Assessing the impact of economic performance and political environment on debt intolerance: A case study of highly indebted poor countries

Abstract

The present study is an attempt to examine the role of economic and political factors in assessing the level of debt intolerance in poor countries. To carry out the investigation, a sample of 29 highly indebted poor countries (HIPC) is taken, covering the time period 20002015. Economic performance is measured through GDP, inflation rate and availability of domestic credit to private sector. Political environment is assessed through the voice and accountability index (VA) and political stability and absence of violence (PSAV) index as given by ICRG. Governance (GOV) indicator is used to determine the quality of institutions and is measured through an average of six indictors provided by World Governance Indicators (WGI). Exchange rate, foreign direct investment, and money supply (M2) are included as control variables extracted from World Development Indicators. To examine the relationship, Pooed OLS, fixed effect model along with panel corrected standard error techniques has been employed to account for heteroskedasticity and serial correlation. The results of the study indicate that GDP and domestic credit to private sector has a significant negative impact on debt intolerance. Whereas, inflation rate tends to increases the debt intolerance thereby reducing the debt carrying  capacity. Voice and accountability, political stability and absence of violence, and governance play an important role in improving the debt carrying capacity of a country by reducing its debt intolerance level.  Therefore, policies should be devised towards enhancing the economic performance of a country through productive use of resources.