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External Debt and Growth

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  • Hélène Poirson
  • Luca Antonio Ricci
  • Catherine A. Pattillo

Abstract

This paper assesses the non linear impact of external debt on growth using a large panel data set of 93 developing countries over 1969–98. Results are generally robust across different econometric methodologies, regression specifications, and different debt indicators. For a country with average indebtedness, doubling the debt ratio would reduce annual per capita growth by between half and a full percentage point. The differential in per capita growth between countries with external indebtedness (in net present value) below 100 percent of exports and above 300 percent of exports seems to be in excess of 2 percent per annum. For countries that are to benefit from debt reduction under the current HIPC initiative, per capita growth might increase by 1 percentage point, unless constrained by other macroeconomic and structural economic distortions. Our findings also suggest that the average impact of debt becomes negative at about 160–170 percent of exports or 35–40 percent of GDP. The marginal impact of debt starts being negative at about half of these values. High debt appears to reduce growth mainly by lowering the efficiency of investment rather than its volume.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/69.

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Length: 48
Date of creation: 01 Apr 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/69

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Keywords: External debt; Debt relief; HIPC Initiative; debt; debt overhang; debt service; debt stocks; debt reduction; net present value of debt; external indebtedness; external borrowing; repayment; repudiation; debt burden; debt ratios; debt service to exports; creditors; public debt; low debt; debt repudiation; debt servicing; debt threshold; loans; debt rescheduling; debt data; debts; sovereign debt; relief mechanisms; debtor countries; debt relief mechanisms; payments; debt sustainability; external debt burden; interest; debt crises; debt stock; debt forgiveness; debt ratio; debt problems; debt accumulation; debt repayment; substantial debt; public debt crises; debt crisis; obligations; debtor country; debt-relief; debt terms; excessive indebtedness; taxes; external debt sustainability; external finance; bilateral creditors; ratio of debt service to exports; debt problem; external shocks; domestic growth; traditional debt relief; traditional debt relief mechanisms; debt service burden; debt level; international lending; debt service ratio; repayment ability; international borrowing; ratio of debt; indebted countries; debt relief initiative; debt thresholds; long-term external debt;

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References

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  1. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  2. Presbitero, Andrea F., 2006. "The debt-growth nexus in poor countries: a reassessment," Proceedings of the German Development Economics Conference, Berlin 2006 22, Verein für Socialpolitik, Research Committee Development Economics.
  3. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  4. Jean Imbs & Romain Ranciere, 2005. "The Overhang Hangover," Working Papers 219, Barcelona Graduate School of Economics.
  5. Orlando Rubio M. & Jair Ojeda J. & Enrique Montes U., . "Deuda Externa, Inversión y Crecimiento en Colombia, 1970-2002," Borradores de Economia 272, Banco de la Republica de Colombia.
  6. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  7. Shuanglin Lin & Kim Sosin, 2001. "Foreign debt and economic growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 635-655, November.
  8. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  9. Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June.
  10. Chowdhury, Abdur R., 2001. "External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
  12. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1208-31, December.
  13. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link," IMF Working Papers 05/223, International Monetary Fund.
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