Introduction

Financial crisis2007-2008 affects the fiscal imbalances of many economies of the world. The crisis originated with the bankruptcy of Lehman Brothers. Almost all the globalized world feels its spillover effects. To control its effect, governments have taken some fiscal and monetary measure to control the effects. However, corruption and the shadow economy affect the remedial measures. Most of the Belt & Road (BRI) countries are developing and facing rampant corruption (Olken&Pande, 2011). Therefore, the study aims to investigate the role of public debt in economic growth and income inequality in BRI countries by examining the intermediating role of corruption.

Role of government debt in economic growth gave rise to controversy when the findings of the Reinhart & Rogoff (2010) came into light. The slower economic performance and controversy further fueled the debate when mistakes in their study were highlighted. The debate continues regarding this macroeconomic issue. The governments usually print money, impose taxation, and other essential measures to curb slower economic performance. For politicians and social scientists, Buchanan (1966) ask an important question-e.g., “When and who pays for public expenditure financed by debt issue, instead of by taxation or the printing of money?”

The neoclassical growth theories argue that capital mobility enhances economic performance. In their initial stages of developments, the countries do not have sufficient amount of resources-e.g., investment opportunities, and capital stock (Chowdhury, 2001). The external debt positively contributes the economic growth so far it is used

for investment. Similarly, the findings of Burnside and Dollar (2000) also report that debt can enhance growth performance under some specific conditions. However, economic growth and investment may also be adversely affected by a higher volume of debt. ‘Debt overhang' theory states that whenever the volume of debt is high enough, then it leads to the depressing of investment by anticipating the increased cost of debt servicing (Krugman, 1988; Karagol, 2002). This is called the crowding-out effect of government debt because a limited 

amount of money left for investment, and it leads to adverse economic growth.

Similarly, the shadow economy andcorruption affect the level of public debt.¹A vast literature shows that corruption is detrimental for economic growth (Mauro, 1995; Mo, 2001; Tanzi&Davoodi, 2002), reduce foreign direct investment (Wei, 2000; Abed &Davoodi, 2000); limit productivity (Lambsdorff, 2003). 

Corrupt countries tend to have larger shadow economy (Friedman, Johnson, Kaufmann, &Zoido-Lobaton, 2000; Johnson, Kaufmann, & Shleifer, 1997; Schneider, Buehn, & Montenegro, 2010), face higher inflation (Al-Marhubi,2000), 

lower expenditure on health and education (Mauro, 1998) affect state bond ratings (Depken&Lafountain, 2006), and adversely affect the poor (Justesen&Bjornskov, 2014). Corruption can also has undermine the firms’ performances.Corruption destroys the firms andforeign bank affiliates’ financial performance (Van Vu, Tran, Van Nguyen, and Lim 2016; Petrou, 2014). Economic growth and innovation has been discouraged in countries with rampant corruption (Lau, Yang, Zhang, and Leung; 2015).

The previous studies did not convey the clear picture of government debt & economic growth relationship. Poirson et al., (2004); and Poirson et al., (2002); Cohen (1993) did not find significant evidence to support the view that government debt can crowd out the investment. On the other hand, the findings of several studies report that debt can adversely affect investment and economic growth (Nguyen et al., 2003; Chowdhury, 2001; Elbadawi, 1999). Therefore, our contribution is to provide further insights into the debt and growth literature by exploring the impact of public debt on economic growth in a newly established economic block, i.e., Belt & Road Initiative (BRI). Moreover, we also provide new insight by seeing the intermediating role of corruption on economic growth. Furthermore, various robustness checks are applied to look more closely the specific relationship, i.e., period specifications, grouped & ungrouped data analysis, and static as well as dynamic panel estimation (GMM), and inclusion of more robust variables in our analysis.

Similarly, previous studies provide non-conclusive findings of public debt and income inequality Claessens and Perrotti, 2007; De Haan and Sturm, 2017). Previous studies are based on cross-countries with IV and OLS approaches. The techniques estimate the parameters of interest at the mean evaluation by a conditional distribution of the dependent variable. We contribute the literature by examining the effect of public debt on income inequality using the Koenker and Bassett (1978) quantile regression (QR) technique. The QR methodology enables us to examine the effect at different intervals. Similarly, we contribute the existing literature by examining the influence of public debt on income inequality through a transmission channel of corruption.

The paper is organized as follows. The background of the study is described in Section II. The third section deals with the data and estimation methodology. Section IV reports the empirical results. Concluding remarks are given in Section V.