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The Effect of Foreign Debt on the Economic Growth

Author

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  • Kurniasih, Erni Panca

    (Department of Economics Faculty of Economics and Business Universitas Tanjungpura Jl. Prof. Hadari Nawawi Kota Pontianak 78121 INDONESIA)

Abstract

This study examines the effect of foreign debt on the economic growth. Using a time series Indonesian data over 1981 - 2017, we employ the Error Correction Model based on the debt overhang theory. Foreign debt was found to produce negative and significant effect on the economic growth both in the short- and long-run. The paper further found that Foreign Direct Investment (FDI) improves the economic growth. Foreign debt that continues to increase drastically in the long-run could slow down the economic growth which may indicate the economy experiencing a debt overhang. It is thus imperative for the government to ensure the debt ratio remain below a certain threshold. Further, foreign debt should be prioritized to develop infrastructure with a broad multiplier effect and the FDI likewise prioritized for labor-intensive sectors.

Suggested Citation

  • Kurniasih, Erni Panca, 2021. "The Effect of Foreign Debt on the Economic Growth," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(3), pages 125-136.
    • Handle: RePEc:ukm:jlekon:v:55:y:2021:i:3:p:125-136
    DOI: http://dx.doi.org/10.17576/JEM-2021-5503-09
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign debt; Foreign direct investment; Indonesia; economic growth; error correction model;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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