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Capital Accumulation, External Indebtedness and Macroeconomic Performance of Emerging Countries


  • Marcos Rocha

    () (Pontífica Universidade Católica de São Paulo.)

  • José Luis Oreiro

    (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)


This paper aims at presenting a non-linear post-keynesian growth model to evaluate at theoretical and empirical level the relationship between external indebtedness and economic growth in emerging countries. For this intent, it is presented a post-keynesian endogenous growth model in which: i) desired rate of capital accumulation is supposed to be a non-linear function of external indebtedness as share of capital stock; ii) there is an endogenous country risk premium, which is supposed to be an increasing (linear) function of the external indebtedness (as a share of capital stock); iii) there is a fixed exchange rate regime and perfect capital mobility in the sense of Mundell and Fleming. The main theoretical result of the model is the existence of two long-run equilibrium positions, one of them with a high level of external indebtedness (as a ratio of capital stock) and a low profit rate and the other with a low level of external indebtedness and a high profit rate. This means that an “excessive” external indebtedness can result in a stagnant growth due to its negative effect over the rate of profit. To test the effects of external indebtedness over the rate of economic growth in emerging economies, it is estimated a dynamic panel which evaluates if external debt has an effective negative impact over economic growth of emerging countries. The empirical test of demand-led growth equations with a dynamic panel for 55 emerging countries confirms the potential negative effects of external debt over the long-run rate of growth of the countries in the sample. Moreover, it was detected a hump-shaped relation between external debt and economic growth for the countries in the sample, but the positive effect of external debt over economic growth will only occur for negative values of this variable. This means that, according to the empirical model, any positive level of external debt is harmful for economic growth of emerging countries. Economic growth can be maximized only for a negative value of external debt, i.e. only if a country became a net creditor in international markets. This requires the running of persistent current account surpluses by emerging countries.

Suggested Citation

  • Marcos Rocha & José Luis Oreiro, 2010. "Capital Accumulation, External Indebtedness and Macroeconomic Performance of Emerging Countries," Working papers - Textos para Discussao do Departamento de Economia da Universidade de Brasilia 338, Departamento de Economia da Universidade de Brasilia.
  • Handle: RePEc:brs:wpaper:338

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    References listed on IDEAS

    1. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
    2. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-115, March.
    3. Paulo Gala, 2008. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 273-288, March.
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    Cited by:

    1. Köhler, Karsten, 2016. "Currency devaluations, aggregate demand, and debt dynamics in an economy with foreign currency liabilities," IPE Working Papers 78/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    More about this item


    External debt; balance of payments; and capital accumulation;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy


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