Does private share of public external debt support economic growth in developing countries?

Abstract

Over the past years, developing countries have increased their borrowing from international private creditors. So far, however, little is known about the effect of public debt owed to international private creditors (private debt) on economic growth in developing countries. This paper analyzes the effects of private debt and its main components (i.e., commercial loans, and bond finance) on economic growth. Using panel data over 1970–2017 and covering 70 low -and middle-income countries, the paper finds a positive and significant effect of private debt on GDP per capita growth rate. Private debt appears to stimulate economic growth mainly by improving the efficiency of investment rather than its volume. However, there are differential effects: bond finance has a positive effect, while the effect of commercial loans on growth is negative. The paper discusses the policy implications of the main findings.