The Impact of Public Debt on Economic Growth in the Western Balkans

This study aims to analyze the impact that public debt has on economic growth in the long run for six remaining countries of the Western Balkans that have not joined the European Union yet, also referred to as the Western Balkan 6 (WB6) by including even the effect of debt threshold and other determinant factors of debt efficiency. In the study, we examine and evaluate the direct effect that an increase in public debt has on the economic growth of the WB6, which is based on public expenditure to affect economic development during the economic transition. This study also verifies whether increasing debt beyond the Maastricht treaty’s threshold hinders economic growth. Empirical results of the models show that public debt has a positive impact on the economic growth of the WB6 countries, regardless of its level, and that the increase of corruption in the WB6 countries has a negative impact on their economic growth. Moreover, from the model, the stock of public debt in these countries is negatively affected by the increase in the efficiency of good governance and positively affected by the level of public revenues. In conclusion, we can say that improving good governance and reducing corruption can serve to increase the efficiency of reallocation of public expenditures; this will lead in the long run to a reduction of the public debt stock in relation to the GDP for WB6 countries.