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Abstract

This research inspects the association between economic growth and external debt in developing countries, by adding institutional quality. Drawing on annual data from 1996 to 2022 on external debt, economic growth, and measures of institutional quality, the analysis employs System GMM estimation techniques. The sample encompasses 86 developing countries, categorized into lower-income (51 countries) and middle-income (35 countries) based on World Bank classifications. The findings are clear and significant, indicating that increasing external debt hampers economic growth across all income levels in developing countries. However, the study also highlights a beacon of hope-strong institutions can mitigate the adverse effects of debt. Accountability, political stability and regulatory quality have a crucial part in this, significantly influencing the debt-growth connection, especially in middle-income countries. This underscores the importance of strong institutions in the economic development of these countries and provides a reassuring path for policymakers to follow in managing debt prudently.