constant

Sta nda rd error

p-va l ue
Sta nda rd error
p-va l ue

We also included Education as a variable in the model and the results are presented in Table A2 in the
Appendix. Since the estimated coefficient for education has the incorrect sign and is insignificant, education was
dropped from the model estimation.

19

We use the Hausman test to test the null hypothesis of no difference between the MG and
PMG estimators 5. The value of the test statistic is 15.18 with a p-value of 0.002, indicating
that we are unable to accept the null hypothesis that the MG and PMG estimates are the same.

Capital Formation as a proportion of GDP

As expected, across the three estimation methods, in general, the capital formation variable
has a positive impact on GDP in the short run as well as in the long run. This means that
higher levels of capital formation as a proportion of GDP would have increased the level of
GDP in the HIPCs. At the 10 percent level of significance, the PMG estimate of capital
formation variable is statistically significant in both short and long-run. The long run MG and
DFE estimates for capital formation variable are statistically significant at the 5 per cent level
but both the short run MG and DFE estimates are statistically insignificant.
Debt as a proportion of GDP
Across the three estimation methods, debt variable has a negative and statistically significant
influence on GDP in the short run as well as in the long run and supports prior expectations.
This means that higher levels of debt as a proportion of GDP would have reduced the level of
GDP in the HIPCs. At the 5 percent level of significance, all the PMG, MG and DFE
coefficient estimates are statistically significant in both the short-run and long-run.

This is an interesting result as it is in line with the debt overhang hypothesis which states that
a country experiences debt overhang when its stock of external debt exceeds its ability to
repay its debt. This can have negative impact on economic growth of a debt ridden country as
a large proportion of its output is used to repay the debt to foreign lenders, which
consequently creates disincentive to invest (Krugman, 1988; and Sachs, 1989).

This result raises important policy questions. If this relationship is true of the past, and we
expect it to remain true into the future, then a reduction of HIPCs debt burden should
increase their level of GDP. This, however, does not say that taking on external debt is bad if
managed well. For example, some of the East Asian economies especially, the tiger
economies were able to reduce poverty and enhance economic growth through efficient
utilisation of foreign debts.

We use the STATA software for estimation.

20

Total Trade as a proportion of GDP

The three sets of short-run negative estimates for the trade variable coefficient suggest that
increasing total merchandise exports as a proportion of GDP has a statistically significant
negative effect on increasing the level of GDP in the HIPCs. The long-run PMG coefficient
estimate for the trade variable is positive and significant but the long-run MG and DFE
coefficient estimates for trade variable are statistically insignificant.

This result could give rise to a change in development assistance policy. It also suggests that
the best way to help HIPC country economic performance is not to give more aid, but to
promote more exports.

Population
None of the short-run population coefficients are statistically significant. However, the longrun PMG and MG population coefficient estimates are both positive and statistically
significant. This means that, in the long-run, an increase in population would impact
positively on the GDP, which may be due to the increase in the work force or human capital.

6. Conclusion
This paper examines short-run and long-run relationships between external debt and
economic growth in 40 HIPC countries over the period of 1970-2007 with the aid of the
growth accounting process. In addition, the impact of capital formation, trade and population
growth on economic growth in these countries is also examined. We use panel data
estimation of an ARDL model. The results indicate that capital formation has a positive
impact on GDP in the short run as well as in the long-run; debt has a negative influence in the
short run as well as in the long-run; and population increase has a positive influence on the
economic growth.

21

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24

APPENDIX
The individual country short-run PMG estimates for equation (6) are given in Table A1.
Table A1 Panel ARDL Estimation Results, Individual HIPCs, 1970-2007
EC
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

-0.039
-0.080
-0.029
-0.014
-0.040
-0.031
-0.034
-0.083
-0.038
-0.009
-0.092
0.006
-0.011
-0.048
-0.018
-0.071
-0.004
-0.020
-0.083
-0.034
-0.091
-0.009
-0.044
-0.013
-0.050
-0.035
-0.034
-0.041
-0.020
-0.046
-0.071

0.171
0.055
0.410
0.041
0.002
0.055
0.006
0.002
0.109
0.650
0.011
0.639
0.074
0.007
0.220
0.195
0.336
0.448
0.014
0.138
0.023
0.085
0.030
0.144
0.095
0.001
0.030
0.042
0.038
0.045
0.002

Capform
79.482
-198.324
-170.788
55.945
-373.487
-97.133
-189.431
-17.194
-29.561
199.430
703.942
41.122
-23.134
39.797
162.449
231.802
36.543
14.523
-36.360
378.140
3.464
210.122
343.721
-32.048
-24.690
-44.590
-112.937
-156.179
643.611
222.482
-1.165

0.520
0.170
0.216
0.361
0.203
0.540
0.000
0.878
0.811
0.363
0.185
0.301
0.786
0.718
0.289
0.324
0.367
0.926
0.851
0.085
0.979
0.554
0.147
0.418
0.813
0.109
0.316
0.078
0.000
0.057
0.994

Trade
-0.130
0.550
1.479
0.324
-7.670
-0.528
-0.149
-0.526
-1.074
1.343
-4.140
-0.090
-4.326
0.118
-1.031
-1.457
-0.660
0.055
-0.288
-1.442
1.881
-0.173
-1.059
-0.694
-1.061
-0.323
-5.214
0.203
-5.437
-0.139
-1.739

0.876
0.750
0.250
0.478
0.000
0.428
0.556
0.646
0.096
0.203
0.051
0.808
0.000
0.713
0.150
0.104
0.009
0.893
0.698
0.197
0.004
0.655
0.157
0.007
0.055
0.265
0.000
0.716
0.000
0.862
0.001

Debt
-293.424
-307.575
-504.665
-55.189
-487.700
-314.442
-308.199
-426.175
-70.299
-356.225
-314.488
-157.078
-43.257
-150.239
-258.686
-433.105
-43.397
-106.765
-648.575
-412.861
-291.171
-26.862
-50.701
-74.488
-129.799
-216.179
-10.247
-213.158
-48.806
-158.614
-106.360

Pop
0.000 -38.700
0.000 718.300
0.000 -99.700
0.002 -17.700
0.000 -105.400
0.000 -135.300
0.000
24.500
0.000 10702.000
0.013 -24.100
0.000 -1635.500
0.000
37.800
0.000
23.500
0.008
2.910
0.000 -121.700
0.000 -63.200
0.000 -77.800
0.000 -249.100
0.000 -1456.600
0.000 -13.200
0.000 -620.800
0.000 645.800
0.002 -48.400
0.157 -94.600
0.000 -21.700
0.001 -23.400
0.000 -897.300
0.605
7.890
0.000 -75.300
0.000 -145.500
0.002 -42.800
0.000 -13.200

0.660
0.203
0.001
0.426
0.002
0.396
0.459
0.104
0.184
0.000
0.810
0.737
0.388
0.429
0.200
0.126
0.331
0.783
0.728
0.000
0.020
0.511
0.077
0.370
0.041
0.000
0.746
0.029
0.467
0.404
301.000

Constant
10.252
-65.276
19.341
4.606
47.348
18.558
-3.747
-88.315
-3.192
160.247
29.951
16.786
-17.292
3.678
27.133
13.750
14.574
32.539
-17.207
112.837
-31.726
17.830
26.705
3.892
-2.815
69.938
10.629
2.363
53.307
1.668
-13.903

0.604
0.393
0.405
0.228
0.021
0.132
0.613
0.214
0.878
0.000
0.612
0.328
0.088
0.747
0.127
0.312
0.044
0.091
0.264
0.000
0.122
0.008
0.125
0.669
0.810
0.000
0.350
0.822
0.017
0.926
0.155

-0.053
-0.006
-0.020
-0.111
-0.027
-0.065
-0.005
0.040

0.035
84.798
0.729 -100.898
0.080 -67.181
0.004 321.057
0.059 -116.499
0.002
68.197
0.863 260.493
0.078
21.973

0.709
0.535
0.170
0.172
0.311
0.364
0.252
0.888

-2.602
0.342
-0.513
-0.413
-0.518
0.055
-1.540
1.091

0.008
0.545
0.002
0.846
0.262
0.895
0.133
0.295

-439.302
-104.582
-79.378
-173.956
-77.707
-186.839
-273.885
-161.534

0.000 -161.900
0.000 -49.700
0.000 -35.800
0.000 104.400
0.002
-6.340
0.000
96.600
0.000 -26.200
0.000 -1226.700

0.267
0.506
0.092
0.083
0.704
0.487
0.494
0.000

40.870
9.685
10.747
-88.281
-16.698
-23.269
18.475
264.846

0.227
0.283
0.036
0.021
0.425
0.302
0.216
0.000

Table A2 presents the corresponding estimation results to Table 7 with Education (education
expenditure as a proportion of GDP) included as an additional variable in equation (6).
Across the three sets of short-run estimates, the coefficient attached to the education variable
is mostly negative but statistically insignificant. The long run PMG coefficient estimate for
education is negative and statistically significant, and the long-run MG and DFE coefficient
estimates of education are insignificant. These results suggest that expenditure on education
as a proportion of GDP is detrimental to the level of GDP in the HIPCs. The direction of this
relationship is markedly different from rational expectation.

25

Table A2 Panel ARDL Estimation Results (including Education)

from 40 HIPCs, 1970-2007
Variable
Short-run
Error Correction

Pooled Mean
Group (PMG)

Mean Group (MG)

Dynamic Fixed
Effect (DFE)

-0.07
(0.02)
(0.00)

-0.34
(0.15)
(0.03)

-0.04
(0.02)
(0.01)

Capital formation

81.88
(39.87)
(0.04)

13.94
(53.73)
(0.80)

16.82
(41.54)
(0.69)

Debt

-233.18
(27.02)
(0.00)

-167.60
(39.96)
(0.00)

-98.63
(24.36)
(0.00)

Trade

-0.83
(0.33)
(0.01)

-0.94
(0.33)
(0.01)

-1.03
(0.46)
(0.03)

Education

-5.23
(4.53)
(0.25)

-10.61
(7.17)
(0.14)

-10.29
(7.60)
(0.18)

169.00
(428.90)
(0.69)

-368.10
(261.90)
(0.16)

-18.10
(15.20)
(0.23)

49.64
(9.99)
(0.00)

-49.36
(141.02)
(0.73)

11.92
(14.53)
(0.41)

1016.842
(146.68)
(0.00)

1420.102
(442.78)
(0.00)

1945.135
(1003.79)
(0.05)

-95.197
(13.06)
(0.00)

-316.774
(168.56)
(0.06)

-460.706
(271.40)
(0.09)

2.183
(0.64)
(0.00)

-15.315
(11.73)
(0.19)

12.923
(8.60)
(0.13)

-56.393
(13.01)
(0.00)

36.123
(89.97)
(0.69)

-105.000
(95.34)
(0.27)

-4.890
(2.68)
(0.07)

-31.200
(313.70)
(0.92)

19.000
(20.50)
(0.35)

Population ( x 10 6 )

Constant

Long-run
Capital formation

Debt

Trade

Education

Population ( x 10 6 )

For each estimate the first row in parentheses are the standard errors and
the second row provides the corresponding p-values for testing the statistical
significance of the estimates.

26

Editor, UWA Economics Discussion Papers:

Sam Hak Kan Tang
University of Western Australia
35 Sterling Hwy
Crawley WA 6009
Australia
Email: ecoadmin@biz.uwa.edu.au
The Economics Discussion Papers are available at:
1980 2002: http://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/
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http://ideas.repec.org/s/uwa/wpaper1.html
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ECONOMICS DISCUSSION PAPERS

2013
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NUMBER

AUTHORS

TITLE

13.01

Chen, M., Clements, K.W. and

Gao, G.

THREE FACTS ABOUT WORLD METAL PRICES

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EVOLUTION, FERTILITY AND THE AGEING

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Clements, K., Genberg, H.,

Harberger, A., Lothian, J.,
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LARRY SJAASTAD, 1934-2012

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Robitaille, M.C. and Chatterjee, I.

MOTHERS-IN-LAW AND SON PREFERENCE IN INDIA

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Clements, K.W. and Izan, I.H.Y.

REPORT ON THE 25TH PHD CONFERENCE IN

ECONOMICS AND BUSINESS

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Walker, A. and Tyers, R.

QUANTIFYING AUSTRALIAS THREE SPEED BOOM

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Yu, F. and Wu, Y.

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Yu, F. and Wu, Y.

PATENT CITATIONS AND KNOWLEDGE SPILLOVERS:

AN ANALYSIS OF CHINESE PATENTS REGISTER IN
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Chatterjee, I. and Saha, B.

BARGAINING DELEGATION IN MONOPOLY

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Cheong, T.S. and Wu, Y.

GLOBALIZATION AND REGIONAL INEQUALITY IN

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13.11

Cheong, T.S. and Wu, Y.

INEQUALITY AND CRIME RATES IN CHINA

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Robertson, P.E. and Ye, L.

ON THE EXISTENCE OF A MIDDLE INCOME TRAP

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Robertson, P.E.

THE GLOBAL IMPACT OF CHINAS GROWTH

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Hanaki, N., Jacquemet, N.,

Luchini, S., and Zylbersztejn, A.

BOUNDED RATIONALITY AND STRATEGIC

UNCERTAINTY IN A SIMPLE DOMINANCE SOLVABLE
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Okatch, Z., Siddique, A. and

Rammohan, A.

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Clements, K.W. and Gao, G.

A MULTI-MARKET APPROACH TO MEASURING THE

CYCLE

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Chatterjee, I. and Ray, R.

THE ROLE OF INSTITUTIONS IN THE INCIDENCE OF

CRIME AND CORRUPTION

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Fu, D. and Wu, Y.

EXPORT SURVIVAL PATTERN AND DETERMINANTS

OF CHINESE MANUFACTURING FIRMS

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Shi, X., Wu, Y. and Zhao, D.

KNOWLEDGE INTENSIVE BUSINESS SERVICES AND

THEIR IMPACT ON INNOVATION IN CHINA

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Tyers, R., Zhang, Y. and

Cheong, T.S.

CHINAS SAVING AND GLOBAL ECONOMIC

PERFORMANCE

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Collins, J., Baer, B. and Weber, E.J.

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THE FUTURE OF LONG-TERM LNG CONTRACTS

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Tyers, R.

A SIMPLE MODEL TO STUDY GLOBAL

MACROECONOMIC INTERDEPENDENCE

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McLure, M.

REFLECTIONS ON THE QUANTITY THEORY: PIGOU IN

1917 AND PARETO IN 1920-21

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Chen, A. and Groenewold, N.

REGIONAL EFFECTS OF AN EMISSIONS-REDUCTION

POLICY IN CHINA: THE IMPORTANCE OF THE
GOVERNMENT FINANCING METHOD

13.26

Siddique, M.A.B.

TRADE RELATIONS BETWEEN AUSTRALIA AND

THAILAND: 1990 TO 2011

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Li, B. and Zhang, J.

GOVERNMENT DEBT IN AN INTERGENERATIONAL

MODEL OF ECONOMIC GROWTH, ENDOGENOUS
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SEX-SELECTIVE ABORTIONS AND INFANT

MORTALITY IN INDIA: THE ROLE OF PARENTS
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Ezzati, P.

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Das, S., Ghate, C. and

Robertson, P. E.

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28

ECONOMICS DISCUSSION PAPERS

2014
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DEPENDENT ECONOMY MODEL

14.03

Fan, J., Zhao, D., Wu, Y. and Wei, J.

CARBON PRICING AND ELECTRICITY MARKET

REFORMS IN CHINA

14.04

McLure, M.

A.C. PIGOUS MEMBERSHIP OF THE

CHAMBERLAIN-BRADBURY COMMITTEE.
PART I: THE HISTORICAL CONTEXT

14.05

McLure, M.

A.C. PIGOUS MEMBERSHIP OF THE

CHAMBERLAIN-BRADBURY COMMITTEE.
PART II: TRANSITIONAL AND ONGOING ISSUES

14.06

King, J.E. and McLure, M.

HISTORY OF THE CONCEPT OF VALUE

14.07

Williams, A.

A GLOBAL INDEX OF INFORMATION AND

POLITICAL TRANSPARENCY

14.08

Knight, K.

A.C. PIGOUS THE THEORY OF UNEMPLOYMENT

AND ITS CORRIGENDA: THE LETTERS OF
MAURICE ALLEN, ARTHUR L. BOWLEY, RICHARD
KAHN AND DENNIS ROBERTSON

14.09

Cheong, T.S. and Wu, Y.

THE IMPACTS OF STRUCTURAL RANSFORMATION

AND INDUSTRIAL UPGRADING ON REGIONAL
INEQUALITY IN CHINA

14.10

Chowdhury, M.H., Dewan, M.N.A.,

Quaddus, M., Naude, M. and
Siddique, A.

GENDER EQUALITY AND SUSTAINABLE

DEVELOPMENT WITH A FOCUS ON THE COASTAL
FISHING COMMUNITY OF BANGLADESH

14.11

Bon, J.

UWA DISCUSSION PAPERS IN ECONOMICS: THE

FIRST 750

14.12

Finlay, K. and Magnusson, L.M.

BOOTSTRAP METHODS FOR INFERENCE WITH

CLUSTER-SAMPLE IV MODELS

14.13

Chen, A. and Groenewold, N.

THE EFFECTS OF MACROECONOMIC SHOCKS ON

THE DISTRIBUTION OF PROVINCIAL OUTPUT IN
CHINA: ESTIMATES FROM A RESTRICTED VAR
MODEL

14.14

Hartley, P.R. and Medlock III, K.B.

THE VALLEY OF DEATH FOR NEW ENERGY

TECHNOLOGIES

14.15

Hartley, P.R., Medlock III, K.B.,

Temzelides, T. and Zhang, X.

LOCAL EMPLOYMENT IMPACT FROM COMPETING

ENERGY SOURCES: SHALE GAS VERSUS WIND
GENERATION IN TEXAS

14.16

Tyers, R. and Zhang, Y.

SHORT RUN EFFECTS OF THE ECONOMIC REFORM

AGENDA

14.17

Clements, K.W., Si, J. and Simpson, T.

UNDERSTANDING NEW RESOURCE PROJECTS

14.18

Tyers, R.

SERVICE OLIGOPOLIES AND AUSTRALIAS

ECONOMY-WIDE PERFORMANCE

29

ECONOMICS DISCUSSION PAPERS

2014
DP
NUMBER

AUTHORS

TITLE

14.19

Tyers, R. and Zhang, Y.

REAL EXCHANGE RATE DETERMINATION AND

THE CHINA PUZZLE

14.20

Ingram, S.R.

COMMODITY PRICE CHANGES ARE

CONCENTRATED AT THE END OF THE CYCLE

14.21

Cheong, T.S. and Wu, Y.

CHINA'S INDUSTRIAL OUTPUT: A COUNTY-LEVEL

STUDY USING A NEW FRAMEWORK OF
DISTRIBUTION DYNAMICS ANALYSIS

14.22

Siddique, M.A.B., Wibowo, H. and

Wu, Y.

FISCAL DECENTRALISATION AND INEQUALITY IN

INDONESIA: 1999-2008

14.23

Tyers, R.

ASYMMETRY IN BOOM-BUST SHOCKS:

AUSTRALIAN PERFORMANCE WITH OLIGOPOLY

14.24

Arora, V., Tyers, R. and Zhang, Y.

RECONSTRUCTING THE SAVINGS GLUT: THE

GLOBAL IMPLICATIONS OF ASIAN EXCESS
SAVING

14.25

Tyers, R.

INTERNATIONAL EFFECTS OF CHINAS RISE AND

TRANSITION: NEOCLASSICAL AND KEYNESIAN
PERSPECTIVES

14.26

Milton, S. and Siddique, M.A.B.

TRADE CREATION AND DIVERSION UNDER THE

THAILAND-AUSTRALIA FREE TRADE
AGREEMENT (TAFTA)

14.27

Clements, K.W. and Li, L.

VALUING RESOURCE INVESTMENTS

14.28

Tyers, R.

PESSIMISM SHOCKS IN A MODEL OF GLOBAL

MACROECONOMIC INTERDEPENDENCE

14.29

Iqbal, K. and Siddique, M.A.B.

THE IMPACT OF CLIMATE CHANGE ON

AGRICULTURAL PRODUCTIVITY: EVIDENCE
FROM PANEL DATA OF BANGLADESH

14.30

Ezzati, P.

MONETARY POLICY RESPONSES TO FOREIGN

FINANCIAL MARKET SHOCKS: APPLICATION OF A
MODIFIED OPEN-ECONOMY TAYLOR RULE

14.31

Tang, S.H.K. and Leung, C.K.Y.

THE DEEP HISTORICAL ROOTS OF

MACROECONOMIC VOLATILITY

14.32

Arthmar, R. and McLure, M.

PIGOU, DEL VECCHIO AND SRAFFA: THE 1955

INTERNATIONAL ANTONIO FELTRINELLI PRIZE
FOR THE ECONOMIC AND SOCIAL SCIENCES

14.33

McLure, M.

A-HISTORIAL ECONOMIC DYNAMICS: A BOOK

REVIEW

14.34

Clements, K.W. and Gao, G.

THE ROTTERDAM DEMAND MODEL HALF A

CENTURY ON

30

ECONOMICS DISCUSSION PAPERS

2015
DP
NUMBER

AUTHORS

TITLE

15.01

Robertson, P.E. and Robitaille, M.C.

THE GRAVITY OF RESOURCES AND THE

TYRANNY OF DISTANCE

15.02

Tyers, R.

FINANCIAL INTEGRATION AND CHINAS GLOBAL

IMPACT

15.03

Clements, K.W. and Si, J.

MORE ON THE PRICE-RESPONSIVENESS OF FOOD

CONSUMPTION

15.04

Tang, S.H.K.

PARENTS, MIGRANT DOMESTIC WORKERS, AND

CHILDRENS SPEAKING OF A SECOND
LANGUAGE: EVIDENCE FROM HONG KONG

15.05

Tyers, R.

CHINA AND GLOBAL MACROECONOMIC

INTERDEPENDENCE

15.06

Fan, J., Wu, Y., Guo, X., Zhao, D. and

Marinova, D.

REGIONAL DISPARITY OF EMBEDDED CARBON

FOOTPRINT AND ITS SOURCES IN CHINA: A
CONSUMPTION PERSPECTIVE

15.07

Fan, J., Wang, S., Wu, Y., Li, J. and

Zhao, D.

BUFFER EFFECT AND PRICE EFFECT OF A

PERSONAL CARBON TRADING SCHEME

15.08

Neill, K.

WESTERN AUSTRALIAS DOMESTIC GAS

RESERVATION POLICY THE ELEMENTAL
ECONOMICS

15.09

Collins, J., Baer, B. and Weber, E.J.

THE EVOLUTIONARY FOUNDATIONS OF

ECONOMICS

15.10

Siddique, A., Selvanathan, E. A. and

Selvanathan, S.

THE IMPACT OF EXTERNAL DEBT ON ECONOMIC

GROWTH: EMPIRICAL EVIDENCE FROM HIGHLY
INDEBTED POOR COUNTRIES

15.11

Wu, Y.

LOCAL GOVERNMENT DEBT AND ECONOMIC

GROWTH IN CHINA

15.12

Tyers, R. and Bain, I.

THE GLOBAL ECONOMIC IMPLICATIONS OF

FREER SKILLED MIGRATION

15.13

Chen, A. and Groenewold, N.

AN INCREASE IN THE RETIREMENT AGE IN

CHINA: THE REGIONAL ECONOMIC EFFECTS

31