External Debt, Public Investment, and Growth in Low-Income Countries

Abstract

This Working Paper should not be reported as representing views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper examines the channels through which external debt affects growth in low-income countries. Our results suggest that the substantial reduction in the stock of external debt projected for highly indebted poor countries (HIPCs) would directly increase per capita income growth by about 1 percentage point per annum. Reductions in external debt service could also provide an indirect boost to growth through their effects on public investment. If half of all debt-service relief were channeled for such purposes without increasing the budget deficit, then growth could accelerate in some HIPCs by an additional 0.5 percentage point per annum.

Real effects of government debt on sustainable economic growth in Malaysia

“…Howev-er, gross fixed capital formation and labor force are positive and significantly affecting sus-tainable economic growth at the 1 percent and 5 percent levels, respectively. The results are consistent with the findings from Pattilo et al (2002);Clements et al (2003); Smyth and Hsing (1995) as well as Reinhart and Roggof (2010).…”

“…The level of government debt does not have an adverse impact on economic growth. This is also supported by Pattilo et al (2002);Clements et al (2003); Smyth and Hsing (1995); as well as Reinhart and Roggof (2010). Table 6 presents the statistical output for sensitivity tests.…”

“…Besides, Patillo et al (2002) did an examination on debt to economic growth relationship by utilizing a huge in-formation set of 93 creating nations for a period of 30 years and discovered that the negative effect of debt on economic growth exists just when the net present estima-tion of debt levels are over 35%-40% of GDP. Furthermore, Clements et al (2003) using data from a panel of 55 low-wage nations information for the period of 1970-1999 also ob-served the negative effect of debt but over a lower level of between 20% and 25% of GDP. Reinhart and Roggof (2010) in their study on sustainable economic growth at various levels of government debt, in light of new information on 44 nations for a period of 40 years found that the relationship between government debt and economic growth is weak for a GDP proportion of below 90%.…”

“…The presence of high debt can influence economic growth and development negatively. According to Reinhart and Rogoff (2010) as well as Clements et al (2003), instabilities of national debt service repayment will cause difficulties and thus may discourage the pursuit of economic reforms. The current economic growth refers to the real growth in GDP which is computed as the sum of the values of all final goods and services produced within a period of time at market prices.…”

External Debt and Economic Growth in Vietnam: A Nonlinear Relationship

“…This means that the increase in the value of debt leads to an increase in debt up to the "threshold", along the right side of the Laffer curve debt, thereby, increasing the expected payment and reducing in profits of investors. Nguyen, Clements, and Bhattacharya (2003) also mentioned this situation was the existence of the debt Laffer curve between foreign economic growth through investment. Debt overhang also falls in investment and economic growth and increases the uncertainty of the economy.…”