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Scheide, Joachim
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Series/Report no.: 
Kiel Working Paper 427
Two datasets are combined to analyze a few standard implications of the theory of economic growth. Real GDP per capita (RGDP) and the investment share (IS) are taken from Summers, Heston (1988), the ratio of net external assets to GDP (=NAP) are calculated by Sinn (1990). For the period 1970-1985, the data for a sample of 116 countries are analyzed; in addition, the group of industrial countries and highly indebted countries is discussed. One hypothesis suggests that low-income countries catch up in the process of development, and that this is, in part, made possible by the supply of capital from abroad. The data show indeed that poor countries borrow more; however, they do not grow faster than rich countries. Furthermore, those countries which show relatively high growth are not large capital importers. In general, the ratio of net external assets to GDP does not help to predict how fast a country will grow in the future; this also means that high debt is not a burden in the sense that a country will grow less than average. These results hold for the entire sample and for the two subgroups of countries as well. A second analysis includes the investment performance. A high investment share coincides with high economic growth in the large sample, but not for industrial or highly indebted countries. The hypothesis that a low NAP goes along with a high IS is not supported by the data; the opposite is true for industrial and highly indebted countries. It seems that large creditor countries (high NAP) also invest more at home. In general, the analysis does not support the - plausible - ideas of cycles of external debt or the stages hypothesis in the balance of payments which suggest that low-income countries tend to run a current account deficit while investing more and growing faster than other countries; such performances seem to be the exception. The fact that the level of net external assets does not, per se, say anything about the strength of economic growth implies that high debt does not mean that a country has large problems, just as the fact that a country runs a high surplus in the current account is not - by itself - a sign of strength. Therefore, conclusions for economic policy must be based on more than just figures on net external assets or current account balances.
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Working Paper

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