Long-Term and Short-Term Impact of External Debt on Economic Growth in Laos: An ARDL Model Analysis

Abstract

This study investigates the impact of external debt on the economic growth of Laos, with a specific focus on the evolving structure of external debt in the country spanning 1995 to 2020. It employs an Autoregressive Distributed Lag (ARDL) model to establish long-term cointegration among key economic variables. The variables under scrutiny include human capital, labor force participation, external debt, inflation, and exchange rates, which are analyzed for their roles in shaping economic growth in Laos. In the long term, the study identifies robust and statistically significant relationships. Notably, human capital and the labor force emerge as influential drivers of economic growth, with coefficients of 2.0594 and 0.0591, respectively. Conversely, there is a substantial negative correlation between the external debt ratio per GDP and inflation rate with economic growth. This indicates that increases in these variables are associated with diminished economic expansion over time. In the short term, the study reveals that human capital and labor force participation positively impact Laos' economic growth. In contrast, the short-term effects of the external debt ratio, inflation rate, and exchange rate are adverse, indicating potential economic challenges that need to be addressed promptly. Based on findings, this study provides valuable insights into the determinants of economic growth in Laos, both in the long and short terms. These findings can inform policymakers and researchers in the development of more effective economic strategies, taking into account Laos' unique economic context.