Universitas Indonesia Conferences, The Seventh International Conference on Strategic and Global Studies 2023

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From Debt Trap to Economic Prosperity: A Solow Model Approach to Tackling External Debt in Indonesia
Safiullah Junejo, Issa Hamadou

Last modified: 2023-05-05

Abstract


Indonesia, like many developing countries, has been grappling with the issue of external debt. This study aims to examine the relationship between external debt and economic growth in Indonesia using the Solow Growth Model approach. The study utilizes time-series data from 1970 to 2022 and includes Gross Domestic Product (GDP) as the dependent variable, while Debt Service, External Debt, Exports, Imports, Gross Capital Formation, and Population Growth are the independent variables. The Ordinary Least Square method is used to analyze the data to determine whether there is a statistically significant relationship between the independent and dependent variables. The findings of this study reveal that External Debt, Debt Service, Exports, Imports, and Gross Capital Formation have a significant positive relationship with GDP, indicating that increased external debt can contribute to economic growth in the country. This suggests that the government can take advantage of external borrowing to increase investments, exports, and imports and ultimately drive GDP growth. These results have important implications for policymakers who are looking for strategies to promote economic growth in Indonesia. By focusing on measures that stimulate foreign investment, increase exports and imports, and enhance gross capital formation, policymakers can help the country move from a debt trap to economic prosperity. This study also provides a framework for other developing countries to examine the relationship between external debt and economic growth, using the Solow Growth Model approach.