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Foreign Debt and Domestic Savings in Developing Countries

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Author Info

  • Luke Emeka Okafor

    (Faculty of Economic Sciences, University of Warsaw (alumnus))

  • Joanna Tyrowicz

    ()
    (Faculty of Economic Sciences, University of Warsaw)

Abstract

This paper approaches the question of potential causality between foreign debt and domestic savings in the context of developing countries. Literature provides evidence in as far as foreign debt and development is concerned, but little attention was given so far to internal potential for capital formation. We provide a theoretical framework and test its relevance using 1975-2004 data for two groups of countries: sub-Saharan Africa and Latin America with the Caribbean. With the use of instrumental variables we find negative impact of foreign debt on domestic savings especially in the long run. The results are not susceptible to the choice of countries or outliers. However, the relationship between foreign debt and savings seems to depend on debt accumulation gaining significance only after passing a country specific threshold.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP6.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2008-06.

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Length: 28 pages
Date of creation: Sep 2008
Date of revision:
Publication status: Published in Latin American Business Review 9.3/4 (2008): pp. 189-226
Handle: RePEc:war:wpaper:2008-06

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Related research

Keywords: Africa; foreign debt; domestic savings; Latin America; MIU;

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References

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  1. Hélène Poirson & Luca Antonio Ricci & Catherine A. Pattillo, 2002. "External Debt and Growth," IMF Working Papers 02/69, International Monetary Fund.
  2. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Center for International Economics, Working Paper Series qt7g18546z, Center for International Economics, UC Santa Cruz.
  3. Osei, B., 1995. "Ghana: The Burden of Debt service Payment Under Structural Adjustment," Papers 33, African Economic Research Consortium.
  4. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
  5. Ndikumana, Leonce & Boyce, James K., 2003. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," World Development, Elsevier, vol. 31(1), pages 107-130, January.
  6. Erdal Karagol, 2002. "The Causality Analysis of External Debt Service and GNP : The Case of Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 39-64.
  7. Mbire, B. & Atingi, M., 1997. "Growth and Foreign Debt: The Ugandan Experience," Papers 66, African Economic Research Consortium.
  8. Menbere Workie Tiruneh, 2004. "An Empirical Investigation Into the Determinants of External Indebtedness," Prague Economic Papers, University of Economics, Prague, vol. 2004(3), pages 261-277.
  9. Hajivassiliou, Vassilis A., 1987. "The external debt repayments problems of LDC's : An econometric model based on panel data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 205-230.
  10. Sawada, Yasuyuki, 1994. "Are the heavily indebted countries solvent?: Tests of intertemporal borrowing constraints," Journal of Development Economics, Elsevier, vol. 45(2), pages 325-337, December.
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Cited by:
  1. Ondřej Šimpach & Jitka Langhamrová, 2013. "Forecasting Future Salaries in the Czech Republic Using Stochastic Modelling," Business Systems Research, Society for Promotion of Business Information Technology (BIT), vol. 4(2), pages 4-16.

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