Purpose The question of public debt management for both developed and developing economies has created an enormous amount of political as well as academic interest. The purpose of this paper is to examine how governance affects public debt accumulation in the Arabian Gulf countries during the period between 1996 and 2015 period. The six Worldwide Governance indicators (WGI) (voice and accountability (VAA), political stability and the absence of violence/terrorism, government effectiveness (GEFF), regulatory quality (RQ), rule of law (RL) and control of corruption) were used to measure the quality of governance in these countries. The results show that an increase in every governance indicator except control of corruption leads to a decrease in public debt. Design/methodology/approach The authors estimate a dynamic specification of debt to GDP ratio to study how governance affects public debt accumulation in the Arabian Gulf countries during the 1996–2015 period. The dependent variable in this study is the ratio of public debt to GDP. This study relies on the six measures of institution’s quality given by the WGI. These variables are the VAA, political stability and absence of violence (PSAV)/terrorism, GEFF, RQ, RL and control of corruption. Additional control variables are also incorporated to account for the omitted variables bias. These include the rate of inflation (Al-Marhubi, 2000) and the independent variable lagged one period. The study of the statistical relationship between institutional quality and public debt allows us to quantify the direct effect of governance on public debt, which is the effect that goes through an increase in spending or a reduction in fiscal revenues and not through a decrease in GDP growth. The econometric estimation is carried out using panel fixed effects and GLS random effects. Findings The estimation results confirm the core hypothesis, which considers that the poor governance in a country the higher is the ratio of public debt to GDP, ceteris paribus. Indeed, five of the worldwide Governance Index are negatively correlated with public debt ratio. These indices are GEFF, VAA, PSAV, RQ and RL. Empirical findings for other independent variables are consistent with those of empirical studies in the literature. The coefficient on the independent variable per capita income has the theoretically expected negative sign and it is highly statistically significant, implying that the higher the per capita income in a country, the lower the ratio of public debt. The independent variable government expenditure has the theoretically expected positive sign suggesting that the higher the government expenditure, the higher the ratio of public debt. The education variable has negative but not statistically significant coefficients. The independent variables (inflation, unemployment rate and lag debt ratio) have the expected signs and are highly statistically significant, implying that the higher their value in a country, the higher the ratio of public debt to GDP. Having the theoretically expected effect, the GDP growth variable is negatively correlated with public debt ratio but its coefficients are not statistically significant. Originality/value Although the literature on the damaging effects of poor governance on growth is abundant (Tanzi and Davoodi, 2002; Mauro, 1996; Mo, 2001; Mauro, 1996; Brunetti et al., 1997; Campos et al., 1999; Al-Marhubi, 2000; Depken and Lafountain, 2006; Mauro, 1998), only very recently the relationship between institutional quality and public debt accumulation has been addressed. By reviewing the research on political and institutional determinants of public debt, it was found that there are few studies, which have examined regional differences, and even fewer ones have focused on the countries of the Gulf Cooperation Council (GCC). Therefore, this paper aims to fill the gap by focusing on this economic region. Furthermore, when studying the relationship between the quality of institutions and the accumulation of public debt, existing studies focus only on corruption index and neglect other determinants of governance. Thus, a second contribution of the study is to investigate how institution quality, through the six WGI, affects public debt accumulation. Furthermore, given the recent rise in public debt in GCC countries, an increasingly important question is what policy actions do these countries need to take to ensure that their debt will be sustainable and will not overwhelm their financial system? we can add: while there has been much attention given to the political and economic explanations of public debt accumulation in developing and developed countries on a global scale, scholars so far have not focused on this debate in high income oil producers.
En considérant les économies de la région MENA, l’objet de cette recherche est d’étudier le rôle de l’endettement extérieur dans le financement du développement. Il s’agit en particulier d’étudier la relation entre la dette extérieure et la croissance économique. En fait, les changements politico-économiques que connaît le Sud de la Méditerranée combinésaux urgences dictées par la crise de la dette souveraine en Europe fait qu'il est pertinent de s'interroger sur la réponse à apporter aux défis économiques que doit relever la région MENA dans son ensemble. Au premier rang de ces défis figure la problématique de l’endettement extérieur et son rôle dans le financement de développement économique. L’étude s’est inspirée du modèle de Patillo et al. (2002) et elle utilise la technique de panel. Ainsi et en combinant des ratios d’endettement et les principaux déterminants de la croissance économique, nous avons vérifié l’existe d’un seuil optimal au-delà duquel l’endettement extérieur ralentit la croissance économique (l’existence d’une courbe de Laffer de la dette). Pour la région MENA, la dette extérieure en soit n'est pas un frein au développement lorsqu’elle est contenue dans des limites raisonnables ; au contraire, elle peut aider ces pays à consolider leur croissance. Par ailleurs, uneaugmentation du service de la dette a un impact négatif sur la croissance économique et le canal de transmission de cet impact passe par la qualité de l’investissement et par le fardeau de la dette. Les résultats obtenus montrent égalementqu’il existe une relation non linéaire entre la dette et la croissance, c’est-à-dire qu’il y a un seuil critique qui rendrait la croissance négative. Ce seuil, qui correspond à l’impact marginal de la dette sur la croissance s’établit à un niveau de 60% du PIB.
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