The Role of Public Debt in Economic Growth: An Empirical Analysis
Evidence for Western Balkans and European Countries
MUSTAFA BASHKIM1, FEJZA EJUP2
1Faculty of Management,
University of Applied Science,
70000 Ferizaj,
REPUBLIC OF KOSOVO
2Faculty of Mathematics and Natural Sciences,
University of Prishtina “Hasan Prishtina”,
rr. EqremÇabej, 10000 Prishtina,
REPUBLIC OF KOSOVO
Abstract: - Public debt was often considered as a supplementary source of public finances. In six Western
Balkan states, a fixed regression model was employed to gauge the effect of public debt on economic growing
using panel data. Findings demonstrate that public debt significantly affects economic growth. It was found too
that direct foreign investments have a substantial influence into the economic growth. As an option for
financing, state governments use external and internal public debt, which is often part of the debate
approximately how much public debt should be used. Use of public debt varies from country to country and
depends on economic growth and budgetary factors and economic and social demands. Reviewing the
literature, it can be observed impact of public debt on overall economy and its growth and this was too used by
states as an opportunity for economic growth. This is also reflected in the case of our study where we analyzed
the data for EU member countries and Great Britain compared to the Western Balkans countries. During the
research it is observed influence of public debt in economic growth on these countries and as such many states
have exceeded the limits of the use of public debt based on legal frameworks, with the sole purpose of
financing public demands and influence of economic growth. Public debt in this paper identifies the affiliation
with economic growth through the specification of linear and non-linear time series models using the panel
model for the years 2012-2021 for 35 countries in total. Also, the regression analysis shows us a support and
correlation among public debt versus economic growth of countries part of this study. This is observed in
developed countries, which have a higher potential and possibility of financing economic activity through
public debt, while the Western Balkans countries are often challenged with the possibilities of financing from
public debt. As variables we have GDP, Foreign Direct Investments and Inflation.
Key-Words: - Public debt, GDP, FDI, inflation, economic growth
Received: April 7, 2023. Revised: September 30, 2023. Accepted: October 9, 2023. Published: October 20, 2023.
1 Introduction
Quality of services in the hotel industry is an
important factor for successful business Public debt
as a term is used very often and heard very often in
everyday life. Public debt is among the “pushers”
of economic growth and as the increase of the
welfare of citizens through the financing of public
projects. Public debt in any country today is a
determining and economic driving factor, but on
the other hand, each country must know how and
how much to introduce public debt, domestically or
abroad? States use different methods to assess the
sustainability of public debt by strengthening fiscal
discipline as the main pillar of economic policies in
the country. This paper tries to find the connection
among public debt and GDP, by using independent
and dependent variables, and also uses Foreign
Direct Investment (FDI), inflation and growth rates
as supporting variables. Given that we will examine
the role of public debt in the Western Balkans
countries and the European Union region countries
this is a very significant and vital topic to evaluate.
This study alsAo tries to discover the liaison
amongst public debt and economic growth,
together by analyzing independent & dependent
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variables, by using also a supporting variable.
Investigation on the dynamics of public debt in the
country (Kosovo) related to other states in this
region and the European Union countries, and also
threshold level of public debt in relation to GDP
and economic growth among thirty-five countries,
saix of The Western Balkans (WB) and 29 from the
European Union for a period of time 2012-2021
will be analyzed in this paper.
Different academics identify the threshold
level, inflation foreign direct investment, and
public debt as the main determinants of economic
development, [1]. Finds in their study that
“developing economies issue 23% of their local
currency (LC) public debt linked to inflation.
Issuance of LC debt is countercyclical, increases in
periods of nominal exchange rate depreciation and
replaces foreign currency (FC) and non-indexed
local currency debt”, [2]. In their study finds that:
“a higher level of public debt rises the inflation
reaction whereas a weaker tax response to debt
decreases the inflation answer to shock”. Some
studies have shown that public debts, regardless of
whether they are internal or external debts, up to a
certain level, positively stimulate economic growth.
2 Literature and Development of
Hypotheses
2.1 Literature Review
Each country aims to meet the minimum living
standards of its citizens in terms of investment,
employment that stimulates economic growth,
where governments must take measures that result
in increased spending. This is one of the main
reasons governments borrow to cover these
expenses. The need to cover expenses also arises
when it is not possible to collect public revenues in
time in relation to public expenses. This presents
another problem called the budget deficit, which is
even more of a motive for the government to go
into public loaning/debt, [3]. Describes public debt
as: “Debt is the sum of money hired/borrowed by
one party to another and the obligation to repay it.
The total debt in the country consists of private and
public debts, but each country must take in
consideration the average influence of the increase
in GDP per capita of the government debt”. There
is an ongoing discussion regarding the influence of
percentage growth, [4]. Claim that: “a ratio of
public debt on GDP above 90% is associated with a
lower rate of economic growth, [6]. High amounts
of governmental/ public debt, especially countries
with lower domestic income, will affect their
economic growth and for countries with high debts,
if the debt is doubled, the growth per capita will
decrease by 1%, [5]. On the arguments about the
threshold, [6]. Created by analysis of 18 OECD
counties from 2010 to 2018, argues that: “the
threshold level at 85% of debt to GDP, which if
surpassed, leads to a decrease of the upcoming
economic growth and that after the threshold, a
10% increase in the government debt-to-GDP ratio
will reduce annual economic growth by 0.17 –
0.18% over the next 5-year period”.
Reinhart and Rogoff were corrected by others
regarding the threshold level such as, [7]. Who
disagree with the presence of the 90% threshold in
debt, claiming that there isn’t proper cohesion
beyond the threshold level and this was also
supported by, [8]. Explaining that: “the threshold
level of 90% in a debt versus GDP ratio is higher
than 90% and moves to a new level that goes
around 115% of debt in GDP ratio and states that
above. at that level, public debt can harm economic
growth”, while, [9]. Find that unlike Reinhart and
Rogof , they propose that economic downturns
have a tendency to cause debt growth and not the
other way around . Other authors such as, [10].
Based on the analysis of six countries, found that
the expansion of debt even beyond these borders
could promote economic growth in more or less
countries, although it deters growth uniform at low
levels of debt in same countries. Meanwhile, [11].
In their study, analyzing 71 developing countries,
found that value of border debt at 51.65 %, which
is considerably lower comparing to earlier
literature, and that the debt takes an adverse and by
statistics noteworthy effect on economic growth at
a high amount of public debt, while it has an
irrelevant impact on reduced public debt.
But, there are some authors who give the right
to the analyzes of Reinhart and Rogoff concerning
the threshold level of debt in GDP such as, [12].
Finding almost the same results based on panel data
of 38 countries and showing almost similar level.
threshold at the 90% point in relation to GDP and
that does not harm economic growth. Other authors
such as, [13]. Who analyzed the growth countries
of the Eurozone by considering 5 year annual data
of governmental debt overlap so they concluded
that: “after the 90 – 100% debt/GDP ratio there is a
negative effect of public debt on economic
growth”. The threshold level in level of 90% was
also supported by, [14], and, [15]. In the study of,
[16], showed that an rise in governmental debt is
adversely linked to economic growth being in long
run or short run terms, which are also in line with
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the findings of, [17]. The derived first-hand results
advise that on the short run effect of debt on growth
of GDP, is positively related and stylistically very
important, while reductions to round zero and fails
significance further than the ratios of public debt
into GDP of about 67 percent. It also corresponds
to the case of our study where we have short-term
impacts on one of our empirical measurements.
Based to the IMF (IMF, 2022) Global Debt
Database: “overall borrowing increased by 28
percentage points to 256 percent of GDP in 2020.
Government borrowing accounted for about half of
this increase, with the remainder from non-
financial corporations and households. Public debt
now represents roughly 40 percent of the global
total—the most in almost six decades”.
2.2 Development of Hypotheses
Public debt treated in numerous studies have
revealed the linkage amongst public/governmental
debt and the economic grow, but influenced by a
large number of internal and external factors that
give effects depending the rise of the level of debt
on the country's economy. This was also observed
in the case of our study during the analysis of
public debt in the economies of 35 EU countries
and 6 countries of the Western Balkans. This study
also shows the connection between Foreign Direct
Investments (FDI), inflation and economic growth
rates by comparing the debt level Western Balkans
countries versus countries of the EU. A
considerable number of studies have treated public
debt from short-term and long-term impacts, but
what is observed is that the main reasons for the
use of debt were the financing of high public
deficits. Our paper aims on analyzing also the level
of public debt used by the EU member countries
and the developing economies of countries in the
Western Balkan. The level of public debt differs
from country to country, but its connection with
GDP growth is evident, in some countries even
though we have an increase in public debt, GDP
growth has remained constant and this has
managed to cover the budget deficit. The
continuous growth of the public debt as
uncontrolled can increase the level of risk in the
economy and can show problems in the economic
structure, [18]. In the group of countries that we
have for study, we have taken as a basis the factors
of debt growth that affect economic growth.
Analyzing the data has enabled us to identify the
ratio of public debt into the economic growth,
relying correspondingly on the controlling
variables of inflation, Foreign Direct Investments
and their relationship with GDP growth. For this
study, data were used for 35 countries, 29 of which
are from the European Union and 6 from the
Western Balkans for a 10 years period (2012-
2021), resultant to a total of 350 observations for a
country. The data is obtained from different sources
such as: World Bank, official state statistics,
Eurostat and the IMF. In recent decades,
globalization has increased opportunities for easier
access to debt financing through financial markets.
Therefore, the states increasingly use the
opportunities to secure financing in foreign
markets, which also results in an increase in public
debt, [19]. Governments' tendencies to increase
public debt mainly aim to finance the economy
through financial instruments and economic
growth. It often happens that these goals have
negative effects both on investments and on the
decline of investments, since the increase in debt is
done even without affecting fiscal policies and can
be a financial burden for future generations. What
is observed during our study, the percentage of
participation of public debt on GDP, has nothing to
do with the size of the economy or the development
level that these countries have. Countries with
weaker economies, such as WB countries, have
different level of public debt on GDP. Of the states
that have the lowest percentage, Kosovo’s has the
lowest level of 31.97% to GDP, while the highest is
in Montenegro with 136.09%, which is
characteristic of these states that have the economy
with the lowest level of income per capita, but the
difference in the debt level is very high. While
other countries of WB, such as Albania, Bosnia
Herzegovina, North Macedonia and Serbia have
almost similar level of public debt on GDP with an
average of 69.80%, even in these countries we have
variances in the level of the economy and income
as of per capita but the level of debt is almost the
same. Despite the fact that level of development in
the EU countries differs from the WB countries, the
level of the percentage of debt participation is
similar in relation to their GDP. What is worth
observing is that countries with strong EU
economies have a high level of debt. Estonia has
the lowest public debt level at 12.73% of GDP and
has a largely stable economy. While the highest
public level of debt for years in a row is the in
Greece with 236.87% of GDP for years in a row.
But what is characteristic to point out is the fact
that even countries with powerful economies such
as Italy, Belgium, Portugal, France and in some
years even Great Britain have a level of their public
debt over 120%. The European average of public
debt, for the years analyzed in our study, is at the
average level of 82% of GDP, and if it is taken at
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the level of the Eurozone, on the other side, it is at
the allowed level of public debt, but not for the
economy separately. Characteristic element of this
is that regardless of the level of development,
neither developed or developing countries, both
used public debt as an opportunity to finance
various programs, [20]. Although the effects in
economic growth are observed depending on the
use of public debt and their orientation in public
investment projects, this depends a lot on the level
of debt that the states have. [21], who used a GMM
specification model with annual models, it shows
that as of 1% of rise in public debt in the EU lead
to a reduction on the public investment to 0.03%.
But this depends also on the flow of public debt
and public investments, and as a ritual must also be
supported with interventions in fiscal policies that
are useful for economic promotion and
development, [22]. The data in our study is based
on the OLS Fix model, which gives an empirical
result where in the set of WB countries, public debt
was at the average allowed level of 22.83 points,
while in EU countries the average level was 4.259
points of public debt but has exceeded the
maximum limit allowed in some countries such as
Greece.
Having above mentioned in consideration, we
raised:
Hypothesis 1. Increase of the public debt is very
much associated to economic growth
Based on the collected data on public debt and
its relationship with other factors, we have
analyzed and made empirical measurements for the
correlation of Foreign Direct Investments and
inflation with public debt for the states and time
period in the case of our study. From this
reflection, it can be seen that FDI has an increase
and decrease depending on the state and this does
not mean that it has an impact or connection with
the increase/decrease on the public debt level, [23].
Some research findings show that foreign direct
investment is an important determinant of the
stability of public finances, and it also shows the
confidence of investors in the economic and
financial stability of the country, [24]. Therefore,
even access to international funds is easier when
FDI is taken as a basis, where it is a relevant
indicator for economic stability, this complements
even more that access to public debt is also the
financial stability of a country's economy. If we
look at some researches that highlights the role of
FDI we could notice positive relation to economic
growth in host countries by the critical level of the
public debt, [25]. FDI increases economic
reliability and could contribute to real economic
growth, and as a result could impact the public debt
portfolio, depending on the increase of the level of
flow of foreign capital in the economy of a country.
But the rate of inflation, even though it was not at a
high level during this time period of study, it is not
observed to be related to economic growth, and it
has not had relevance in determining the public
debt level. Effects of increase of inflation rate on
the proportion/ratio of public debt to GDP in 35
developing and developed economies provide
relevant results that have also been examined by
researchers like, [26]. Who suggest that the hit of 1
percentage of the points on the inflation rate could
decrease the ratio of debt on GDP to around 0.7
percentage of the point in average in all countries.
The empirical results of, [27]. Also show that
inflation rates are linked to public debt, where any
percentage increase in the inflation rate reduces the
ratio of debt to GDP. The rate of inflation can also
affect the rise in interest rates, and if there is a rise
in the rate of inflation, of course the governments
of the states will change the interest rates and this
will also affect those countries that enter public
debt. Therefore, the maturity of the debt shows a
significant part in the rate of inflation, and the
longer the term is held, it lowers the interest rate
and vice versa. The maturing of the public debt and
the movements of the inflation rates have often
been in favor of the economies of different
countries, and once it has also influenced the
economic growth, but up to a certain degree, [28].
Consequently, it is essential that government and
central bank precisely assess the influence of the
increase in public debt in relation to GDP and the
rate of inflation, in directive to raise the control
level and management of public/governmental
debt. As it is known, inflation brakes down
economic motion and directs lowering GDP
growth, so state governments must act carefully by
managing public money well, so that the level of
debt reaches the highest levels of the rate of return,
[29].
The level of debt of the countries of the
Western Balkans is on a scale from the lowest that
Kosovo has on average 34.48% in relation to GDP
to the highest level that Montenegro has on average
at 112.91 %, while other WB states have an
average debt level of 68% in relation to GDP. What
is characteristic of this study is that if it is
compared with the EU countries that have a higher
economic development, these countries on average
have 82.11% of the debt level in relation to GDP.
What can be singled out is the very high rate of the
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state of Greece, which reached the highest possible
level of 236.87% in 2020.
Having above mentioned, we developed the
following hypothesis:
Hypothesis 2. Foreign investment directly affects
economic growth in a significant way
3 Research Methodology
3.1 Sampling and Data
Starting from the relatively high level of use of
public debt, particularly in some countries with the
highest economic development of the EU member
states, we could say that regardless of the studies
that have been done so far, there is still room for
analytical and empirical studies that cover this
field.
The methodology used in our study will
contribute to the analysis of public debt data and
the influences or connections to the growth on the
Domestic Product. In our study, the six countries of
the Western Balkans (WB6) and the 29 countries of
the European Union (EU 29) were taken for
investigation, for a period of 10 years (2012-2021).
The data are based on the basic data of the World
Bank, of the International Monetary Fund also the
statistical agencies of the countries part of this
study, as the main sources and other relevant data
that reflect the public debt.
Data on external debt are collected through the
Debtors Reporting System (DRS) of the World
Bank. Long-term debt data is compiled using the
country's public borrowing ratio. They are collected
from the Quarterly Database of External Debt
Statistics (QEDS), from the World Bank and the
IMF, and from creditors through the Bank's
reporting systems.
Our study covers the two hypotheses, which
have been tested when analyzing the reflection of
the public debt into the economic growth on both:
Western Balkans countries and European Union
countries.
Data used for this study are based on public
debt, its flow over the years, as well as an analysis
of FDI data and the inflation rate. Their relevance
to economic growth and the direct and indirect
impacts they have on public debt. In accordance
with the literature, public debt is also treated with
the connection of monetary and fiscal policies that
are mutually dependent on the rate of inflation and
the economic and financial stability that are related
to Direct Foreign Investments, [30], [31], [32].
We first collected summary data with high
relevance for the 10-year period, analyzing the flow
of public debt of the EU and WB countries,
comparing this group of countries. We have
collected and tested with a sufficient number of 60-
time series for the Western Balkans countries and
280-time series for the countries of Europe Union.
We found also that the level of public debt has a
linear flow in different countries and differs from
state to state, and we found empirical evidence on
the impacts on economic growth and its relevance.
We also tested the connection of FDI and Inflation
with the increase/rise in public debt and VAT as a
controlling variable.Model testing
This section shows the testing model.
Considering our data, we used the Ordinary Least
Square (OLS) estimator. Therefore, the initial
mathematical model consist takes form as below:
β = (XTX)−1XTy (1)
Next, since our data consists of n observations
[yi, xi], then each observation includes a scalar
response yi and a vector of predictors (or
regressors) xi. In a linear regression model the
response variable is a linear function of the
regressors. In other words, our testing model used
to test hypothesis is comprehended on main test
variables (e.g., age, gender and origin) as show
below:
cus_satis i= b0+b1agei+b2genderi+b3origini+ei
(2)
where, yi stands as depend variable for
customer satisfaction (cus_satis i) for client i, while
b1, b2 and b3 represents the coefficients. Running
regression models, we find that not all of the
independence variables have the same magnitude
on the depend variable. Specially, age, gender and
origin have not any great impact on customer
satisfaction, however they are found to have
modest impact on depend variable but not as
expected.
In summary, in all cases clients are satisfied
with services offered by hotels, but compare to
domestic, the foreigners are responded to be more
satisfied with services provided by hotels. While
age was not found to be impactful to client’s
satisfaction, next the gender provides mixed results
in terms of male versus female.
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3.2 Measurement of Variables
Based on the public debt data, inflation and foreign
direct investment, a correlation with GDP is
observed.
The Gross Domestic Product realized for the
period 2012-2021 was taken as dependent variable
while public debt, foreign direct investment and
inflation are independent variables while VAT is
controlling variable, and these is supported by
many authors when comparing these variables in
their studies, [9]. Similarly, the level of FDI in an
economy has been treated and evaluated as positive
indicator on economic performing and the welfare
of the state's economy for the possibilities of using
public debt, [33]. We found also that moderate
inflation affected the usage of public debt on the
growth of the GDP of countries that are part of this
study.
3.3 The Model Used
During this study we compared several types of
regression estimation models but we used OLS, as
the fixed model. The results obtained from this
model enable the use of changing data for
comparison between different periods for different
years and their impact on the country economy.
Application of the fixed model OLS econometric
model enables us to control the variables that in
reality are very difficult to measure with simple
methods and methods. For our study, the
measurement of the influence of public debt, direct
foreign investments and inflation on GDP growth
and as a controlling variable VAT during the period
2012-2021 for the economies of 35 European
countries is valid. All this in order that the data
obtained from the qualitative research tend to be
subjective, so the findings will be generalized, well
administered and with the real choice at the level of
more than 95% reliability, therefore the equation
model will be used for regression analysis testing in
this study is as follows:
Yit (GDP growth) = b0 + b1PDit + b3FDIit + b4
Infit + b5VAT + eit
(3)
y – Gross domestic product (GDP),
b 0 - Regression coefficient i = 1,2,3...
Pd – Public Debt,
FDI – Foreign direct investment,
VAT - Value Added Tax
– Time period 2012 -2021,
INF-inflation
ei – Error term.
Through the used OLS model, variables have
been identified based on multiple regression for the
results that will be obtained according to
econometric calculations, [34]. In the first case, we
have the measurement of public debt with an
impact on GDP growth, [35]. In the second case we
have FDI with an impact on GDP growth, [36],
while the third case as a variable we control VAT
in GDP growth, [37]. Data collection was done
annually during the study period. A similar data
collection method is possible and has been
implemented in the authors' studies and scientific
work, [38]: All independent variables show their
participation in the Gross Domestic Product in
percentage.
Regression analysis with moderator variables
are regression analysis which involve moderating
variables in creating the relationship model.
Variable moderator performs as a variable which
could support or deteriorate the connection between
the dependent and independent variable.
4 Results and Findings
4.1 Descriptive Statistics
Table 1 displays the descriptive statistics of the
variable examined for this study which are
presented on an annual basis. For the countries of
the Western Balkans for the period 2012-2021, it is
observed that the average GDP was 23.27 points
and in minimum values 22.42 and in maximum
values 24.87 which is not sufficient for sustainable
development. While the average public debt was
23.27 points and in minimum values 21.24 and in
maximum values 24.40 which is within the allowed
level with an increasing trend. FDI on average was
20.15 points and in minimum values 18.83 and in
maximum values 22.18 which represents the size of
the conditions for FDI. Inflation for this period on
average was 1.54 points and in minimum values -
1.58 and in maximum values 7.69 which represents
low values and no indications of decline in
purchasing power which is a good possibility of
constant economic growth. VAT for this period on
average was 21.05 points and in minimum values
20.12 and in maximum values 22.45, which
represents a relatively high participation.
The standard deviation values have expressed
the variation of the data with high probability. The
low values expressed in Table 1, with units of Std .
Dev 0.69, 0.86 and 0.57 meaning that data points
were gathered very closely to the same rate/value
(mean). Though the high values expressed in units
of Std . Dev . 1.71 and 1.74 shows us that the data
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are positioned in a bigger group of values and have
enabled the result to be so for BP countries.
Table 1. Descr. stat. for WB Countries
Variable
Obs
Mean
Min
Max
id
60
3.52
1.00
6.00
MNE
60
23.27
22.42
24.87
pd
60
22.83
21.24
24.40
FDI
60
20.15
18.83
22.18
inflation
60
1.54
-1.58
7.69
TV
Listings
60
21.05
20.12
22.45
country1
60
3.50
1.00
6.00
Table 2 present descriptive statistics of
variables examined for our study which are
presented in annual basis. For the countries of the
European Union and for the period 2012-2021, it
can be observed that the average GDP was 26.13
points and the minimum values were 22.97 and the
maximum values were 29.07, which indicates a
stable development. While the public Debt in
relation to GDP was on average 4.259702 points
and at minimum values 2.543668 and at
maximum values 5.47 which is within the allowed
level. FDI on average was 26.1382 points and in
minimum values 22.97057 and in maximum values
29.07 which represents the improvement of
conditions for FDI . The average inflation for this
period was 0.15931 point and in minimum values -
4.79074 and in maximum values 1.73 which
represents low values and no indications of decline
in purchasing power which is like a good
possibility of constant economic growth. VAT in
relation to GDP for this period on average was
2.615665 points and in minimum values 1.824316
and in maximum values 3.17 which represents a
relatively high participation.
The standard deviation values have expressed
the variation of the data with high probability. The
low values expressed in Table 2, with units of Std .
Dev 0.57 (SD), 0.88 and 0.26 meaning the data
points were gathered near to the identic value
(mean). Though the high values expressed in units
of Std . Dev . 1.53 tells us that the data is located in
a larger set of values and has enabled the result to
be so for BP countries.
Table 2. Descr. Stat. for EU Countries
Variable
Obs
Mean
SD
Min
Max
ID
280
14.5
8.09
1
28
GDP
280
26.14
1.53
22.97
29.07
Pd GDP
280
4.26
0.58
2.54
5.47
FDI
280
26.14
1.53
22.97
29.07
Inflation
280
0.16
0.89
-4.79
1.73
VAT_GDP
280
2.62
0.27
1.82
3.17
COUNTRY
280
14.5
8.09
1
28
4.2 Model Testing
However, before proceeding to the interpretation of
the results, some diagnostic tests related to the
testing of the model are presented, namely the
application of variables. Meeting the required
econometric /statistical assumptions when fitting an
econometric panel regression model. We have
performed the necessary diagnostic tests related to
Correlation matrix and multicollinearity.
Multicollinearity is directly related to the
correlation between the independent variables and
thus we present the correlation matrix with the
dependent variables.
4.3 Multicollinearity Test
Table 3 shows the correlations between the
variables used by what we have presented. The
variable of 1.00 that goes from the top left to the
bottom right is the key diagonal, showing that
individually variable is constantly correlated with
itself. As provided by Table 3 there is no presence
of multicollinearity
Table 3. Correlation Matrix
Variables
1
2
3
4
5
GDP
1
PD/GDP
0
1
FDI
1
0.49
1
inflation
0
-
0.179
-
0.036
1
VAT_GDP
-1
-
0.237
-
0.591
0.047
1
Table 4 show the results of variance Inflation
Factor (VIF), which enables to test the statistical
data that we used through the multiple regression
model that measured the values of a specified
dependent variable grounded on the values of two
(2) or more independent variables. Indeed, VIF
show that values are under parameters (i.e., under
10). Table 4 show that mean VIF is 1.47, which are
much lower values that we cannot say without the
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DOI: 10.37394/23207.2023.20.203
Mustafa Bashkim, Fejza Ejup
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presence of multicollinearity.
Table 4. Multicollinearity
Variable
VIF
1/VIF
FDI
1,930
0.517
VAT_GDP
1,550
0.645
bpGDP
1,370
0.728
Inflation
1,040
0.962
Mean VIF
1,470
There is no reason why it is below 10, in our
case it is 1.47, the sum decreased with the absence
of multicollinearity. Conclusion and findings
5 Conclusions
Results of the regression analyses have been
presented in the Table 5. According to the
regression analysis, the data on the influence of the
variables that have correlation and influence on
GDP and those that have not shown any correlation
are presented.
Data are presented in two models: in Model 1
which shows, for WB 6 countries that: Public debt
has an influence on economic growth with
0.260***, whereas FDI has not shown a connection
with economic growth and is presented with
0.0971, inflation also does not show any impact
with GDP growth in terms of 0.00114. As for VAT,
the data show a high correlation of 0.669*** and it
affects the growth of GDP. But what is observed in
model 2 of EU27, the data show us a negative
result or no effect of public debt, inflation, VAT in
relation to GDP. While FDI has a correlation of
1,000*** with the impact or growth of GDP.
Results obtained from the regression analyze
are the data on the impact that variables have given
on the GDP. This stylistically measured model
gives us the results that are observed for the high
level of correlation in GDP growth of the variables
presented and with negative results in EU27
countries.
Table 5. Regression analysis where GDP growth is
depending variables
VARIABLES
WB6
EU27
Model (1)
Model (2)
PD
0.260***
(0.0728)
FDI
0.0971
(0.0593)
Inflation
0.00114
(0.0192)
VAT
0.669***
(0.0976)
PDGDP
0.000
(0.000)
FDI
1.000***
(0.000)
Inflation
0.000
(0.000)
VAT_GDP
0.000
(0.000)
Constant
1.291
-0.000
(1.203)
(0.000)
Observations
60
280
R-squared
0.889
1.00
Fixed effects
Yes
Yes
This paper examined the influence of the public
debt on GDP growth based on the data from 35
countries. The treatment of this topic has been done
for different countries and in different periods, but
this paper will be supplemented with appropriate
information for the case studies for the countries
we have taken as a basis. Individual studies and
social studies are increasingly helping to find and
offer alternatives, supporting them in analysis and
measurable and empirical results. All this on the
assumption of the connection among public debt,
FDI and inflation in GDP growth.
The influencing factors and the approach that
should be used towards public debt, together with
the risks that accompany them, play an important
role in the economic growth and development of
countries. Conclusions of the research are based on
the purpose and objectives of the paper, that
through the selected research model the research
objectives have been achieved and the basic
hypotheses of the paper have been proven.
The application of the Econometric Model
OLS Fix multiple linear regression model that has
been implemented through the STATA program,
has enabled us to measure the variables. For our
case study, the measurement of the impact on
public debt, FDI and inflation for the years 2012-
2021 and the impact on GDP was valid.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2023.20.203
Mustafa Bashkim, Fejza Ejup
E-ISSN: 2224-2899
2372
Volume 20, 2023
Through the testing of variables, it has been
proven that the rise in public debt over the years
has a direct influence on GDP growth, indirect
impact and other statistical forms. The independent
variables in the case of this research were: FDI,
inflation and VAT, while dependent variable was
GDP. Through the use of the standard deviation
and the median and the linear regression formula,
the results have been obtained that some
independent variables have affected GDP growth
uniformly and some in a fair way through real
growth, [39]. Through the correlation matrix, it has
been tried to find the influence of public debt as an
independent variable, in GDP of the Western
Balkan countries. This can also be argued by many
economic theories that support the argument that
the increase/rise of the public debt affects the
increase/rise in GDP, [40]. Testing of the
Hypothesis of this paper, as the correct one, has
been tested through the model by testing the impact
of the Y independent variable by years, built on
linear regression, to perceive the relation with the
X quantitative variable and their effect on GDP.
Results have shown that the independent variables
of public debt have influenced GDP growth for the
WB 6 countries, with a high impact and it is
positive but not in EU25 countries, [41]. These
obtained results are also consistent with the results
of several different authors and researchers who
have researched similar fields of study.
By the OLS model and the use of STATA p,
hypotheses H1 has been tested through independent
variables: public debt, FDI and inflation on the one
hand and dependent variable GDP. According to
this, the independent variables public debt and
VAT have influenced the growth of GDP and it is
positive, while the other variables are negative for
WB 6 countries, while the EU 25 countries come
out as incorrect since they do not give any effect.
Using the OLS model and the STATA
program, H2 was also verified
According to the obtained data, we have
different results in Model 1 for WB6 countries, the
tested variables FDI and Inflation do not give effect
or impact on economic growth. But in model 2 for
the EU25 countries, we have a difference where
FDI has an effect on economic growth, while
inflation does not show any correlation.
Also, this hypothesis is fulfilled even more by
the data presented in this study. Using the impacts
of independent variables Y according to years,
based on linear regression, to observe through
measurements with quantitative variables X and
their impact on GDP, where it has been proven that
the growth of FDI has a direct impact on the
growth of GDP in EU25 countries. Even in this
study, as with any study, there are some limitations
regarding the treatment of this issue. In addition to
the general limitations of research based on
primary and secondary data, a particular limitation
of this study is related to the measurement of
variables due to the time series and general data on
which the paper is based. As noted in the study,
public debt has not been sufficiently addressed in
BP for long periods of time. During the review of
the literature and the collection of data, it is clear
that it is worth studying the effects of public debt,
FDI and inflation on GDP.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
Conceptualization — Bashkim Mustafa (B. M)
and Ejup Fejza (E. F); Methodology — B.M and
E.F.; Formal Analysis — B.M and E.F.;
Investigation — B.M.; Data Curation — B.M
and E.F.; Writing — Original Draft — E.F.;
Writing — Review & Editing — B.M and E.F.
Sources of Funding for Research Presented in
a Scientific Article or Scientific Article Itself
No funding was received for conducting this
study.
Conflict of Interest
The authors have no conflict of interest to
declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/dee
d.en_US
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2023.20.203
Mustafa Bashkim, Fejza Ejup
E-ISSN: 2224-2899
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Volume 20, 2023