Public Debt, Economic Growth, and Public Sector Management in Developing Countries: Is There a Link?

Kelbesa Megersa, Danny Cassimon

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Abstract

The article investigates whether differences in public sector management quality affect the link between public debt and economic growth in developing countries. For this purpose, we primarily use the World Bank's institutional indices of public sector management (PSM). Using PSM thresholds, we split our panel into country clusters and make comparisons. Our linear baseline regressions reveal a significant negative relationship between public debt and growth. The various robustness exercises that we perform also confirm these results. When we dissect our data set into "weak" and "strong" county clusters using public sector management scores, however, we find different results. While public debt still displayed a negative relationship with growth in countries with "weak" public sector management quality, it generally displayed a positive relationship in the latter group. The tests for non-linearity shows evidence of an "inverse-U"-shape relationship between public debt and economic growth. However, we fail to see a similar significant relationship on country clusters that account for PSM quality. Yet, countries with well-managed public sectors demonstrate a higher public debt sustainability threshold.

Original languageEnglish
Pages (from-to)329–346
Number of pages18
JournalPublic Administration and Development
Volume35
Issue number5
Early online date20 Oct 2015
DOIs
Publication statusPublished - 20 Oct 2015

Keywords

  • Developing countries
  • Economic growth
  • Public debt
  • Public sector management

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