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External Debt, Informal Economy and Growth

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  • Mahmoud Sami Nabi

    ()
    (LEGI-Polytechnic School of Tunisia and University of Sousse, IHEC)

  • Imed Drine

    ()
    (UNU- WIDER)

Abstract

We develop an endogenous growth model with overlapping generations taking into account important characteristics of the developing countries: high public external debt and large informal sector. We show that an increasing of the public external debt has two opposite effects. On the one hand, it enhances growth through a positive externality affecting the productivity of private firms. On the other hand, it inhibits growth by ousting the external financing of private firms and enlarging the less efficient informal sector. These two effects generate a non-linear effect of the public external debt on growth and an optimal share of the public external indebtedness. We also show that, under a certain condition, the enlargement of the informal sector could be accompanied by higher growth.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 1695-1707

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Handle: RePEc:ebl:ecbull:eb-09-00303

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Keywords: growth; informality; public external debt;

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  1. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 847-868, September.
  2. Jean Imbs & Romain Rancière, 2005. "The Overhang Hangover," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 06-03, Swiss Finance Institute.
  3. Cohen, Daniel, 1995. "Large external debt and (slow) domestic growth a theoretical analysis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(5-7), pages 1141-1163.
  4. Bose, Niloy & Cothren, Richard, 1996. "Equilibrium loan contracts and endogenous growth in the presence of asymmetric information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 363-376, October.
  5. Sheku Bangura & Robert Powell & Damoni N. Kitabire, 2000. "External Debt Management in Low-Income Countries," IMF Working Papers, International Monetary Fund 00/196, International Monetary Fund.
  6. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link," IMF Working Papers, International Monetary Fund 05/223, International Monetary Fund.
  7. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  8. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
  9. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(1), pages 49-123, January.
  10. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier.
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