CAUSALITY BETWEEN PUBLIC DEBT, PUBLIC DEBT SERVICE AND ECONOMIC GROWTH IN AN EMERGING ECONOMY
DOI:
https://doi.org/10.2478/subboec-2020-0001Keywords:
Economic growth, Granger-causality, public debt, public debt service, South Africa, ARDLAbstract
This paper explores the causality between public debt, public debt service and economic growth in South Africa covering the period 1970 – 2017. The study employs the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and the multivariate Granger-causality test. The empirical results indicate that there is unidirectional causality from economic growth to public debt, but only in the short run. However, the study fails to establish any causality between public debt service and economic growth, both in the short run and long run. In line with the empirical evidence, the study concludes that it is economic growth that drives public debt in South Africa, and that the causal relationship between public debt and economic growth is sensitive to the timeframe considered. The paper recommends policymakers in South Africa to consider growth-enhancing policies in the short run, since poor economic performances may lead to high public debt levels.
JEL Classification: H63, O47
References
Abbas A.S.M., Christensen J.E. (2007) The role of domestic debt markets in economic growth: An empirical investigation for low-income countries and emerging markets, IMF Working Paper 07/127, Washington DC, International Monetary Fund
Afxentiou P.C. (1993) GNP growth and foreign indebtedness in middle-income developing countries, International Economic Journal, 7 (3), 81-92
Amoateng K., Amoako-Adu B. (1996) Economic growth, export and external debt causality: The case of African countries, Applied Economics, 28 (1), 21-27
Balcilar M. (2012) The difficult quest for an answer to low growth dilemma in Turkey: The channel of debt and productivity, International Journal of Economic Perspectives, 6 (4), 93-111
Barro R.J. (1979) On the determination of the public debt, Journal of Political Economy, 87 (5), 940-971
Barro R.J. (1990) Government spending in a simple model of endogenous growth, Journal of Political Economy, 98 (5), 103-125
Baum A., Checherita-Westphal C., Rother P. (2013) Debt and growth: New evidence for the Euro Area, Journal of International Money and Finance, 32 (C), 809-821
Chenery H.B., Strout A.M. (1966) Foreign assistance and economic development, American Economic Review, 56 (4), 679-733
Cheung Y.W., Lai K.S. (1993) Finite sample sizes of Johansen's Likelihood Ratio test for cointegration, Oxford Bulletin of Economics and Statistics, 55 (3), 313-328
Clark N. (1994) Manufacturing Apartheid: State Corporations in South Africa. University Press, Yale
DeLong B.J., Summers L.H. (2012) Fiscal policy in a depressed economy, Available online at: http://larrysummers.com/wp-content/uploads/2012/10/2012_spring_BPEA_delongsummers.pdf
Dogan I., Bilgili F. (2014) The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach, Economic Modelling, 39 (C), 213-220
Domar E.D. (1944) The burden of the debt and the national income, American Economic Review, 34 (4), 798-827
Donayre L., Taivan A. (2017) Causality between public debt and real growth in the OECD: A country-by-country analysis, Economic Papers, 36 (2), 156-170
Elbadawi I., Ndulu B., Ndungu N. (1997) Debt overhang and economic growth in sub-Saharan Africa. In, IMF and World Bank Conference on External Financing for Low-income Countries; External Finance for Low-income Countries, 49-76
Elmendorf D.W, Mankiw G.N. (1999) Government debt, In, Handbook of Macroeconomics, Taylor J.B., Woodford M. (eds). Volume 1, Chapter 25, 1615-1669
Engle R.F., Granger C.J. (1987) Cointegration and error-correction representation, estimation and testing, Econometrica, 55 (2), 251-278
Faulkner D., Loewald C. (2008) Policy change and economic growth: A Case study of South Africa, Policy Paper 14, Washington DC, The International Bank for Reconstruction and Development/World Bank
Ferreira C. (2009) Public debt and economic growth: A Granger-causality panel data approach, Instituto Superior de Economia e Gestão, WP24/2009/DE/UECE
Gómez-Puig M., Sosvilla-Rivero S. (2015) The causal relationship between public debt and economic growth in EMU countries, Journal of Policy Modelling, 37 (6), 974-989
Gómez-Puig M., Sosvilla-Rivero S. (2018) Public debt and economic growth: Further evidence for the Euro area, Acta Oeconomica, 68 (2), 209-229
Government of South Africa (GSA) (1994) Reconstruction and development programme, Pretoria, Government Printers
Government of South Africa (GSA) (1996) Growth, employment and redistribution, Pretoria, Government Printers
Government of South Africa (GSA) (2014) Twenty-year review: South Africa: 1994-2014, Pretoria, Government of South Africa
Granger C.W.J. (1969) Investigating causal relations by econometric models and cross-spectral methods, Econometrica, 37 (3), 424-459
Huang Y., Panizza U., Varghese R. (2018) Does public debt crowd out corporate investment? International Evidence, IHEID Working Papers 08-2018, Economics Section, The Graduate Institute of International Studies
International Monetary Fund (IMF) (2005) Post-apartheid South Africa: The first ten-years, Washington DC, International Monetary Fund
Jalles J.T. (2011) The impact of democracy and corruption on the debt-growth relationship in developing countries, Journal of Economic Development, 36 (4), 41-72
Johansen S., Juselius K. (1990) Maximum likelihood estimation and inference on cointegration with applications to the demand for money, Oxford Bulletin of Economics and Statistics, 52 (2), 169-210
Karagol E. (2002) The causality analysis of external debt service and GNP: The case of Turkey, Central Bank Review, 1 (2002), 39-64
Kobayashi K. (2015) Public debt overhang and economic growth, Policy Research Institute, Public Policy Review, 11 (2), 247-276
Kourtellos A., Stengos T., Tan C.M. (2013) The effect of public debt on growth in multiple regimes, Journal of Macroeconomics, 38 (PA), 35-43.
Lin J.L. (2008) Notes on testing causality, Available online at: http://faculty.ndhu.edu.tw/~jlin/files/causality.pdf
Lutkepohl H. (1982) Non-causality due to omitted variables, Journal of Econometrics, 19 (2-3), 367-378
Mankiw N.G. (2000) The savers-spenders theory of fiscal policy, American Economic Review Papers and Proceedings, 90 (2), 120-125
Modigliani F. (1961) Long-run implications of alternative fiscal policies and the burden of the national debt, Economic Journal, 71 (4), 730-755
Moss G., Obery I. (1987) South African Review, Ravan Press, Johannesburg
Muyambiri B., Odhiambo N.M. (2018) Financial development and investment dynamics in Mauritius: A trivariate Granger-causality analysis, Spoudai Journal of Economics and Business, 68 (2-3), 62-73
National Treasury (1995) Budget review, Government Printers, Pretoria, Government of South Africa
National Treasury (1998) Macroeconomic slowdown and prospects for recovery, Pretoria, Government of South Africa
National Treasury (2012) 2011/12 Debt management report, Pretoria, Government of South Africa
National Treasury (2016) 2015/16 Debt management report, Pretoria, Government of South Africa
National Treasury (2018) Budget review, Government Printers, Pretoria, Government of South Africa
Narayan P.K. (2005) The savings and investment nexus from China: Evidence from co-integration tests, Applied Economics, 37 (17), 1979-1990
Odhiambo N.M. (2008) Financial depth, savings and economic growth in Kenya: A dynamic causal linkage, Economic Modelling, 25 (4), 704-713
Odhiambo N.M. (2009) Finance-growth-poverty nexus in South Africa: A dynamic causality linkage, Journal of Socio-Economics, 38 (2), 320-325
Owusu-Nantwi V., Erickson C. (2016) Public debt and economic growth in Ghana, African Development Review, 28 (1), 116-126
Panizza U., Presbitero A.F. (2013) Public debt and economic growth in advanced economies: A survey, Swiss Journal of Economics and Statistics, 149 (2), 175-204
Panizza U., Presbitero, A.F. (2014) Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41 (C), 21-41
Perron P. (1997) Further evidence on breaking trend functions in macroeconomic variables, Journal of Econometrics, 80 (2), 355-385
Pesaran M.H., Shin, Y. (1999) An autoregressive distributed lag modelling approach to cointegration analysis. In, Storm, S. (ed) Econometrics and Economic Theory in the 20th Century: Chapter 11, 1-31
Pesaran M.H., Shin, Y., Smith, R. (2001) Bound testing approaches to the analysis of level relationship, Journal of Applied Econometrics, 16 (3), 174-189
Reinhart C.M., Rogoff, K.S. (2010) Growth in a time of debt, American Economic Review, 100 (2), 573-578
Sachs J.D. (1989) The debt overhang of developing countries. In, Debt, stabilization and development, Calvo, G.A., Findlay R., Kouri P., De Macedo J.B. (eds). Basil Blackwell, Oxford
Saint-Paul G. (1992) Fiscal policy in an endogenous growth model, Quarterly Journal of Economics, 107 (4), 1243-1259
Savvides A. (1992) Investment slowdown in developing countries during the 1980s: Debt overhang or foreign capital inflows, Kyklos, 45 (3), 363-378
Serieux J., Samy Y. (2001) The debt service burden and growth: Evidence from low-income countries, The North-South Institute Working Paper, Ottawa, Canada
Sims C.A. (1972) Money, income, and causality, American Economic Review, 62 (4), 540-552
South African Reserve Bank (SARB) (2006) Deepening capital markets: The case of South Africa, Deepening Financial Sectors in Africa: Experiences and Policy Options Seminar, Johannesburg, South Africa
South African Reserve Bank (SARB) (2016) Annual economic report, Pretoria, South Africa
Statistics South Africa (2017) Quarterly bulletin of statistics (Various issues), Pretoria, South Africa
Teles V.K., Mussolini C.C. (2014) Public debt and the limits of fiscal policy to increase economic growth, European Economic Review, 66 (C), 1-15
Thornton D.L., Batten D.S. (1985) Lag-length selection and tests of Granger-causality between money and income, Journal of Money, Credit, and Banking, 17 (2), 164-178
Wagner A. (1893) Text and Handbook of Political Economy, 3rd edition, Winter C.F. (ed). Leipzig, Germany
Wagner A. (1911) The state in Economic Perspective Hinsicht, In, Gustav F. (ed). Handwörterbuch der Staatswissenschaften, 3rd edition, 743-745, Jena, Germany
Woo J., Kumar, M.S. (2015) Public debt and growth, Economica, 82 (328), 705-739
World Bank (2001) Policies to promote growth and employment in South Africa, World Bank, Southern Africa Department, Available online at: http://www.tips.org.za/files/Policies_to_Promote_Growth_and_Employment_in_South_Africa.pdf
World Bank (2018a) World development indicators, Database, available online at: http://databank.worldbank.org/data/database.aspx
World Bank (2018b) South Africa economic update: Jobs and inequality, South Africa Economic Update No. 11, Washington DC, World Bank, Available online at: http://documents.worldbank.org/curated/en/368961522944196494/South-Africa-Economic-Update-jobs-and-inequality
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2020 Studia Universitatis Babeș-Bolyai Oeconomica
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
