Economic and Political Drivers of External Debt: Insights from Developing and Transitioning Economies in Asia

Abstract

This study explores the economic and political determinants of external debt in 37 Asian developing and transition economies (ADTEs) over the period 1997-2020. Controlling for endogeneity and dynamic panel bias using fixed effects (LSDV), bias corrected LSDVC and Generalised Method of Moments (GMM) estimators, we find that economic growth, national savings, trade balance and strong institutional quality significantly reduce external debt. However, debt levels are exacerbated by investment, government consumption, inflation, interest rate, exchange rate, debt servicing and international reserves. The study underscores the importance of institutional quality in the pattern of borrowing, providing useful insights for policy-makers for sustainable debt management and long-term economic development.