Australia's external debt: Is it a symptom or a cause of economic slowdown?

Amidst the debate surrounding the 'debt problem' in Australia, the key analytical issue of whether external debt is a symptom or a cause of economic slowdown has been ignored. Sachs (1990) and Kenen (1990) argued that the external 'debt overhang' is a primary cause of economic slowdown and acts as an obstacle to economic growth. The second view is by Bulow and Rogoff (1990) who argue that the external debts are a symptom of poor economic management and performance rather than a primary cause of stifled economic growth. The statistical tests of causal relationships between the GDP growth rate and the external debt accumulation rate suggest unilateral causation flowing from gross external debt (GED), net external debt (NED) and non-official external debt (NOD) to GDP. The long-term impact of these categories of debt on GDP growth is small but positive. Secondly, gross official external debt (GOD) rate and GDP growth rate are statistically independent (neutral) over the sample period. Thirdly, in this study we have found no evidence of Bulow-Rogoff and Kenen-Sachs propositions.