Journal of Economic Policy Researches

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DOI :10.26650/JEPR1429732   IUP :10.26650/JEPR1429732    Full Text (PDF)

Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy

Yağmur Yavuz, Mehmetsıddık Polat

The phenomenon of economic growth being a leading indicator of economic progress in developing countries has long been accepted by economists and policymakers. In contrast to advanced economies, in developing economies, the pursuit of growth based on limited savings and capital accumulation often requires overcoming challenges through the utilisation of external resources, leading countries in this group, including Turkey, to resort to foreign borrowing. The contribution of external debt to economic growth after acquisition varies depending on the countries’ existing domestic resources and the areas in which the borrowed funds are utilised. Similarly, population growth and openness to foreign trade are key economic sources for many developing countries with limited productive resources. In this study, the external debt-economic growth relationship is discussed using economic variables based on the 1973-2021 period for the Turkish economy. Traditional unit root tests, namely the Augmented Dickey-Fuller Unit Root Test and the Phillips-Perron Unit Root Test, are employed in the analysis. This study also investigates the stationarity of variables using the Narayan and Popp (2010) Unit Root Test, which considers structural breaks, and the non-linear Fourier Kruse Unit Root Test developed by Güriş (2019), where structural breaks are modelled using Fourier functions. Furthermore, the long-term relationships between variables is examined using the ARDL Bound Test. The results indicate that external debt and population growth rate have a statistically significant and negative impact on economic growth, whereas the effect of openness to foreign trade on economic growth is statistically significant and positive.

Keywords: External debt, Economic growth, Trade openness, Unit root test, ARDL
JEL Classification : 047 , F34 , C01
DOI :10.26650/JEPR1429732   IUP :10.26650/JEPR1429732    Full Text (PDF)

Dış Borç-Ekonomik Büyüme İlişkisi: Türkiye Ekonomisi İçin Ekonometrik Bir Analiz

Yağmur Yavuz, Mehmetsıddık Polat

Ekonomik büyüme olgusunun gelişmekte olan ülkelerin iktisadi ilerlemelerinde en öncü göstergelerden biri olması hem iktisatçılar hem de politika yapıcılar tarafından uzun süredir kabul gören bir yaklaşımdır. Gelişmiş ülke ekonomilerinin aksine gelişmekte olan ekonomilerde, sınırlı tasarruf ve sermaye birikimine dayalı gerçekleştirilen büyümenin dış kaynakların kullanımıyla aşılma çabası, Türkiye’nin de içinde bulunduğu bu gruptaki ülkeleri dış borç alımına yönlendirir. Dış borcun alındıktan sonra ekonomik büyümeye olan katkısı ise, ülkelerin mevcut iç kaynakları ve alınan borcun hangi alanlarda kullanıldığına göre farklılıklar göstermektedir. Benzer şekilde nüfus büyüme olgusu ile dış ticarete açıklık da, verimli kaynakları sınırlı olan çoğu gelişmekte olan ülke için ekonomik büyümenin ana kaynaklarındandır. Bu çalışmada dış borç-ekonomik büyüme ilişkisi, Türkiye ekonomisi için 1973-2021 dönemi baz alınarak ekonomik değişkenler aracılığıyla ele alınmıştır. Analizde geleneksel birim kök testleri olarak değerlendirilen, Genişletilmiş Dickey-Fuller Birim Kök Testi ve Phillips-Perron Birim Kök Testi kullanılmıştır. Yapısal kırılmayı dikkate alan Narayan ve Popp (2010) Birim Kök Testi ve Güriş (2019) çalışmasında geliştirilen, yapısal kırılmaların Fourier fonksiyonları ile modellendiği doğrusal olmayan Fourier Kruse Birim Kök Testi ile değişkenlerin durağan yapı sergileyip sergilemedikleri sınanmıştır. Çalışmanın devamında, değişkenler arasındaki uzun dönemli ilişki ARDL Sınır Testi ile incelenmiştir. Çalışmadan elde edilen sonuçlar, dış borçların ve nüfus büyüme oranının ekonomik büyümeyi istatistiksel olarak anlamlı ve negatif yönde etkilediğini gösterirken, dış ticarete açıklığın ekonomik büyüme üzerindeki etkisinin istatistiksel olarak anlamlı ve pozitif yönde olduğunu göstermektedir. 

Keywords: Dış borç, Ekonomik büyüme, Ticarete açıklık, Birim kök testi, ARDL
JEL Classification : 047 , F34 , C01

EXTENDED ABSTRACT


The net effect of external debt on economic growth is a heavily debated issue. For developing and less developed economies, external debt can provide the necessary capital for economic growth, but it can lead to negative consequences if misused and becomes unsustainable. The effect of external debt can vary depending on a country’s effective management of its economic policies, debt utilisation, and repayment capacity. Therefore, when evaluating the impact of external debt, it is important to consider a careful balancing and sustainability perspective is important to ensure stable and long-term economic growth. Additionally, a country’s dense population can be viewed as a potential labour force and can contribute to economic growth by increasing economic output. On the other hand, foreign trade can stimulate economic growth because it enhances productivity through greater market access and specialisation.

The relationship between economic growth and external debt is crucial in modern macroeconomics. Keynes’ principle of the necessity of state intervention for developing countries’ growth forms the basis for external debt theory. Keynes emphasised the importance of external debt in achieving economic growth for many developing countries that have problems in accumulating savings.The growth model, which forms the theoretical basis of Keynes and explains which paths countries should follow in their growth processes, was developed by his colleagues Harrod-Domar, who came after him.

External debt growth theory continued with Harrod-Domar’s model, which accepts investments as the primary element of growth. In this model, the importance of external debt in increasing total savings to reach the targeted growth rate is demonstrated. The Harrod-Domar model explains the long-term equilibrium state of aggregate supply and demand at the point at which the investment-saving ratio in a certain period is equalised. According to this model, when countries with insufficient savings accumulate to meet their financing needs through borrowing, investments increase, resulting in high long-term growth rates. Transferring foreign debt to investments generates a significant increase in national income, which also positively impacts domestic savings. Thus,increasing domestic savings will reduce the country’s initial external debt requirements, and sufficient resources will be provided to pay off the existing debt (Mosley et al. 1987).

According to the findings obtained from studies by other economists, such as Krugman and Paper, external debt affects economic growth positively initially but negatively after a certain threshold value. Moreover, according to these economists, external debt reduces domestic savings. Krugman (1988) emphasised debt overhang when this value of a country’s potential future resource transfers is lower than its total debt. As external debt stock gradually increases over the long term, investors reduce their return expectations in anticipation of higher tax rates for debt repayment. 

In this study, we examined how external debt, population growth, and openness to foreign trade affected economic growth in the Turkish economy between 1973 and 2021. The findings indicate that the effects of external debt and population growth rate variables on economic growth are statistically significant and negative. It is observed that the effect of openness on foreign trade is statistically significant and positive. According to the results, a 1% increase in external debt will cause a 1.20% decrease in economic growth. A 1% increase in population growth will cause a 0.51% decrease in economic growth. An increase in openness to foreign trade by 1% has a positive impact on economic growth of 0.50%.

The results from the literature are as follows; Uysal et al. (2009), Çelik and Direkçi (2013), and Biçer (2020) found a negative relationship between external debt and growth. Kutlu and Yurttagüler (2016), Yavuzer (2020), Çeştepe et al. (2021), Arslanhan ve Çondur (2022), Kadiroğlu (2023) found this relationship to be positive. Çöğürcü and Çoban (2011), Çevik and Cural (2013), Ağır (2016) concluded that there is no relationship between external debt and growth.

In this study, we examined the relationship between economic growth and external debt using various unit root tests. The examination of the unit root processes of the series used in our analysis constitutes the first step of our study. In this step, we used the Augmented Dickey Fuller and Phillips-Perron unit root tests, which are considered conventional unit root tests. Because it is known that conventional unit root tests do not take into account structural breaks and thus give non-stationary results for stationary series, we analysed the series using the Narayan and Popp (2010) unit root test, which takes into account structural breaks. In recent years, the use of nonlinear unit root tests in which the structural break is modelled by Fourier functions has increased considerably. This approach makes it possible to examine the unit root process without assuming the form, number, and date of the structural break. For this reason, the series are finally analysed with the Güriş-Fourier Kruse (2019) unit root test. After this step in which the stationarity levels of the series are determined, the second step, the existence of a long-run relationship between the series is analysed with the ARDL approach. ARDL analysis allows other variables to be I(0) or I(1), provided that the order of the dependent variable is I(1). Therefore, the use of this approach provides an advantage when investigating the existence of long-run relationships between series.

Taking these factors into consideration, the main objective of this study is to determine how external debt affects economic growth. In addition to external debt, trade openness and population growth rate are considered effective variables for explaining economic growth. Therefore, we investigate how external debt, trade openness, and population growth influence Turkish economic growth. 


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APA

Yavuz, Y., & Polat, M. (2024). Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy. Journal of Economic Policy Researches, 11(2), 334-354. https://doi.org/10.26650/JEPR1429732


AMA

Yavuz Y, Polat M. Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy. Journal of Economic Policy Researches. 2024;11(2):334-354. https://doi.org/10.26650/JEPR1429732


ABNT

Yavuz, Y.; Polat, M. Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy. Journal of Economic Policy Researches, [Publisher Location], v. 11, n. 2, p. 334-354, 2024.


Chicago: Author-Date Style

Yavuz, Yağmur, and Mehmetsıddık Polat. 2024. “Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy.” Journal of Economic Policy Researches 11, no. 2: 334-354. https://doi.org/10.26650/JEPR1429732


Chicago: Humanities Style

Yavuz, Yağmur, and Mehmetsıddık Polat. “Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy.” Journal of Economic Policy Researches 11, no. 2 (Nov. 2024): 334-354. https://doi.org/10.26650/JEPR1429732


Harvard: Australian Style

Yavuz, Y & Polat, M 2024, 'Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy', Journal of Economic Policy Researches, vol. 11, no. 2, pp. 334-354, viewed 24 Nov. 2024, https://doi.org/10.26650/JEPR1429732


Harvard: Author-Date Style

Yavuz, Y. and Polat, M. (2024) ‘Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy’, Journal of Economic Policy Researches, 11(2), pp. 334-354. https://doi.org/10.26650/JEPR1429732 (24 Nov. 2024).


MLA

Yavuz, Yağmur, and Mehmetsıddık Polat. “Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy.” Journal of Economic Policy Researches, vol. 11, no. 2, 2024, pp. 334-354. [Database Container], https://doi.org/10.26650/JEPR1429732


Vancouver

Yavuz Y, Polat M. Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy. Journal of Economic Policy Researches [Internet]. 24 Nov. 2024 [cited 24 Nov. 2024];11(2):334-354. Available from: https://doi.org/10.26650/JEPR1429732 doi: 10.26650/JEPR1429732


ISNAD

Yavuz, Yağmur - Polat, Mehmetsıddık. “Relationship between External Debt and Economic Growth: An Econometric Analysis of the Turkish Economy”. Journal of Economic Policy Researches 11/2 (Nov. 2024): 334-354. https://doi.org/10.26650/JEPR1429732



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Submitted01.02.2024
Accepted16.07.2024
Published Online13.08.2024

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