Proceedings of the 3rd International Conference on Economics, Business and Economic Education Science, ICE-BEES 2020, 22-23 July 2020, Semarang, Indonesia

Research Article

Does the Reinhart-Rogoff Hypothesis is Applicable for the Upper-Middle-Income Economies?

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  • @INPROCEEDINGS{10.4108/eai.22-7-2020.2307936,
        author={Nur Hayati Abd Rahman and Shafinar  Ismail and Abdul Rahim Ridzuan and Eeng  Ahman and Aas  Nurasyiah and Neni Sri Wulandari},
        title={Does the Reinhart-Rogoff Hypothesis is Applicable for the Upper-Middle-Income Economies?},
        proceedings={Proceedings of the 3rd International Conference on Economics, Business and Economic Education Science, ICE-BEES 2020, 22-23 July 2020, Semarang, Indonesia},
        publisher={EAI},
        proceedings_a={ICE-BEES},
        year={2021},
        month={5},
        keywords={economic growth middle-income trap public debt reinhart-rogoff hypothesis upper-middle-income economies},
        doi={10.4108/eai.22-7-2020.2307936}
    }
    
  • Nur Hayati Abd Rahman
    Shafinar Ismail
    Abdul Rahim Ridzuan
    Eeng Ahman
    Aas Nurasyiah
    Neni Sri Wulandari
    Year: 2021
    Does the Reinhart-Rogoff Hypothesis is Applicable for the Upper-Middle-Income Economies?
    ICE-BEES
    EAI
    DOI: 10.4108/eai.22-7-2020.2307936
Nur Hayati Abd Rahman1,*, Shafinar Ismail1, Abdul Rahim Ridzuan1, Eeng Ahman2, Aas Nurasyiah3, Neni Sri Wulandari3
  • 1: Universiti Teknologi MARA, Malaysia
  • 2: Universitas Pendidikan Indonesia, Bandung, Indonesia
  • 3: Universitas Pendidikan Indonesia, Indonesia
*Contact email: nurhayati@uitm.edu.my

Abstract

This paper aims in investigating the appropriateness of the Reinhart-Rogoff hypothesis in the upper-middle-income economies. The hypothesis argues that public debt is good for the economic growth, but it starts to give detrimental effects as the debt to GDP ratio reaches 90 percent. This issue is essential in the midst of the accomplishment of the Industrial Revolution 4.0, in which all countries need to invest in advanced technology, robotics, artificial intelligence, research, and development as well as human capital development. However, the challenge comes when the government is required to spend a tremendous amount of funds for economic and social recovery due to unexpected events, such as tsunami, earthquakes, and floods. Given a limited amount of funds, the governments have to incur huge amount of public debt to support economic growth and development. By using system GMM for the 32 countries in the upper-middle-income economies from 1990 to 2018, it was found that the Reinhart-Rogoff hypothesis is not applicable in the upper-middle-income economies. The economic growth starts to diminish when the ratio of public debt to GDP is more than 70 percent. This study contributes to the policy implication by re-alerting the government not to borrow funds beyond the 70 percent threshold.