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External Debt, Public Investment, and Growth in Low-Income Countries

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  • Toan Quoc Nguyen
  • Benedict J. Clements
  • Rina Bhattacharya
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    Abstract

    This paper examines the channels through which external debt affects growth in low-income countries. Our results suggest that the substantial reduction in the stock of external debt projected for highly indebted poor countries (HIPCs) would directly increase per capita income growth by about 1 percentage point per annum. Reductions in external debt service could also provide an indirect boost to growth through their effects on public investment. If half of all debt-service relief were channeled for such purposes without increasing the budget deficit, then growth could accelerate in some HIPCs by an additional 0.5 percentage point per annum.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/249.

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    Length: 25
    Date of creation: 01 Dec 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/249

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    Keywords: External debt; Public investment; Economic growth; debt service; debt relief; debt overhang; debt service payments; public debt; fiscal balance; debt-service; external debt service; foreign aid; net present value of debt; debt stock; ratio of debt; central government fiscal; debt crisis; public finance; budget deficit; composition of public spending; budget deficits; increase in debt service; debt burden; public spending; public investment spending; foreign debt; budget balance; debt servicing; fiscal policy; stock of debt; public and publicly guaranteed; debt-relief; fiscal affairs department; debt reduction; external debt indicators; fiscal balances; external debt burden; fiscal affairs; fiscal position; repayment capacity; government spending; long-term external debt; debt burdens; foreign capital; fiscal reforms; repayment ability; total debt stock; government revenue; tax revenues; external shocks; increase in health spending; debt stocks; external finance; fiscal sustainability; debt-service obligations; foreign borrowing; debt problems; fiscal balance in percent; government debt; debt service obligations; expenditure composition; public sector debt; long-term debt; spending cuts; fiscal targets; external debt stock;

    References

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    1. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
    2. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, Elsevier, vol. 29(3), pages 253-268, November.
    3. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, Elsevier, vol. 52(1), pages 169-187, February.
    4. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, Università di Perugia, vol. 2(3).
    5. Serven, Luis, 1997. "Uncertainty, instability, and irreversible investment : theory, evidence, and lessons for Africa," Policy Research Working Paper Series 1722, The World Bank.
    6. Oks, Daniel & van Wijnbergen, Sweder, 1994. "Mexico after the debt crisis : is growth sustainable?," Policy Research Working Paper Series 1378, The World Bank.
    7. Andrew M. Warner, 1991. "Did the debt crisis cause the investment crisis?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 418, Board of Governors of the Federal Reserve System (U.S.).
    8. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1733, Harvard - Institute of Economic Research.
    9. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
    10. Benedict J. Clements & Gabriela Inchauste & Nita Thacker & Thomas William Dorsey & Shamsuddin Tareq & Emanuele Baldacci & Sanjeev Gupta & Mark W. Plant, 2002. "Is the PRGF Living Up to Expectations?," IMF Occasional Papers 216, International Monetary Fund.
    11. Sturm, Jan-Egbert, 2001. "Determinants of public capital spending in less-developed countries," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 200107, University of Groningen, CCSO Centre for Economic Research.
    12. Vito Tanzi & Hamid Reza Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 97/139, International Monetary Fund.
    13. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(3), pages 441-463, April.
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    Cited by:
    1. Imbs, Jean & Ranciere, Romain, 2006. "The Overhang Hangover," CEPREMAP Working Papers (Docweb), CEPREMAP 0604, CEPREMAP.
    2. Marcela Meléndez Arjona & Arturo Harker, 2008. "Revisiting Economic Growth in Colombia: A Microeconomic Perspective," IDB Publications 45218, Inter-American Development Bank.
    3. Marco Arnone & Luca Bandiera & Andrea Presbitero, 2005. "External Debt Sustainability: Theory and Empirical Evidence," International Finance, EconWPA 0512007, EconWPA.
    4. Abutaleb, Ahmed S. & Hamad, Marwa G., 2012. "Optimal foreign debt for Egypt: A stochastic control approach," Economic Modelling, Elsevier, Elsevier, vol. 29(3), pages 544-556.
    5. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
    6. Agenor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2005. "Roads out of poverty? assessing the links between aid, public investment, growth, and poverty reduction," Policy Research Working Paper Series 3490, The World Bank.
    7. Idlemouden, Khadija & Raffinot, Marc, 2005. "Le fardeau virtuel de la dette extérieure. Une revue de la littérature à l'aune de l'initiative « pays pauvres très endettés » (PPTE)," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4089, Paris Dauphine University.
    8. Qayyum, Unbreen & Din, Musleh-ud & Haider, Adnan, 2014. "Foreign aid, external debt and governance," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 41-52.
    9. Lopes da Veiga, José & Ferreira-Lopes, Alexandra & Sequeira, Tiago, 2014. "Public Debt, Economic Growth, and Inflation in African Economies," MPRA Paper 57377, University Library of Munich, Germany.
    10. Rodolphe Blavy, 2006. "Public Debt and Productivity," IMF Working Papers 06/235, International Monetary Fund.
    11. Sawami Matsushita & Abu Siddique & Margaret Giles, 2006. "Education and Economic Growth: A Case Study of Australia," Economics Discussion / Working Papers, The University of Western Australia, Department of Economics 06-15, The University of Western Australia, Department of Economics.
    12. Drine, Imed & Nabi, M. Sami, 2010. "Public external debt, informality and production efficiency in developing countries," Economic Modelling, Elsevier, Elsevier, vol. 27(2), pages 487-495, March.
    13. Pinto Moreira, Emmanuel & Bayraktar, Nihal, 2005. "A macroeconomic framework for quantifying growth and poverty reduction strategies in Niger," Policy Research Working Paper Series 3506, The World Bank.

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