The Impact of Institutional Quality on Public Debt Sustainability in the Digital Era

Abstract

In the development of any country, institutional quality is an essential factor that profoundly shapes the business atmosphere and economic sustainability in today's new media age, where institutional strength is prominent and remains a keystone for sustainable development. Its recognition in major accolades, such as the Nobel Prize in Economics 2024, has highlighted this importance. Strong institutions are essential for emerging countries struggling with high debt burdens and facing difficulties in achieving long-term economic growth and addressing fiscal tasks. Panel data from 116 countries from 2000–2022 was studied to investigate the influence of the quality of institutions on public debt. The Principal Component Analysis (PCA) index was used to measure institutional quality. Pre-estimation tests confirm the data reliability for further analyses. Employing the two-step System GMM estimation technique reveals that improved institutional quality significantly reduces public debt levels. Additionally, debt persistence is evident, as public debt from the earlier year contributes to the current year's debt burden. The analysis further highlights that higher tax revenue generation leads to lower public debt, whereas increases in unemployment, inflation, and government expenditure exacerbate debt levels. These results underscore the critical importance of enhancing institutional quality and adopting sound fiscal policies to mitigate public debt accumulation globally.