The role of institutional quality on external debt and sectoral growth nexus: evidence from emerging economies

Abstract

Economic growth and external debt stock have been on a steady increase. But in some countries, output growth does not reflect similar growth patterns with external debt stock, which contradicts theoretical literature. Hence, this research investigates the role of institutional quality on external debt and sectoral growth relationship across 17 countries between 2005 and 2018. The Fully Modified Ordinary Least Squares (FMOLS) technique was used to estimate the longrun relationship after ascertaining the stationarity and cointegration condition of the data series. The findings reported that external debt on average exerts a significant positive effect on the agricultural and industrial sectors, while exerting a negative impact on the service sector. The findings further revealed that institutional quality (government effectiveness, voice of accountability, control of corruption, regulatory quality, rule of law and political stability) has detrimental effects on the agricultural sector. In the service sector, some of the institutional quality variables show positive impacts on the sectoral growth, however, most of them (government effectiveness, voice of accountability, control of corruption and political stability) had detrimental impact on the growth of the sector. In the industrial sector, institutional quality have a more detrimental effect on sectoral output, suggesting that poor institutional quality, as measured by these variables, constrains economic activities and hampers the growth of these sectors. The study recommended institutional reforms that will ensure both effective and transparent use of resources and improved accountability in these sectors.