When does debt become a burden? Evidence from Asian developing countries

This study investigates the critical debt-to-GDP threshold at which external debt transitions from growth-enhancing to growth-impeding across 32 Asian developing economies over the period 1995–2020. Using dynamic panel estimators that address endogeneity, cross-sectional dependence, and heterogeneity—specifically the two-step system generalized method of moments, dynamic common correlated effects, and dynamic panel threshold models—the analysis reveals a robust inverted U-shaped relationship consistent with the Debt Laffer curve framework. Moderate external debt levels (below the thresholds) are found to support economic growth, whereas excessive debt (beyond the estimated thresholds) exerts a dampening effect. The identified thresholds vary by income group, with estimated turning points of approximately 48% for lower-middle-income countries, 56% for upper-middle-income countries, and 48% for the full sample. These thresholds are interpreted as early-warning reference bands rather than strict cut-off points, providing practical guidance for debt sustainability monitoring. While recent post-pandemic debt developments underscore the policy relevance of the analysis, the empirical findings are strictly derived from the 1995–2020 sample period. Overall, the results offer region-specific insights for managing external debt within Asia’s diverse development context.