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The Debt Overhang Hypothesis: Evidence From Pakistan

Author

Listed:
  • SHAH Muhammad Imran

    (Wuhan University, China)

  • ULLAH Irfan

    (Zhongnan University of Economics and Law, China)

  • RAHMAN Zia Ur

    (Gomal University, D.I.Khan, Pakistan)

  • JAN Nadeem

    (Gomal University, D.I.Khan, 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.

Suggested Citation

  • SHAH Muhammad Imran & ULLAH Irfan & RAHMAN Zia Ur & JAN Nadeem, 2016. "The Debt Overhang Hypothesis: Evidence From Pakistan," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 11(1), pages 140-151, April.
    • Handle: RePEc:blg:journl:v:11:y:2016:i:1:p:140-151
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    References listed on IDEAS

    as
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    3. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    4. Muhammad Aslam Chaudhary & Sabahat Anwar, 2000. "Foreign Debt, Dependency, and Economic Growth in South Asia," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 551-570.
    5. Sadia Tahir, 2006. "Core Inflation Measures for Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 319-342.
    6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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    Keywords

    debt overhang; GDP; ECM; Pakistan;
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