A Research On The Relationship Between External Debt And Economic Growth In Tonga

Most of the Pacific Island States depend on foreign aid,loans and grants to achieve economic growth and progress.The association concerning external debt and economic growth is unclear and ambiguous as it has dissimilar effects on different economies.Economic growth of Pacific island countries depends on the adverse factors caused by their geographical location.Debt and grants play a crucial role in determining the economic indicators of the Pacific Island States.There are very few literature studies on this topic relevant to the Pacific Island states primarily in the case of Tonga.However,there is no literature to indicate the relationship between external debt and economic growth in the case of Tonga,and for that reason the empirical findings of this study will be a first to contribute to the current situation in the role of external debt on economic growth.It further contributes to the literature studies by formulating an augmented Solow growth model using standard variables and indicators most relevant to the Island nation.The earliest and latest works of literature for external debt and economic growth in the South Pacific were from 1985 to early 2000 showing a positive affiliation between external debt and GDP(economic growth).This paper examined how external debt can impact the economic growth of Tonga.Further contributing the literature studies,the article also estimated different types of grants and aid received by Tonga.For the purpose,a time series data based on 32 years ranging from 1985 to 2016 are employed for this research.Using an augmented Solow Growth model,crowding out effect and debt over-hang theory,this paper attempted to estimate the significance of the factors in determining the economic growth of Tonga through Ordinary Least squares(OLS)estimation.A total of nine variables were used for regression including Real GDP(RGDP)as the dependent variable and proxy for economic growth,while eight independent variables were used.The model and variables were tested through Unit root tests and co-integration test to assess the stationary variables and the validity of the variables.All of the variables showed expected results with significant outcomes.External debt proved to be significant with positive impacts on the economic growth in terms of Tonga.Similarly,debt repayment,technical assistance and population showed significant and positive statistical figures and estimation with high values of elasticity.The estimation model was finally tested for robustness through the inclusion of remittance(RMT)in the specification equation.The outcomes showed the results and variables used in the estimation model were robust.In the case of Tonga,the findings of this research has huge implications and worth as it sheds light on the integral factors contributing to the growth of the economy of the kingdom of Tonga.