3.0. IntroductionBased on the analytical results in chapter two we can discover the path of the economic situation in Lebanon from 1992 when debt starts to increase until now days.
Concerning debt the first phase is from 1992 till 2003 when debt was increasing rapidly, then the second phase from 2003 till 2012 when debt increased smoothly and the last third phase from 2012 till present when debt increased very rapidly. The other economic indicators were fluctuating differently based on these three phases. Eliminating any external political events and relying on pure economic conditions the GDP was on average having a high growth between 1992 till 2003, then a very rapid growth until 2012, then lower growth until now days. In general same trend can be detected in the foreign direct investments where between 1992 till 2007 there was a high attraction for foreign investments and this increased more between 2007 till 2011 where in deteriorates to lower levels until now days.And the debt to GDP ratio also passed through three phases where it was increasing until 2005 then it decreased until 2012 then it starts to increase rapidly.
During these three phases the trade of balance was in general decreasing with sharp deterioration in last period, same for government deficit that was increasing especially in last years. Moreover the external debt payments to GNI passed through was affected by these three phases where it was increasing until 2004 then it decreases until 2013 then it starts to increase much rapid even than the first phase. The tax rates also faced an increase during the period from 1992 till now days. Foreign reserves has been also affected by the three debt phases thus from 1992 until 2007 the foreign reserve was increasing in normal levels, then after 2007 the foreign reserve increase in much accelerated rate until 2012 where it starts to increase in smoother rates until now days with very little growth rates compared to previous years. In addition the unemployment rates also were affected by the three phases were until 2007 unemployment was in general increasing, after that it decreased to low levels until 2012 where it starts to increase very rapidly reaching horrible rates.At last during this period the political stability was deteriorating and the corruption was increasing in general. A prudent man could normally discover that there could be a certain relation between the government debt and other economic indicators such as GDP growth, Debt to GDP, trade balance, Exports, Imports, government deficit, government spending, foreign direct investments, taxes, political stability, corruption; or any other direct or indirect indicators.Thus we can build the main hypothesis for the thesis that will be studied and tested in this chapter.Hypothesis: There are significant determinants of Lebanese national debt.This chapter presents the methodological approach applied in this study and the results of empirical analysis. It has been divided into two parts. The first part contains a description research approach and design and deals with data collection, sub-hypothesises development and models’ construction, as well as with variables description. The second part, in turn, presents the descriptive statistics for all the variables used for econometric analysis, discusses the degree of correlation between the National debt in Lebanon as a dependent variable and other economic factors as independent variables. The discussed variables are Debt to Exports ratio, Imports, Government Balance; Tax collection ability; Foreign Direct Investments in Lebanon; Government spending; Control of Corruption and Political Stability. These variables are used for the model to study the significant determinants of Lebanese National debt.Next, this chapter presents and discusses the results of causality and the post estimation tests and concludes by underlining the main results of the analysis.3.1. Methodology3.1.1. Research DesignAn investigation of the determinants of national debt in Lebanon requires the use of a positivist stance. This research philosophy asserts that only certain knowledge obtained through observation, including measurement, is reliable. This factual knowledge is based on natural phenomena, their properties and interactions. Consequently, evidence extracted from sensory experience and expounded through logic and reason is the only source of all reliable knowledge (Bryman, 2007, p.72). Studies based on the philosophy of positivism limit the role of the researcher to collection and interpretation of data in an unprejudiced manner. Research findings of studies of this type are usually observed and quantifiable. Positivist research relies mainly on statistical analysis of quantitative observations. It was noted that positivism as the philosophy corresponds to the empirical view that knowledge comes from human experience. This philosophy is based on an ontological and atomistic picture of the world as containing distinct, observable events and elements that interrelate with each other in an observable, specific and consistent way (Collins, 2010, p. 38). Furthermore, positivism assumes the researcher’s independence from the research itself and does not leave room for personal interests.According to Crowther and Lancaster (2008, p. 29), positivistic studies, as a rule, usually apply a deductive approach, while inductive approach is usually used by studies based on the phenomenological philosophy. The deductive approach implies a development of hypotheses on the basis of the existing theory, and then a testing of these hypotheses with a suitable research strategy. To this end, the deductive approach, generally, makes use of quantitative methods that allows researchers to assess expectations of the underlying theory. On the contrary, qualitative data is employed under the phenomenological approach, which is more focused on the theories generation rather than on the hypothesis testing (Saunders, 2007, p. 152). Although inductive methods could provide more flexibility with respect to information and structure, the analysis of cause-effect relationships in a greater sample would contribute to an increase in the reliability of the study (Bryman, 2007, p. 48).Based on the main hypothesis for our research: There are significant determinants of Lebanese national debt.The study is aimed at answering a particular research question regarding the selected variables and their relationship with the level of national debt in Lebanon. In particular, the Hypothesis explores the following research question:What are the determinants of the national debt in Lebanon? Considering the nature of these specific research questions, the deductive approach is found to be the most appropriate to be applied in the present study. Using a deductive approach, these research questions can be answered by testing hypotheses formulated within the framework of the relevant theories (Kumar, 2005, p. 125). Based on the stated above main hypothesis and research questions, several hypothesises are formulated. These hypotheses are based on existing empirical evidence and theoretical arguments regarding and are described later in this chapter. They define dependent and independent variables, which are studied using econometric methods. 3.1.2. Hypotheses DevelopmentBased on the main hypothesis There are significant determinants of Lebanese national debt and since the research approach of this paper is based on empirical testing of hypothesis about the influence of selected independent variables on the level of national debt in Lebanon and signs of a debt crisis, the construction of appropriate hypotheses based on existing empirical and theoretical data is of principal importance. This section presents the development of appropriate hypotheses based on available research on the determinants of the national debt. The existing body of empirical literature provide sufficient evidence on the relationship between national debt and country’s international trade. In an earlier study, Feder et al. (1981, p. 652) analysed the effect of increase in export growth rate on national debt and revealed a strong reverse relationship between these variables. On the other hand, Moreno-Brid (1998, p. 283) and Barbosa-Filho (2004, p. 145) demonstrated that the import growth rate exceeding export growth rate leads to the conditions of the trade deficit, which contributes to the accumulation of foreign debt. The effect of trade deficit on the economy was also examined by Hervey and Merkel (2000, p. 3) for the US and by Koukouritakis (2003, p. 1) for the EU. The authors noted that increase in import leads to increased borrowing irrespectively of the purpose of these imports. Whether imported goods are used for capital investments or as inputs to exports, an increase in imports in both cases leads to an increase in debt either as a means of investing in production or as financing for current production. Moreover Saad (2012) investigated the relationship between economic growth, exports and external debt servicing in Lebanon for the period 1970-2010 with the inclusion of a fourth macroeconomic variable that is exchange rate. In this study, the Vector Error Correction Model (VECM) and Granger causality techniques were used. Findings suggest that there is bidirectional Granger causality between GDP and external debt servicing, a unidirectional Granger causality running from external debt to exports, a unidirectional causality that runs from exports to economic growth and a unidirectional causality that runs from exchange rate to economic growth. The above results validate the exports-led growth hypothesis. Exports are considered as an important factor in the process of economic development. Exports can cause scare in foreign exchanges reserves that are required to finance imports of goods (such as energy), which are substantial for the formation of capital and the promotion of growth.Based on all the results of previous empirical research, the following hypothesizes regarding Lebanon international trade are formulated:Null Hypothesis I: There is a significant relationship between export and the level of national debt in Lebanon. Null Hypothesis II: There is a significant relationship between import and the level of national debt in Lebanon. Another independent variable assumed to have significant impact on the national debt is government balance. In general, government deficit leads to an increase in national debt, as government is forced to borrow funds to finance its expenditures (Alesina and Tabellini, 1990, p. 403). Likewise, in the case of a budget surplus, the government strives to at least maintain the current level of debt or even to curtail its current obligations and buy back its sovereign bonds. This quite a straightforward point of view was supported by Boskin (2004, p. 1) and Br¤uninger (2005, p.828) in later studies. Consequently, it is expected that government (budget) balance has a significant impact on national debt in Lebanon, with surplus having positive impact while deficit having negative impact on the growth of total debt. The following hypothesises are proposed:Null Hypothesis III: There is a significant relationship between the growth of government balance and the level of national debt in Lebanon. Moreover, since the budget balance is made up of the difference between government incomes and expenditures. Consequently, it is expected that both these indicators also have a significant impact on the level of the national debt, regardless of the state of the budget balance. Government incomes consist of tax revenues from various types of activities, including international trade, business and social contributions. Jha (2001, p. 1) argued that the country’s ability to collect taxes has a negative correlation with the level of total debt. Increase in taxes’ collection ability results in lower debt burden and vice versa. Daniel and Shiamptanis (2012, p. 1289) argued that a weak tax collection ability of Greece and Italian governments led to the accumulation of external debt by these countries. Based on these findings, the following hypothesises are proposed:Null Hypothesis IV: There is a significant relationship between the government’s tax collection ability and the level of national debt in Lebanon. Government spending, in turn, are supposed to have a positive relationship with national debt. According to Kormendi (1983, p. 994), growth of government spending is backed by government borrowings and current-period taxation. Consequently, with a stable level of tax incomes, increase in government spending is likely to lead to the growth of debt (Bohn, 1998, p. 949). To test the impact of government spending, the following hypothesises are proposed:Null Hypothesis V: There is a significant relationship between government spending and the level of national debt in Lebanon. The last financial indicator assessed in this study is the inflow of foreign direct investments. Sahoo (2014, p. 1) argued that foreign direct investments should be considered as a form of capital that could smooth the lack of domestic resources without the need for debt capital, reflecting an inverse relation. Although Sinha et al. (2011, p. 15) revealed that foreign direct investment do not have significant impact on the level of national debt, proxied by debt to GDP ratio, in high income developed countries, it could be an important determinant of national debt in emerging ones. Since Lebanon is considered as emerging market, the following hypothesises about the impact of foreign direct investments are formulated:Null Hypothesis VI: There is a significant relationship between foreign direct investment and the level of national debt in Lebanon. Regarding governance indicators, the level of corruption could also influence the level of national debt. Corruption erodes government spending, which leads to a less than optimal distribution of public expenditure. A study by Wei and Zechauser (1999, p. 443) showed that corruption contributes to increase in government expenditure, though its composition is far from optimal. Since higher corruption results in a higher government spending and lower income from tax revenues, it contributes to the growth of public debt. Cooray et al. (2017, p. 115) argued that for any country, the higher the level of corruption, the higher is the debt to GDP ratio, ceteris paribus. Based on existing argument, the following hypotheses are formulated:Null Hypothesis VII: There is a significant relationship between the level of corruption and the level of national debt in Lebanon. Another governance indicator, namely political stability, could also have a significant impact on the level of national debt in Lebanon. Qi et al. (2010, p. 202) revealed that the quality and stability of political institutions have an impact on bondholders their confidence in the sovereign bond issuer. The more politically stable the country, the less it is associated with risks. Consequently, it is easier for politically stable countries to attract new investors for bond subscriptions and obtain debt financing. On the other hand, countries with an unstable government have virtually no access to debt capital markets. Based on this, one could assume that political stability has a significant direct link with the level on sovereign debt. The following hypothesises are formulated for empirical testing:Null Hypothesis VIII: There is a significant relationship between political stability and the level of national debt in Lebanon. All Null Hypothesises formulated above should be accepted in case if the results of this study demonstrate statistically significant effects between relevant independent variables and the level of Lebanon’s national debt. Likewise, the absence of significant impact of any of independent variables and the level of national debt would result in the rejection of relevant Null Hypothesis.3.1.3. Model and VariablesFollowing the approach applied by Nooruddin (2008, p. 168), this study carry out the preliminary estimations using Ordinary Least Squares (OLS) regression. In general, OLS regression allows for analysing the relations between specific economic and non-economic indicators and debt dynamics. The main hypothesis deals through studying the determinants of the national debt in Lebanon, and thus study the relationship between the level of national debt in Lebanon and its explanatory variables could be modelled by the following specification: + (1)Where, for period t:Dependent variable:- Debt is the national total debt of Lebanon as % of GDP. Total debt consist of country’s domestic debt and USD denominated bonds and other foreign debt;The debt to GDP ratio is the most famous and used ratio by world financial institutions such as World Bank and IMF to study the debt position of the country, and since debt to GDP has been chosen as dependent variable, then the independent variables Exports, Imports, Tax rent, Net FDI, and Spending are all measured as a ratio to GDP to have a consistency with the measure of dependent variable; however CC and PS are bench marks for governance conditions and thus should be stay constant. .