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The Impact Of Public Debt On Economic Growth
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By Rubo Zhao Rubo Zhao Scilit Preprints.org Google Scholar , Yixiang Tian Yixiang Tian Scilit Preprints.org Google Scholar * , Ao Lei Ao Lei Scilit Preprints.org Google Scholar , Francis Boadu Francis Boadu Scilit Preprints.org Google Scholar and Ze Ren Ze Ren Scilit Preprints.org Google Scholar
Received: 22 April 2019 / Revised: 23 May 2019 / Accepted: 25 May 2019 / Published: 30 May 2019
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By drawing on the concept of sustainable Economic development, this study advances the research on debt sustainability in the economic literature. We examine the relationship between local government debt and regional economic growth in 30 provinces in China. Previous studies have established that the development of economic growth between regions is not independent, and we therefore examine the spatial effect of regional economic growth due to the existence of a spatial spillover or spatial expansion between regions. Using Moran’s scatter plot, a Local Indicator of Spatial Association (LISA) map and a semiparametric spatial model (SE-SDM), our results show the following: (1) the spatial agglomeration effect has a significant influence on regional economic growth; (2) the relationship between local government debt and regional economic growth has non-linear characteristics, rather than having an inverted U-shaped relationship; (3) the semiparametric spatial model more accurately characterizes the non-linear relationship between municipal debt and regional economic growth compared to a basic regression model and the spatial Durbin model; and (4) when the extent of local government debt exceeds a certain level, economic growth will be suppressed by the crowding out of private investment and the reduction of public spending.
Financing plays an important role in economic development. Researchers such as Levine [1] and Ziolo et al. [2] have seen financing as the lifeblood of economic development and sustainability. Levine [1] claims that countries with more developed financial systems experience faster economic growth. Indeed, financing involving debt (e.g., bank loans, bond issuance, etc.) or equity (e.g., self-raised funds, equity financing, etc.) can be both beneficial to and inhibit economic development [3]. Over the past few decades, several local governments from both advanced and emerging economies have resorted to debt financing in one form or another to enhance economic development. In the literature, research on municipal debt has increasingly shown the important role and strategic position of such debt in promoting sustainable regional economic growth [1, 2]. Scholars and economic practitioners have argued that local government debt can initiate economic growth with infrastructure spending [4, 5, 6]. Interestingly, a 2013 report by the Chinese National Audit Office indicated that in China, 88.77% of the total debt of local governments was invested in basic infrastructure projects such as municipal facilities [7]. Application of municipal debt within the debt ceiling can promote the construction of urban and rural infrastructure and stimulate the regional economy [8]. Démurger’s study of the influence of transport infrastructure and telecommunication facilities on the growth performance of provinces in China shows a positive significant relationship between the variables [9]. According to Shi and Huang [10], the development of local government infrastructure has a positive impact on economic growth. They believe that when the general level of infrastructure increases by 1%, the gross domestic product (GDP) of a province can increase by about 0.25%. The proper development of infrastructure actually stimulates the efficiency of regional research and development (R&D), which in turn reduces the operating costs of companies, thus accelerating sustainable regional economic development [11]. Conversely, municipal debt that is above the regional debt ceiling can inhibit economic development [12, 13]. Research has shown that municipal debt that exceeds a certain threshold displaces private investment, increases the debt burden and slows down economic growth [14]. For example, in China, local government debt has grown rapidly over the past decade, and documents suggest that this has greatly threatened the country’s economic and financial security [11].
The literature indicates that the relationship between local government debt and economic growth is a popular topic, having generated much debate among researchers, economic practitioners and policy makers [15, 16]. Some authors have used various theoretical and empirical models to analyze the relationship between municipal debt and economic growth in different regions in different time periods [17, 18]. However, the results continue to create controversy in the macroeconomic literature. For example, empirical studies have indicated that municipal debt has no significant impact on regional economic growth in the short or long term [12, 19, 20, 21, 22, 23]. On the other hand, other researchers [24, 25, 26, 27, 28, 29, 30, 31] have established that there exists an inverted U-shaped non-linear relationship between municipal debt and regional economic growth. This paradoxical contrast necessitates further investigation to determine which empirical model can establish the correlation between these two variables. The authors of this study are of the opinion that choosing an appropriate empirical model will have an effect on the overall reliability of the empirical results. A review of previous empirical studies reveals that researchers have used linear models or introduced the quadratic term for local government debt variables to construct non-linear models. It is obvious that there is currently no clear theoretical evidence suggesting a monotonic-linear or inverted U-shaped relationship between municipal debt and regional economic growth [32].
Nevertheless, some authors [33, 34, 35] have tried to combine a semiparametric approach with the usual parametric econometric models to accommodate non-linearities in the relationship between municipal debt and regional economic growth. In these models, researchers [33, 34, 35] mostly use an unknown function to depict the non-linear relationship and do not make strict assumptions about relationship forms, which overcomes possible tuning errors and the so-called “curse of dimensionality”. Indeed, there are defects associated with both parametric and non-parametric models. The former is linked to possible setting errors, while the latter is subject to the curse of dimensionality. To overcome these limitations, researchers have advocated the use of a semiparametric model to depict a nonlinear relationship [ 35 , 36 ]. In recent years, there has been a rapid increase in the use of semiparametric models in many fields. Researchers [37, 38] have attested to the remarkable effect of such models, especially in economics and finance. The unique advantage of semiparametric models compared to parametric models is that they can visually show non-linear relationships between variables.
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In addition, researchers have used spatial econometric models to examine regional economic issues across the globe [39]. Their findings have revealed a significant spatial correlation between the economic performance of adjacent regions [ 40 , 41 ]. This suggests that increased cooperation and competition between local authorities can strengthen the spatial relationship between regional economies. The failure to consider the spatial effect between regional economies certainly has a significant impact on the accuracy of empirical results [ 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 , 50 , 51 , 52 ].
In this study, we therefore build a spatial weight matrix for 30 provinces in China using the concepts of geographic distance and economic distance. First, we use Moran’s index and Moran’s scatter plot to analyze the general and local spatial agglomeration characteristics of regional economic growth. Second, we construct a semiparametric spatial model (SE-SDM) to analyze the relationship between municipal debt and regional economic growth. Specifically, this study intends to address the following research questions: RQ1: What kind of spatial effects exist in regional economic growth? RQ2: What characterizes the non-linear relationship between municipal debt and regional economic growth? RQ3: What is the optimal level of municipal debt to promote regional economic growth?
This study contributes to the literature in two ways: First, previous studies [26, 27, 28, 29, 30, 31] which analyze the relationship between municipal debt and regional debt.
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