JURNAL TATA KELOLA DAN
AKUNTABILITAS KEUANGAN NEGARA
p-ISSN 2460-3937 e-ISSN 2549-452X Jurnal Tata Kelola dan Akuntabilitas Keuangan Negara.
Volume 11 Number 2, 2025: 259-275 Public debt and economic growth: Does governance quality matter? Penny Septina*.
Vid Adrison Faculty of Economics and Business.
Universitas Indonesia.
West Java.
Indonesia
ABSTRACT
Rising public debt has become a central policy concern as governments increasingly rely on borrowing to finance development and recovery programs.
Yet the impact of debt on growth remains debated, depending on how effectively countries manage and allocate borrowed resources.
This study examines the relationship between public debt and economic growth, with governance quality as a moderating Anchored in an extended neoclassical framework, public debt is treated as a financing tool whose effect depends on governance quality and fiscal allocation.
Using panel data from 188 countries for 1996Ae 2023, the analysis applies fixed-effects and instrumental-variable estimations based on non-overlapping five- and ten-year averages to capture medium- also long-term dynamics while addressing endogeneity.
The results show that debt reduces growth when governance is excluded.
however, the effect becomes positive and significant once governance interactions are includedAiespecially in the five-year model with lagged debt as an instrument.
By contrast, the three-way interaction among debt, governance, and public capital is insignificant in the medium term, suggesting that investment effects may require longer horizons or stronger institutional alignment.
Overall, the findings highlight that sound governance and efficient fiscal allocation are prerequisites for transforming public debt from a fiscal burden into a driver of sustainable economic growth.
KEYWORDS:
Economic growth.
fixed effect-instrumental variable.
governance quality.
public debt.
public capital HOW TO CITE:
Septina.
, & Adrison.
Public debt and economic growth: Does governance quality matter?.
Jurnal Tata Kelola dan Akuntabilitas Keuangan Negara, 11.
, 259-275.
https://doi.
org/10.
28986/jtaken.
*Corresponding authorAos Email: pennyseptina@gmail.
ARTICLE HISTORY:
Received : 9 July 2025 Accepted : 29 August 2025 Revised : 22 August 2025 Online Available : 10 December 2025 Published Copyright A 2025.
This is an open-access article under a CC BY-SA license.
https://jurnal.
id/TAKEN 18 December 2025 Jurnal Tata Kelola dan Akuntabilitas Keuangan Negara.
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INTRODUCTION
Governments frequently finance budget deficits through public debt to sustain priority expenditures such as infrastructure, education, healthcare, economic stimulus, and subsidies.
These measures are intended to stimulate economic activity and counter cyclical downturns.
However, when revenue growth does not keep pace, rising debt increases the debt-to-Gross Domestic Product (GDP) and debt service ratios, thereby elevating fiscal vulnerability.
In 2023, the World Bank reported that low- and middle-income countries allocated 3.
7% of their total revenue to debt service, including 1.
1% for interest alone, the highest burden in two decades (World Bank, 2.
Persistent deficits also shift the tax burden forward, requiring future generations to bear the cost of current consumption.
From a Keynesian perspective, public debt can spur short-run growth by enabling tax reductions and higher government spending, thereby increasing disposable income, wealth, and Under conditions of wage and price rigidity, such expansionary fiscal policy raises output and employment during recessions (Mankiw, 2.
Conventional theory, however, holds that sustained debt accumulation harms long-run growth by raising interest rates and crowding out private investment.
Higher debt elevates risk premiums and borrowing costs, diverting resources from consumption and capital formation (Reinhart et al.
, 2.
Even where high debt ratios do not immediately trigger interest rate increases (Sun, 2.
, persistent debt still generates welfare costs and fiscal vulnerabilities (Blanchard, 2019.
Rogoff, 2.
Empirical evidence echoes these views.
Excessive public debt reduces governmentsAo ability to fund productive sectors, increases borrowing costs, and crowds out private investment (Eberhardt & Presbitero, 2.
Over time, the resulting decline in capital accumulation and productivity heightens fiscal distress and threatens sustainability (Woo & Kumar, 2.
Still, public debt can support growth when managed well.
For example, emerging markets tend to benefit when debt ratios remain below thresholdsAiapproximately 60% of GDP in the postpandemic period (Jusaj et al.
, 2.
Debt-financed spending can also accelerate structural transformation when allocated to productive sectors (Casares, 2.
or deployed countercyclically during downturns (Abiad et al.
, 2.
These benefits, however, rely heavily on governance quality and institutional capacity (Tarek & Ahmed, 2.
Institutions, therefore, occupy a central role in shaping fiscal performance.
At the macro level, institutions drive long-term growth by shaping incentives, resource allocation, and fiscal effectiveness (Acemoglu et al.
, 2.
Stronger institutions are linked to higher growth, less volatility, and better fiscal management (Jungo, 2.
Governance captures the exercise of authority in government, encompassing political accountability, regulatory capacity, the rule of law, and corruption control (Kaufmann & Kraay, 2.
Yet, global governance remains weak:
in 2023, all Worldwide Governance Indicator (WGI) dimensions averaged negative or near-zero values, indicating persistent institutional fragility across effectiveness, stability, and Studies have further linked weak governance to rising debt ratios.
Short political time horizons often lead to fiscal choices that favor immediate gains while shifting burdens to future administrations (Alesina & Tabellini, 1.
Poor institutional quality also fosters inefficiency, rent-seeking, and resource misallocation, worsening debt-to-GDP ratios (Acemoglu et al.
Recent evidence from Sub-Saharan Africa shows that weak governance magnifies the negative consequences of debt, raising vulnerability to debt overhang (Oppong et al.
, 2.
Governance also shapes how debt affects economic growth.
Strong governance improves Public debt and economic growth: Does .
Septina & Adrison debt management, particularly through effective capital spending (Barro, 1990.
Gymez-Puig et , 2.
Trust in government enhances tax compliance and the productivity of debt-financed investment, reinforcing growth (Musa et al.
, 2.
Conversely, weak governance often turns debt into a drag on the economy: poor service quality reduces compliance, increases fiscal deficits, and triggers additional borrowing that crowds out investment and dampens growth.
Based on this reasoning, the conceptual framework in Figure 1 is developed.
Figure 1.
Conceptual Framework The framework reflects an extended neoclassical perspective in which public debt influences growth through two mechanisms.
First, debt directly affects growth by shaping macroeconomic stability and fiscal space, thereby influencing aggregate growth.
Second, its effect increases when directed to public capital formation, as infrastructure and productive investment expand long-term economic capacity.
Governance quality moderates both mechanisms by improving fiscal discipline, reducing inefficiencies, and ensuring that borrowed funds are invested in projects that yield sustainable returns.
Thus, the growth effect of public debt depends on institutional capacity to convert borrowing into productive outcomes.
Building on this framework, three hypotheses are proposed.
First, public debt is expected to negatively affect growth in the baseline model.
Second, the effect should become positive when governance quality improves, reflecting institutionsAo role in enhancing debt productivity.
Third, the growth impact of debt is expected to strengthen when allocated to public capital, particularly under strong governance.
This study contributes in two ways.
First, it employs a non-overlapping panel aggregation strategy, yielding more stable and policy-relevant estimates than models that use annual or full-period data.
Second, it examines how debt is transmitted through public capital formation.
A three-way interaction between debt, governance quality, and public capital evaluates whether debt more strongly promotes growth when directed to productive sectors under effective institutions.
Together, these contributions emphasize that the growth effect of debt depends not only on the quantity of borrowing but also on institutional quality and fiscal allocation.
Empirical analysis is conducted using panel data from 188 countries for 1996Ae2023.
reflect the intergenerational nature of debt and reduce short-term volatility, the data are aggregated into non-overlapping five- and ten-year periods (Abbas et al.
, 2021.
Mankiw, 2.
All six WGI dimensions are included simultaneously to avoid omitted variable bias and reflect institutional diversity.
The study uses instrumental variable estimation to address endogeneity concerns (Panizza & Presbitero, 2.
, evaluate marginal effects across governance levels, and explore differential effects across income groups.
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RESEARCH METHOD
Theoretical Framework and Empirical Model This study builds on the neoclassical growth model in which output (Y) depends on the accumulation of capital (K) and labor (L).
While the traditional SolowAeSwan model predicts absolute convergence toward a common steady state, empirical evidence supports conditional convergence, where countries converge to distinct steady states shaped by their structural characteristics, including institutions and fiscal policy.
Public debt influences the steady state by affecting productivity and investment efficiency (Assoum & Alinsato, 2.
Budget deficits financed through debt provide additional resources that can serve as capital, especially when allocated to productive activities or investment (Barro.
Cross-country income disparities can also be attributed to governance, which enhances productivity through improved public investment efficiency, effective budget management, and efficient resource allocation.
The Solow growth model is extended as follows:
ycU = ya yce.
aya , y.
where KD includes both private and public capital.
Public capital functions as a production factor partly financed through debt, while G represents governance quality, which proportionally enhances the productivity of capital and labor.
To complement this formulation.
Figure 2 illustrates an extended neoclassical framework that integrates governance quality and debt allocation, highlighting how institutional factors also fiscal choices jointly influence longrun economic outcomes.
Figure 2.
Extended Neoclassical Steady-State Framework Figure 2 graphs on the left, presents the long-run equilibrium in an extended neoclassical model that incorporates governance quality.
A country with a governance level ya1 achieves output yc1 = ya1 yce.
and investment ycyc1 at steady state .
co1O , yc1 ).
When governance improves to ya2 , both output and investment increase .
c2 = ya2 yce.
, ycyc2 ), leading to a higher steady state ( yco2O , yc2 ).
This shows that stronger governance improves efficiency and long-term growth Figure 2 on the right, illustrates how greater debt allocation to public capital can temporarily raise output ycyaA by increasing capital stock ycoyaA .
Without governance improvements, however, the effect is unsustainable and equilibrium returns to its initial state .
coyaO , ycya ), since investment remains below the breakeven rate, yuyco.
This pattern often occurs in debt-financed infrastructure projects lacking institutional readiness .
, digitalization programs in public services that fail to gain adoptio.
Building on this foundation, and consistent with the view that fiscal outcomes depend on Public debt and economic growth: Does .
Septina & Adrison institutional settings, the empirical model introduces two-way interactions between debt and governance indicators also a three-way interaction with public capital.
This design tests whether stronger institutions and more efficient fiscal allocation enhance the growth effect of debt, aligning with the view that governance moderates fiscal effectiveness (Abiad et al.
, 2.
incorporating these interactions, the model captures not only the debtAos direct effect but also its conditional impact under differing governance quality.
Grounded in this theory, the empirical model incorporates debt, governance, and their interaction terms.
It is specified as:
ycIycn,yc = yu0 ycycn,0 yu1 yccyceycaycycn,yc yu2 yciycuycycn,yc yu3 .
ccyceycaycycn,yc ycu yciycuycycycn,yc ) yu4 .
ccyceycaycycn,yc ycu yciycuycycycn,yc ycu yceycayceycyycycaycn,yc ) yuyueycn,yc yuycn yuUyc yuAycn,yc .
Here, i denotes the country and t the period.
The variable k represents the aggregation window, which is either five or ten years.
The study applies non-overlapping averages for all variables to provide stable long-term estimates, reduce volatility from cycles and shocks, also limit autocorrelation (Woo & Kumar, 2.
Accordingly, ycnyc is the average growth rate over the period yco , while yaycuyci ycycn,yc is the logarithm of initial GDP per capita at the start of the k-year period.
A negative coefficient.
indicates conditional convergence.
Variable debti,t measures public debt, while yciycuycycn,yc represents governance quality indicators.
All governance measures are included simultaneously to capture institutional dimensions.
yueycn,yc is the set of controls .
apital and The parameter yuycn is a country-specific effect, yuUyc a time effect, and yuAycn,yc the error term.
To assess how governance and capital allocation shape debtAos effect, the marginal effect of debt on growth is derived as Formula 3.
yuiycIycn,yc yuiyccyceycaycycn,yc = yu1 yu3 .
yciycuycycn,yc yu4 .
yciycuycycn,yc .
yceycayceycyycycaycn,yc .
This expression shows that debt contributes positively to growth when governance quality is sufficient and borrowing is directed toward public capital formation.
Weak governance or unproductive allocation produces neutral or negative effects.
Data and Variable Construction The study covers 188 countries from 1996Ae2023, grouped by World Bank income classifications: 64 high-income, 52 upper-middle, 49 lower-middle, and 23 low-income economies .
ee Appendix .
Data are sourced from the World BankAos World Development Indicators (WDI) and Worldwide Governance Indicators (WGI), also from the IMF for debt In this study, economic growth serves as the dependent variable, measured as the average annual growth rate of real GDP per capita in constant local currency.
The primary independent variable, public debt, is proxied by the ratio of general government gross debt to GDP, which captures the total stock of liabilities, including loans, securities, and other debt instruments (Mbaye et al.
, 2.
Governance quality is represented by all six dimensions of the Worldwide Governance IndicatorsAivoice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, also control of corruption.
These indicators range from Ae2.
5 to 2.
5, where zero reflects the global average.
Including all six dimensions simultaneously minimizes omitted variable bias and reflects the multifaceted nature of institutional quality (Kaufmann & Kraay, 2.
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The model also incorporates variables representing capital allocation.
Total gross fixed capital formation, expressed as a percentage of GDP, is used as a proxy for overall capital accumulation and is lagged one period to reflect investment adjustments.
To distinguish between public and private investment, public capital is calculated as the difference between total capital formation and private capital formation, both expressed as a share of GDP.
Additional controls account for core growth determinants.
The logarithm of initial GDP per capita captures convergence dynamics, where countries with lower starting income are expected to grow faster in the medium and long run.
Labor input is represented by the labor force participation rate.
Country- and time-fixed effects are included to control for unobserved heterogeneity and global shocks that may influence growth independently of fiscal and institutional factors.
Appendix 2 provides definitions and sources for all variables.
Estimation Approach The study develops four model specifications across two horizons: five-year averages .
edium ter.
and ten-year averages .
ong ter.
Each model builds sequentially, showing how governance alters the debtAegrowth relationship, consistent with theory.
The first specification estimates the baseline link between debt and growth, while the second specification incorporates governance as a moderator.
Both are estimated using a fixed-effects (FE) estimator, which controls for unobserved, time-invariant country characteristics that may bias the resultsAian important concern in macroeconomic panels where structural attributes differ substantially across economies.
Diagnostic tests confirm this choice.
The BreuschAePagan Lagrange Multiplier test shows individual effects are present, making pooled OLS inappropriate.
The Hausman test strongly supports FE, with NA = 64.
< 0.
for the five-year horizon and NA = 41.
< 0.
for the ten-year horizon, confirming correlation between country effects and regressors.
check if Specification 2 addresses omitted variable bias.
Wald tests are run between Specifications 1 and 2.
Results confirm that adding governance and higher-order interactions improves model fit, with NA = 3.
= 0.
for the five-year horizon and NA = 3.
< 0.
for the ten-year horizon.
A third specification addresses the potential endogeneity of public debt, which may arise if governance affects both growth and debt accumulation.
An instrumental variables approach is adopted within a Fixed EffectsAeInstrumental Variables (FEAeIV) framework, estimated using two-stage least squares .
SLS).
This retains the within transformation and provides consistent estimates under country heterogeneity (Wooldridge, 2016.
Panizza & Presbitero, 2.
The one-period lag of debt serves as an instrument for current debt.
Past debt influences borrowing decisions but does not directly affect growth or governance within the period.
Indirect channels, such as effects through public capital formation, are controlled for in the model, preserving the exclusion restriction both theoretically and empirically.
The fourth and most comprehensive specification incorporates a three-way interaction among debt, governance, also public capital.
Using the same IV approach with lagged debt as the instrument, this specification distinguishes public from private capital formation to assess whether debt-driven growth operates specifically through public investment.
To explore heterogeneity in fiscal capacity and institutional quality, the analysis also estimates all models separately for income-group subsamples.
This allows the results to show whether the debtAe governanceAegrowth nexus differs across high-, middle-, and low-income countries, where debt burdens, investment efficiency, also institutional maturity vary substantially.
Public debt and economic growth: Does .
Septina & Adrison
RESULT AND DISCUSSION
Descriptive Statistics Before presenting regression results, the descriptive statistics of the key variables are The average growth rate across the sample is 2.
18%, with a large standard deviation and an extreme minimum value of Ae55.
This wide dispersion illustrates substantial heterogeneity in economic performance across countries and over time.
Public debt averages 22% of GDP, ranging from 0% to 600%, indicating a sharp variation in fiscal conditions and potential sustainability risks.
On average, public capital formation is 5.
67% of GDP, while private capital formation is roughly three times larger at 17.
22%, confirming the dominance of private investment in total capital.
All governance indicators exhibit negative average values, suggesting that most countries face institutional weaknesses.
The broad spread in these indicators also reflects heterogeneity in state capacity, regulatory quality, and corruption control.
Such variation reinforces the importance of governance in moderating the debtAegrowth relationship.
Detailed descriptive statistics are presented in Table 1.
Table 1.
Descriptive Statistics Mean Median Std.
Dev Minimum Maximum yc Variable Ae55.
Observation 5,226 yccyceycayc
4,896
ycyca Ae0.
Ae2.
4,694
ycyyc Ae0.
Ae3.
4,654
yciyce Ae0.
Ae0.
Ae2.
4,615
ycyc Ae0.
Ae0.
Ae2.
4,618
ycyco Ae0.
Ae0.
Ae2.
4,694
ycayca Ae0.
Ae0.
Ae1.
4,633
yceycayce Ae2.
4,356
ycoyce 4,724 yceycayce_ycyycyca Ae6.
61,96
1,772
yceycayce_ycyycycnyc 1,772 ycoycu_yc0 _yceycnycu5 1,118 ycoycu_yc0 _yceycnycu10 All variables are based on annual data from 1996 to 2023, apart from log GDP per capita .
, which is calculated from the initial years of each 5- and 10-year period.
Main Regression Results Table 2 summarizes the estimation results across model specifications and horizons.
the baseline model (Specification .
, public debt is negatively associated with growth in both 5and 10-year approaches.
In the five-year model, a 1% rise in the debt-to-GDP ratio corresponds to an average annual growth decline of 0.
In the 10-year model, the decline is 0.
0352 %.
These results align with the crowding-out hypothesis, in which non-productive debt financing suppresses private investment and lowers long-term growth potential (Reinhart et al.
, 2.
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statistically insignificant in both horizons, suggesting the negative effect in the baseline model stems largely from omitted governance quality.
In this specification, interaction terms between debt and governanceAiparticularly government effectivenessAibecome positive and statistically significant in most models.
These results indicate that stronger bureaucratic capacity and more effective public service delivery amplify the productivity of borrowing, consistent with findings from Abbas et al.
Table 2.
Summary of Estimation Results Variable Debt lag_fcf Five-Year Horizon Spec.
Spec.
Spec.
Ae0.
019***
Ae0.
Ten-Year Horizon Spec.
Spec.
Ae0.
035***
Ae0.
026***
Ae0.
lag_fcf_pub Spec.
debt_va debt_ge .
0528***
0506***
1009***
0666***
debt_ge_lag_fcfpub Ae0.
Observations No.
Countries Note: Standard errors are reported in parentheses.
*** indicates significance at the 1% level, ** at the 5% level, and * at the 10% level.
All estimations include time fixed effects.
The R2 values for specifications using the IV approach are not reported, as they are not relevant in this context.
The complete list of control variables and their estimated coefficients is provided in Appendix 3.
To address endogeneity bias in debt estimation.
Specification 3 applies an IV approach, using lagged debt as the instrument.
This is justified because past debt strongly predicts current borrowing while exerting no direct effect on contemporaneous growth beyond its influence through current debt.
The first-stage regression confirms instrument strength in the five-year model: lagged debt significantly predicts current debt .
oefficient = 0.
392, standard error = 038, p < 0.
, with an F-statistic of 27.
As expected in macro panels, instrument strength is weaker for ten-year aggregates due to the reduced number of observations, so IV estimation is not applied for the longer horizon.
After applying IVAeFE, the coefficient on debt becomes positive and statistically significant at the 10% level.
This reversal suggests that, once endogeneity and governance quality are taken into account, debt can actually support growth rather than hinder it.
Moreover, interaction terms between debt and both government effectiveness and voice also accountability remain positive and statistically significant, reinforcing the argument that institutional capacity converts borrowed resources into productive outcomes.
Public debt and economic growth: Does .
Septina & Adrison Specification 4 explores the contribution channel of public debt through public capital and the moderating role of governance.
Estimated only for the five-year horizon, it uses lagged debt as an instrument, which passes the relevance and exclusion tests .
oefficient = 0.
286, standard error = 0.
058, p < 0.
F-statistic = 22.
Due to limited observations, this IV approach is not applied to the ten-year data.
Results show the three-way interaction remains insignificant even after correcting for endogeneity, suggesting the insignificance reflects short-term limits rather than estimation bias.
However, the coefficient on lag_fcf_pub becomes significant, indicating that public capitalAos contribution to growth is clearer once debt endogeneity is addressed.
This supports the view that debt-financed growth effects emerge when resources are directed to productive investment and efficient capital formation (Hilton, 2.
Marginal Effect Analysis To illustrate the conditional nature of the debtAegrowth relationship, marginal effects are calculated at different levels of government effectiveness.
Five benchmarks are evaluated: the minimum, first quartile (Q.
, median, third quartile (Q.
, and maximum values of government The results show that debtAos marginal effect is negative at very low and low levels of institutional quality.
In weak bureaucratic environments, additional borrowing is likely channeled toward unproductive or inefficient spending, yielding little or no return.
As government effectiveness improves, the negative marginal effect diminishes and eventually turns positive.
At the highest observed level of effectiveness, debt makes a significant contribution to growth.
These results confirm that governance conditions shape whether borrowing becomes a fiscal burden or a catalyst for development, consistent with earlier findings by Abbas et al.
Marginal estimates are presented in Table 3.
Table 3.
Marginal Effects of Public Debt at Various Levels of Government Effectiveness Government Level Specification 3 Specification 4 Very Low (Mi.
Ae0.
Ae0.
Low (Q.
Ae0.
Ae0.
Median (Q.
Ae0.
High (Q.
Very High (Ma.
To explore institutional heterogeneity, results are estimated separately for higher-income .
igh and upper-middl.
also lower-income .
ow and lower-middl.
economies using the IVAe FE specification with five-year data.
The result is shown in Table 4.
Results show the interaction between debt and regulatory quality .
is negative also significant for higher-income This suggests that stronger regulatory frameworks heighten market reactions to debt, triggering crowding-out effects that offset growth gains.
In contrast, the interaction is not significant for lower-income economies, where institutional and financial market responses to debt tend to be weaker due to less developed financial systems also regulatory enforcement.
Other interactions with governance indicators are positive but insignificant in both groups, although magnitudes are smaller than in the full-sample estimates.
These findings confirm that the governanceAedebtAegrowth nexus is context-dependent.
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Table 4.
Summary of Estimation Results: Further Analysis by Income Group Variables yccyceycayc_ycyca yccyceycayc_ycyyc yccyceycayc_yciyce ycuycu_yccyceycayc_ycyc yccyceycayc_ycyco yccyceycayc_ycayca Specification 3 Higher Income Lower Income .
Ae0.
Ae0.
Ae0.
Note: Standard errors are reported in parentheses.
*** indicates significance at the 1% level, ** at the 5% level, and * at the 10% level.
Overall, the results demonstrate that the growth consequences of public debt are not In baseline estimates, debt is negatively associated with growth, consistent with concerns about fiscal crowding-out.
However, once governance and endogeneity are accounted for, the relationship becomes neutral or even positive.
This reinforces the theoretical expectation that institutions determine whether borrowed resources are used productively (Acemoglu et al.
, 2005.
Barro, 1.
The marginal effect analysis highlights that debt contributes to growth only in environments with strong bureaucratic capacity.
Similarly, public capital becomes a meaningful channel of debt effectiveness only after addressing endogeneity, underscoring the importance of fiscal efficiency.
Finally, sub-sample analysis reveals that institutional maturity and financial depth influence the balance between growth-enhancing and growth-constraining effects of debt.
Taken together, the findings suggest that the key policy question is not whether countries should borrow, but whether they possess the institutional capability to manage and allocate debt Countries with stronger governance structures appear more capable of converting debt into productive capital, while countries with weak governance remain vulnerable to overhang and instability.
This study has several limitations.
The use of non-overlapping five- and ten-year averages improves long-term stability but reduces the number of observations, especially for IV estimation in the ten-year horizon where lagged debt becomes a weak instrument.
The analysis also relies on broad measures of public debt and public capital that do not distinguish between productive also non-productive spending.
In addition, structural shocks, such as financial crises or commodity price swings, may affect debt dynamics differently across countries but are not explicitly modelled.
These limitations highlight the need for future research using sectorspecific public investment data, alternative instruments, and richer institutional indicators.
Public debt and economic growth: Does .
Septina & Adrison
CONCLUSION
The findings reveal that the impact of public debt on growth is conditional on governance quality and allocation.
In the baseline, debt has a negative effect on growth, but once governance and endogeneity are taken into account, debt can have a positive effect on growth.
Interactions with governanceAiparticularly with government effectiveness, also voice and accountabilityAi are significant, and marginal effect analysis confirms that debt productivity improves as institutional quality rises.
Although public capitalAos contribution strengthens after correcting for endogeneity, the three-way interaction between debt, governance, and capital remains insignificant in the medium term, implying this channel may require a longer horizon or stronger institutional alignment.
The results underscore governance reform as a prerequisite for productive debt Governments must strengthen bureaucratic capacity and transparency to ensure borrowing supports long-term investment.
Enhancing effectiveness through better project planning, stronger coordination, and rigorous monitoring is vital in maximizing growth from debt-financed spending.
Debt management should be embedded in a fiscal framework that emphasizes efficient allocation, forward planning, and safeguards against misuse.
With effective governance, public debt can shift from a fiscal burden to a productive instrument for inclusive and sustainable growth.
REFERENCES