Does economic growth depend on external capital? Some evidence from 116 countries

Two datasets are combined to analyse a few standard implications of growth theory for economic development. One hypothesis suggests that low-income countries catch up in the process of development, and that this is, in part, made possible by capital from abroad. The theory also predicts that debtor countries invest more. Both hypotheses are contradicted by the data. While it is true that poor countries tend to be debtors, they do not grow faster; and it appears that, at least for some periods, creditor and not debtor-countries have a high investment share. These findings are at variance with the notion of the 'debt cycle' or the 'stage hypothesis' for the balance of payments. Put differently, the levels or the changes of the net external asset position do not say anything about the strenth of an economy. One policy implication is that current account balance are a poor indicator for economic policy.