Non-Linear Effect of Debt on the Economic Performance of Transpacific Partnership Countries

Objective - The formation of the Trans-Pacific Partnership (TPP) without the United States has raised many concerns in terms of the possibility of its success. The economic growth of the remaining 11 partner countries is important for the success of the formation of the TPP. Although economic performance depends on certain crucial indicators including debt, the effect of debt on the economic performance among the TPP partner countries remains ambiguous.Methodology/Technique - As a result, this study investigates the nonlinear effect of debt on the economic performance of these partner countries (excluding Brunei and Vietnam) as a whole. In addition, the optimal level of debt is proposed as a means to control the level of debt for sustainable economic growth. Unbalanced panel data of the annual public debt-to-Gross Domestic Product ratio (measured as a percentage of GDP) and real GDP per capita from 1984 to 2015 was collected. Through panel analysis, this study reports an inverted U-shaped relationship between debt and economic performance.Findings - The threshold debt level was identified at 58.02% of GDP. This non-linear relationship means that increasing debt has a positive impact on economic performance before reaching 58.02% of GDP, and an inverse impact on economic performance occurs after this threshold debt level. However, the average debt reveals that the partnership as a whole experiences the reverse effect of debt on growth during this period.Novelty - This study highlights the need for prudent indebtedness policies to ensure continuing trade integration