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Debt Overhang versus Crowding Out Effects: Understanding the Impact of External Debts on Capital Formation in Theory

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  • Muhammad Mustapha Abdullahi

    (Faculty of Social and Management Sciences, Bauchi State University, Gadau, Bauchi State, Nigeria,)

  • Nor Aznin Bt Abu Bakar

    (Department of Economics and Agribusiness, School of Economics, Finance and Banking, UUM COB, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia,)

  • Sallahuddin B. Hassan

    (School of Economics Finance and Banking, Universiti Utara Malaysia, Malaysia)

Abstract

This is a conceptual analysis of the relationships between external debt and capital formation geared towards a proper assessment and understanding the experiences of Sub-Saharan African (SSA) countries external debts experiences. The study established that debt in general and external debt in particular is a necessary evil that all economies survive with. During the five decades of external debt experiences in SSA, all indices have indicated adverse relationships amongst and between all variables of interest in these countries. Most important of the negative consequences was the debt overhang and crowding out effects and their attendant effects on the economies. The study has shown that it has negatively affected the positive development of capital formation being one of the essential macroeconomic variables for a sustained economic development.

Suggested Citation

  • Muhammad Mustapha Abdullahi & Nor Aznin Bt Abu Bakar & Sallahuddin B. Hassan, 2016. "Debt Overhang versus Crowding Out Effects: Understanding the Impact of External Debts on Capital Formation in Theory," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 271-278.
    • Handle: RePEc:eco:journ1:2016-01-35
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    3. H.R.A. Chamini Thilanka & J.G. Sri Ranjith, 2018. "The Impact of Public Debt on Private Investment: Sri Lankan Experience," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 8(8), pages 1-20, August.
    4. Vijay Victor & Joshy Joseph Karakunnel & Swetha Loganathan & Daniel Francois Meyer, 2021. "From a Recession to the COVID-19 Pandemic: Inflation–Unemployment Comparison between the UK and India," Economies, MDPI, vol. 9(2), pages 1-19, May.
    5. H.R.A. Chamini Thilanka & J.G. Sri Ranjith, 2018. "The Impact of Public Debt on Private Investment: Sri Lankan Experience," International Journal of Business and Social Research, LAR Center Press, vol. 8(8), pages 1-20, August.

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    More about this item

    Keywords

    External Debts; Debt Overhang; Crowding Out Effects; Capital Formation;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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