The Debt Overhang Hypothesis: Evidence from Pakistan

Abstract

This study investigates the debt overhang hypothesis for Pakistan in the period 1960-2007. The study examines empirically the dynamic behaviour of GDP, debt services, the employed labour force and investment using the time series concepts of unit roots, cointegration, error correlation and causality. Our findings suggest that debt-servicing has a negative impact on the productivity of both labour and capital, and that in turn has adversely affected economic growth. By severely constraining the ability of the country to service debt, this lends support to the debt-overhang hypothesis in Pakistan. The long run relation between debt services and economic growth implies that future increases in output will drain away in form of high debt service payments to lender country as external debt acts like a tax on output. More specifically, foreign creditors will benefit more from the rise in productivity than will domestic producers and labour. This suggests that domestic labour and capital are the ultimate losers from this heavy debt burden.

Türki̇ye İçi̇n Diş Borcun Dişlama Ve Borç Fazlasi Hi̇potezleri̇ni̇n Ampi̇ri̇k Anali̇zi̇

“…Yalnızca borç fazlası etkisini ele alan çalışmalar, etkiyi farklı ülke ve ülke grupları açısından değerlendirmişlerdir. Çalışmaların bir kısmı dış borç stoku göstergeleri ile özel sektör yatırımları ve ekonomik büyüme arasında negatif etki bulmuşlar, bu anlamda borç fazlası etkisinin geçerli olduğunu vurgulamışlardır (Sichula, 2012;Shah vd., 2016). Bazı çalışmalar ise borç fazlası etkisine vurgu yapmamakla birlikte dış borç yükü ve ekonomik büyüme ilişkisini araştırmışlardır.…”

Foreign Aid and External Debt–A Bane or a Boom to the Ghanaian Economy? New Insights

“…Thus, an indebted firm will find it difficult to undertake new investment opportunities because future cash flows or proceeds from such new investment will be transferred to the creditor in the form of interest payments or debt services, also called promised payments, and this will by far create a disincentive to invest. Myers's theory was first applied to corporations; however, it has since been used to explain the debt and output nexus of countries over sometimes now, see, example (Imbs & Ranciere, 2005;Shah et al, 2016;Sundell & Lemdal, 2011).…”