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A Critical Review of External Debt and Economic Growth Relationship: A Lesson for Indebtedness Countries


  • Erdal Karagol

    () (Balýkesir Universitesi Bandirma Iktisadi Idari Bilimler Fakultesi Iktisat Bolumu)


The purpose of this paper is to review existing empirical studies of external debt and economic growth relationship. The decline in investment and growth performance of the highly indebted countries in the past three decades is frequently attributed, at least to some extent, to the burden of their foreign debt, a phenomenon which has been recognised as debt overhang. Empirical results indicate that it is difficult to say whether external debt has a negative or positive effect on economic growth. It is also improper to make any type of generalizations of the potential relationship between economic growth and external debt. Thus, it is necessary to consider the case of each country separately.

Suggested Citation

  • Erdal Karagol, 2004. "A Critical Review of External Debt and Economic Growth Relationship: A Lesson for Indebtedness Countries," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 4(1), pages 69-78.
  • Handle: RePEc:ege:journl:v:4:y:2004:i:1:p:69-78

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    References listed on IDEAS

    1. Bert Hofman & Helmut Reisen, 1991. "Some evidence on debt-related determinants of investment and consumption in heavily indebted countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 127(2), pages 281-299, June.
    2. Cohen, Daniel, 1993. "Low Investment and Large LDC Debt in the 1980's," American Economic Review, American Economic Association, vol. 83(3), pages 437-449, June.
    3. Rockerbie, Duane W., 1993. "Credit rationing and macroeconomic adjustment in Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(4), pages 325-342.
    4. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    5. 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.
    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. Borensztein, Eduardo, 1990. "Debt overhang, credit rationing and investment," Journal of Development Economics, Elsevier, vol. 32(2), pages 315-335, April.
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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems


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