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Public external debt, informality and production efficiency in developing countries

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  • Drine, Imed
  • Nabi, M. Sami

Abstract

This paper proposes an alternative approach to investigate the non-linear effect of external debt on growth. In the theoretical part, we develop an endogenous growth model with formal and informal sectors to analyse the effect of the public external debt on the production efficiency. We show that an increase of the public external debt share increases the production efficiency through a positive externality effect. However, it generates an opposite effect via the reduction of the formal sector's size in favour of a less efficient informal sector. The resultant effect becomes negative beyond an optimal level. Besides, we show that a large stock of public external debt reduces the production efficiency when it leads to a tight fiscal policy which reduces the formal sector size. Empirically, using a stochastic frontier technique with unobserved heterogeneity, for a panel of 27 developing countries for the period of 1970-2005, we confirm that the turning point associated to the effect of the share external public debt is apparent at 84%.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 2 (March)
Pages: 487-495

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:2:p:487-495

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Public external debt Production efficiency Informality;

References

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  1. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
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  14. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
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Cited by:
  1. Christopoulos, Dimitris & Siourounis, Gregorios & Vlachaki, Irene, 2010. "Democratic Reforms, Foreign Aid and Production Inefficiency," MPRA Paper 23562, University Library of Munich, Germany.

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