Public Debt Trap Conundrum: Exploring the Threshold Level for Optimal Public Debt in Middle East and North African (MENA) Countries
DOI:
https://doi.org/10.55737/qjssh.vi-i.25291Keywords:
Public Debt, Fixed Effect Model , Education, Tax revenue, Income Inequality, Economic Growth, Non-Linear RelationshipAbstract
The vicious circle of public debt i.e. borrowing, debt servicing, and further borrowing for debt servicing has become a major impediment to economic growth and stability for developing countries. The instant study addressed the major knowledge gap regarding a clear understanding of the optimal level of public debt for 19 countries of the Middle East North African (MENA) region. For this purpose, panel data was derived from the World Bank. The participant variables of Central Government debt, debt square, total population, tax revenue, primary school enrolment, Gini coefficient, and per-capita income were analyzed by applying fixed effect regression with Driscoll-Kraay standard errors method. The results exhibited an inverted U-shaped association between per-capita income and public debt. The optimal threshold of public debt after which per-capita income began to decrease was found to be approximately 43,673.17 million (LCU). The income inequality was negative while tax revenue and primary school enrolment were positively and significantly associated with per-capita income, meanwhile, the population was found to be insignificant. It was concluded that the MENA countries must control their public debt and should not go beyond the threshold level in order to increase economic growth. Further, income inequality should be decreased to increase the per-capita income along with an enhanced focus on increasing tax revenue and education level.
References
Adam, C. S., & Bevan, D. L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571-597. https://doi.org/10.1016/j.jpubeco.2004.02.006
Aghion, P., Caroli, E., & García-Peñalosa, C. (1999). Inequality and economic growth: The perspective of the new growth theories. Journal of Economic Literature, 37(4), 1615-1660. https://doi.org/10.1257/jel.37.4.1615
Baum, A., Checherita-Westphal, C., & Rother, P. (2013). Debt and growth: New evidence for the euro area. Journal of International Money and Finance, 32, 809-821. https://doi.org/10.1016/j.jimonfin.2012.07.004
Besley, T., Ilzetzki, E., & Persson, T. (2013). Weak states and steady states: The dynamics of fiscal capacity. American Economic Journal: Macroeconomics, 5(4), 205-235. https://doi.org/10.1257/mac.5.4.205
Bird, R. M., & Zolt, E. M. (2005). Fiscal Policy, Inequality, and Development. World Development, 33(8), 1309–1332.
Blakely, E. J., & Leigh, N. G. (2013). Planning local economic development: Theory and Practice. 5th Edi. Sage, Washington DC.
Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). “The real effects of debt.” BIS Working Papers, no 352, Bank for International Settlement, 2011.s
Checherita-Westphal, C., & Rother, P. (2010). The impact of high and growing government debt on economic growth: an empirical investigation for the euro area (No. 1237). ECB working paper. https://hdl.handle.net/10419/153671
Checherita-Westphal, C., & Rother, P. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 56(7), 1392-1405. https://doi.org/10.1016/j.euroecorev.2012.06.007
Doojav, G., & Baatarkhuu, M. (2024). Public debt and growth in Asian developing economies: Evidence of non-linearity and geographical heterogeneity. Eurasian Economic Review, 14(2), 421-452. https://doi.org/10.1007/s40822-023-00259-3
Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80(4), 549-560. https://doi.org/10.1162/003465398557825
Eberhardt, M., & Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics, 97(1), 45-58. https://doi.org/10.1016/j.jinteco.2015.04.005
Égert, B. (2015). Public debt, economic growth, and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43, 226-238. https://doi.org/10.1016/j.jmacro.2014.11.006
IMF (2024). International Monitoring Fund (IMF) Global Debt Database: Global Debt Monitor, December 2024, Fiscal Affairs Department. https://www.imf.org/external/datamapper/GDD/2024%20Global%20Debt%20Monitor.pdf
Law, S. H., Ng, C. H., Kutan, A. M., & Law, Z. K. (2021). Public debt and economic growth in developing countries: Nonlinearity and threshold analysis. Economic Modelling, 98, 26-40. https://doi.org/10.1016/j.econmod.2021.02.004
Loewald, C., Faulkner, D., & Makrelov, K. (2020). Time consistency and economic growth: A case study of South African macroeconomic policy (No. 842). South African Reserve Bank Working Paper Series WP/20/12.
Ostry, J. D., Berg, A., & Tsangarides, C. G. (2014). Redistribution, Inequality, and Growth. IMF Staff Discussion Note, SDN/14/02. https://wwww.rrojasdatabank.info/growthineq2014.pdf
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. https://doi.org/10.1007/bf03399388
Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41, 21-41. https://doi.org/10.1016/j.jmacro.2014.03.009
Pervaiz, B., Manzoor, M. Q., Gull, R. H., & Umar, H. A. (2024). Empirical analysis of the effectiveness of fiscal and monetary policy tools in stabilizing economy: Evidence from Pakistan. Qlantic Journal of Social Sciences and Humanities, 5(4), 248-257. https://doi.org/10.55737/qjssh.v-iv.24264
Presbitero, A. F. (2012). Total public debt and growth in developing countries. The European Journal of Development Research, 24(4), 606-626. https://doi.org/10.1057/ejdr.2011.62
Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573-578. https://doi.org/10.1257/aer.100.2.573
Rogoff, K. (2022). Emerging market sovereign debt in the aftermath of the pandemic. Journal of Economic Perspectives, 36(4), 147-166. https://doi.org/10.1257/jep.36.4.147
Saungweme, T., & Odhiambo, N. M. (2021). Relative impact of domestic and foreign public debt on economic growth in South Africa. Journal of Applied Social Science, 15(1), 132-150. https://doi.org/10.1177/1936724420980414
Shah, S. S., Dickinson, D., Tao, K., Wang, C., & Zhang, L. (2024). The Heterogenous threshold effects of public debt on economic growth: Empirical evidence from developing countries. Open Economies Review, 1-38. https://doi.org/10.1007/s11079-024-09756-7
Singh, B. P., & Kumar, S. (2024). Public debt and economic growth in India: The new evidence. Millennial Asia, 15(3), 429-446. https://doi.org/10.1177/09763996221136908
Van Zwieten, K., Eidenmueller, H. G., & Sussman, O. (2020). Bail-outs and bail-ins are better than bankruptcy: A comparative assessment of public policy responses to COVID-19 distress. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3669541
World Bank. (2023). Unlocking the Development Potential of Public Debt in Sub-Saharan Africa. Results Briefs.
Downloads
Published
Issue
Section
License
Copyright (c) 2025 Rana Hamza Gull, Dr. Bushra Pervaiz, Dr. Muhammad Qasim Manzoor, Dr. Hafiz Ghulam Mujaddad
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
