How much debt is too much? Debt-growth dynamics in commodity-dependent and non-commodity-dependent developing economies

This paper examines the debt-growth dynamics of commodity-exporting and non-commodity-exporting developing countries, examining whether public debt thresholds differ between these groups. We applied the dynamic panel data threshold effects model with endogenous regressors including both endogenous and exogenous instruments proposed by Kremer et al. (2013) and expanded by Seo and Shin (2016) and Seo et al. (2019). Using panel data for 46 countries from 1981 to 2019, the analysis identifies distinct debt thresholds for the two groups, revealing significant negative effects of debt on growth beyond 62.14% of GDP for commodity exporters over the period 1981–2000, and beyond 53.83% during 2001–2019. For non-exporters, a debt threshold has emerged only over recent decades and is identified at 67.96% of GDP, with low-to-moderate debt levels positively associated with growth. The results highlight the role of institutions, human and physical capital investment, and trade openness in mitigating the growth drag effects of debt, particularly concerning commodity exporters. These findings deepen our understanding of debt sustainability and growth in developing economies, emphasizing the unique vulnerabilities of resource-dependent countries. • Distinct debt-growth dynamics are identified for commodity-exporting and non-commodity-exporting developing countries. • Commodity-exporting countries exhibit debt thresholds declining from 62.14 % (1981–2000) to 53.83 % (2001–2019). • Non-commodity-dependent economies show a debt threshold only after 2001, at 67.96 % of GDP. • Institutional quality, capital investment, exchange rate flexibility, and trade openness mitigate growth constraints. • Results highlight the unique challenges for resource-dependent economies in leveraging debt for sustainable growth.