External Debt and Economic Growth in Vietnam: A Nonlinear Relationship

Most countries in the world are engaged in lending and borrowing activities regardless of their being rich or poor.For Vietnam, external loan is one of the important financial sources for investment because Vietnam's savings are still lower than investment.In the past 10 years, economic growth of Vietnam has slowed down while compared to areas, external debt still goes up continuously.This situation has raised the question whether a developing country like Vietnam should continue to borrow external resources.An empirical evidence to determine the tendency relationship between external debt and economic growth in Vietnam is necessary to decide the external debt policy in the future.This study finds out the relationship between external debt and economic growth in Vietnam between 2000Q1 and 2012Q4.Using OLS (Ordinary Least Square) method associated with the ECM model (Error Correction Model) of Johansen-Juselius, the research calculates the threshold of external debt as well as estimates the relationship between external debt and economic growth in Vietnam.The findings support the existence of non-linear (inverted U-shaped) relationship between external debt and economic growth with the threshold level of 28%.In addition, the study also quantified the effect level of external debt to economic growth if the government continues to borrow and exceed this threshold.