The Effects of External Debts on Economic Growth in Countries with Transition Economies

Abstract

Less developed and developing countries have been facing some restrictions in the way
to achieve the level of economic growth that they plan. Among these, the most serious restriction is the
insufficiency of domestic savings, which are supposed to finance the investments. Besides, in less developed
and developing countries, relatively-low export earnings cause scarcity of foreign exchange. In order to
overcome these restrictions and so achieve a higher rate of growth, these countries often utilize external
loans. However, there is a dispute in the literature over the correlation between foreign debt and economic
growth. Most empirical studies indicate a negative correlation between foreign debt and economic growth,
especially in those countries whose foreign debts are relatively high.
In this study, the relationship between indebtedness and growth rate of transition countries were
analyzed by panel autoregressive distributed lag model (ARDL). Before panel ARDL application,
stationary properties of the variables have been checked with first and second generation unit root test. For
the second generation unit root tests, CADF tests have been used. Also cross section dependency has been
examined by LM tests.