This paper examines the impact of external public debt on the economic growth of developing countries. It delves into the dynamics of borrowing, debt service, and their effects on long-term economic development. The study analyzes established economic growth theories, including the neoclassical and endogenous growth models, to understand the intricate relationships between investment, technology, and labor that shape a nation's economic trajectory. It further explores the implications of debt through liquidity constraint and debt overhang theories, highlighting the potential crowding-out effect and diminished local resources for development due to debt service obligations.
Table of Contents
1. Introduction
1.1. Debt situation in Developing Countries
1.2. Problem statement
1.3. Objectives
2. Literature review
3. Conclusions and recommendations
3.1. Conclusion
3.2. Recommendations
Objectives and Themes
This work aims to evaluate the impact of external public debt on the economic growth of developing nations, investigating whether such borrowing serves as a catalyst for development or as a hindrance due to debt servicing burdens.
- Analysis of external debt dynamics in developing economies
- Evaluation of the relationship between debt servicing and economic growth
- Assessment of the "debt overhang" theory and liquidity constraints
- Formulation of policy recommendations for sustainable debt management
Excerpt from the Book
1. Introduction
Developing countries have high growth potential, and this necessitates borrowing to finance economic development. This pushes a country to accumulate public debt which is the total debt owed to the country both internally and externally. According to the International Monetary Fund (IMF), public debt can be described as the total stock of fixed-term obligations to lenders outstanding at a specific time. These obligations can be either external or internal. Effective borrowing mechanisms and strategies can be positive and accelerate the economic growth of a country. This is because of increased capital flows and productivity growth. For instance, borrowing externally can create macroeconomic stability and also creates capital inflow which can attract investment opportunities. On the other hand, uncontrolled borrowing which leads to a high level of external debt can lead to unwanted outcomes in the long run.
When the government has engaged in increased spending then they are likely to face more cases of debt due to the increase in the government's budget deficit. The larger the government budget relative to revenue the budget deficit occurs, and this has to be financed. This is done by borrowing either internally or externally. If financing is by borrowing it is a debt where the state has an obligation the public external debt becomes a subject of debate. The rate of economic growth in a state comes in line with the annual rate of growth of the public debt if it is to mitigate problems that are because of the accumulation of large stocks of debt. Public debt affects the economy in the long and short run (Gómez-Puig & Sosvilla-Rivero,2018). The debt reflects a deficit in financing and it stimulates the demand and output in the short and long run but it also crowds out capital hence reducing national income in the long run. High levels of debt constrain the scope of countercyclical fiscal policies this bringing about volatility and lowering growth.
Summary of Chapters
1. Introduction: This chapter introduces the context of external borrowing in developing nations, noting its potential to stimulate growth while highlighting the risks of excessive debt and poor fiscal management.
2. Literature review: This section explores prevailing economic theories, including the neoclassical growth model and the debt overhang theory, to establish a framework for understanding how debt influences national economic performance.
3. Conclusions and recommendations: The final chapter summarizes the negative impact of high external debt on growth and proposes strategic management policies, such as debt restructuring and improved project appraisal, to foster sustainable economic environments.
Keywords
External Debt, Economic Growth, Developing Countries, Public Debt, Debt Servicing, Debt Overhang, Liquidity Constraint, Fiscal Policy, Budget Deficit, Macroeconomic Stability, Capital Accumulation, Infrastructure Development, Debt Management
Frequently Asked Questions
What is the core subject of this publication?
The publication examines the complex relationship between external debt and economic growth, specifically focusing on the challenges faced by developing nations.
What are the central thematic areas?
Key areas include the impact of debt servicing on national budgets, the effects of capital flows on productivity, and the role of government policy in managing external financial obligations.
What is the primary objective of this research?
The research intends to determine whether external debt significantly impacts the economic growth of least developed countries and whether this effect is positive or negative.
Which scientific methods are employed?
The study utilizes a theoretical analysis approach, drawing upon neoclassical growth theory, endogenous growth models, and the liquidity constraint theory to evaluate empirical debt indicators.
What does the main body of the work cover?
It covers theoretical frameworks regarding public debt, an overview of the global debt situation for developing nations, and an analysis of how debt overhang affects domestic investment and economic output.
Which keywords characterize this work?
Primary keywords include External Debt, Economic Growth, Debt Overhang, Public Debt, and Developing Countries.
How does the "debt overhang" theory apply to developing nations?
The theory suggests that when debt exceeds a country's repayment capacity, returns from domestic investments are diverted to creditors, thereby discouraging local investment and stifling long-term growth.
What role do international institutions like the IMF play in this context?
The IMF provides guidelines for efficient debt management, advocating for strategies that align debt contraction with risk and cost objectives to ensure sustainable economic development.
- Quote paper
- Owen Adams (Author), 2022, The Effect of External Debt on Economic Growth in Developing Countries, Munich, GRIN Verlag, https://www.grin.com/document/1381449
