Does structural economic vulnerability matter for public indebtedness in developing countries?

Abstract

Purpose – The purpose of this paper is to examine the effect of structural economic vulnerability of developing countries on their public indebtedness. Design/methodology/approach – The authors perform the analysis by the use of fixed effects technique where the standard errors are corrected by the Driscoll-Kraay (1998) method. The panel covers 96 developing countries over the period 1980-2008. Findings – The results suggest evidence of a “U-shaped” relationship between the structural vulnerability and the total public debt in developing countries. More particularly in low-income countries (LICs), the structural vulnerability appears to be a strong determinant of the build-up of the total public debt. Research limitations/implications – It would be interesting to extend the research to small Island developing states. Indeed, the authors do not include this group of countries because of lack of data, especially on the variable “quality of governance” for almost all countries of this group. Accordingly, the research should be extended to such countries as well as these data are available. Practical implications – The implications of the study is that international institutions, including those of the Bretton Woods should take into account the structural vulnerability of developing countries when designing development policies, especially the ones related to debt sustainability in developing countries and particularly LICs. Social implications – The fact of the international institutions to take into account the structural vulnerability in the design of international development policy, especially those related to debt issues will have major implications on the macroeconomic policy design by these developing countries as well as on poverty reduction. Originality/value – The added value of this paper is to use recent data on structural vulnerability to analyse the effect of the latter on public indebtdeness of developing countries.