The Causal Relationship Between Foreign Debt and Economic Growth: Evidence from Commonwealth Independent States

Date01 November 2021
AuthorNermin Yasar
DOI10.1177/00157325211018329
Publication Date01 November 2021
SubjectArticles
The Causal Relationship
Between Foreign Debt
and Economic
Growth: Evidence
from Commonwealth
Independent States
Nermin Yasar1
Abstract
This study investigates the relationship between external borrowing and eco-
nomic growth in the Commonwealth Independent States during the period
1995–2018. Autoregressive distributed lag (ARDL) model is employed to
determine the co-integration relationship among the series and then vector
error correction model (VECM) is used to analyse the causality between external
debt and income. The obtained results suggest that there is a negative long-term
unidirectional causal relationship running from external debt to GDP presenting
a strong evidence of existence of debt overhang hypothesis. The possible reasons
for this unidirectional causal relationship can be explained by poor management
of provided financial resources and incomplete governance in economic
transition process along with structural rigidities and immature institutions in
these countries which, in the long term, resulted in insufficient capital charged
to service external debt. The policymakers in these post-Soviet countries should
not use foreign loans to capitalise the deficits in the economies; instead, they
should be more determined in employing these funds in the areas that will create
national value-added production and, thus, future income.
JEL Classification: C10, F34, H63
Keywords
Foreign Debt, Transition Economies, CIS, Panel Unit Root, ARDL, Causality
Article
1 Department of Foreign Trade, Cankaya University, Turkey.
Corresponding author:
Nermin Yasar, Eskisehir Yolu 29. Km., Yukarıyurtcu Mahallesi, Mimar Sinan Caddesi No. 4,
06790, Etimesgut/Ankara, Turkey.
E-mail: nerminyasar@cankaya.edu.tr
Foreign Trade Review
56(4) 415–429, 2021
© 2021 Indian Institute of
Foreign Trade
Reprints and permissions:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325211018329
journals.sagepub.com/home/ftr

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