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Article

Justin Joy and Prasant Kumar Panda

This paper aims to analyze the pattern of public debt in Brazil, Russian Federation, India, China and South Africa (BRICS) in a comparative perspective. Besides, an…

Abstract

Purpose

This paper aims to analyze the pattern of public debt in Brazil, Russian Federation, India, China and South Africa (BRICS) in a comparative perspective. Besides, an attempt is made to verify the existence of debt overhang as suggested by Krugman (1988) among BRICS nations.

Design/methodology/approach

Annual panel data for BRICS for the period 1980-2016 has been used for the analysis. Percentage ratio method has been used to analyze the pattern of debt. Panel covariate augmented Dickey–Fuller (pCADF) test has been used to verify the time series properties of the variable, while panel cointegration test of Pedroni (1999) is used to check the existence of any co-integrating vector among the variables. Panel Granger causality test is used to check the causality between the variables.

Findings

Co-integration result suggests that there exists a strong long-run equilibrium relationship between debt service, domestic savings, capital formation and economic growth of BRICS nations. From Granger causality test, it is observed that domestic savings and capital formation are Granger caused by debt servicing. The coefficients from fully modified ordinary least squares measure a negative impact of debt service on gross capital formation and gross domestic saving. This suggests that the payment for debt service affects capital formation and gross domestic savings adversely. Thus, it gives primary signals for debt overhang effect in BRICS nations.

Practical implications

Allowing debt service to negatively affect the investment and potential investment will result in slowdown or stagnation in economic growth in the long run, so strategies need to be taken in BRICS nations to check the adverse effects of rising level of debt-service-payment-to-gross national income ratio on domestic savings and capital formation. BRICS nations need to reduce their debt service payment by undertaking appropriate strategy of debt overhaul and fiscal management so that domestic savings and capital formation in the country will not be adversely affected. Besides, BRICS nations need to take measures to augment its domestic savings and capital formations.

Originality/value

To the best of the authors’ knowledge, no published works have analyzed the pattern of public debt for BRICS (major developing nations). Debt servicing is also not checked for BRICS in recent papers, considering overhang approach.

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Article

M. Wasiqur Rahman Khan and Haydory Akbar Ahmed

The purpose of this paper is to examine the dynamics between real gross domestic product (GDP), foreign earnings, development assistance and debt servicing in Bangladesh…

Abstract

Purpose

The purpose of this paper is to examine the dynamics between real gross domestic product (GDP), foreign earnings, development assistance and debt servicing in Bangladesh, 1973‐2008, with the incorporation of a structural break after 1990.

Design/methodology/approach

A vector autoregression (VAR) framework using annual data from 1973‐2008 was used to examine the dynamics among the above mentioned variables, with the incorporation of a structural break after 1990. This was followed by innovation accounting and testing for Granger causality.

Findings

It was found that the structural break is significant and all the macro‐variables exhibit trend stationarity. Innovation accounting suggests that the debt servicing capacity of Bangladesh is enhanced by an improvement in foreign earnings, an outcome which is reinforced by Granger causality tests.

Research limitations/implications

A bigger sample size, consisting of quarterly observations is desirable.

Practical implications

These results suggest that an increase in foreign earnings implies an improvement in the capacity to service overseas debt. Thus, from a policy perspective, it is recommended that steps be taken to diversify the sources of foreign earnings. The analysis affirms that there is a causal link between injections, represented by foreign earnings and overseas development assistance and leakages, represented by debt servicing. Such affirmation is certain to be an important input in macroeconomic policy formulation.

Originality/value

The dynamics between real GDP, foreign earnings, development assistance and debt servicing in Bangladesh have been empirically examined using recent developments in time‐series econometrics.

Details

International Journal of Development Issues, vol. 11 no. 1
Type: Research Article
ISSN: 1446-8956

Keywords

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Article

Esther O. Adegbite, Folorunso S. Ayadi and O. Felix Ayadi

This paper aims to investigate the impact of huge external debt with its servicing requirements on economic growth of the Nigerian economy so as to make meaningful…

Abstract

Purpose

This paper aims to investigate the impact of huge external debt with its servicing requirements on economic growth of the Nigerian economy so as to make meaningful inference on the impact of the debt relief which was granted to the country in 2006.

Design/methodology/approach

The neoclassical growth model which incorporates external sector, debt indicators and some macroeconomic variables was employed in this study. The paper investigates the linear and nonlinear effect of debt on growth and investment utilizing the ordinary least squares and the generalized least squares.

Findings

Among other things, the negative impact of debt (and its servicing requirements) on growth is confirmed in Nigeria. In addition, external debt contributes positively to growth up to a point after which its contributions become negative reflecting the presence of nonlinearity in effects.

Originality/value

Nigeria's external debt is analyzed in a new context utilizing a different but innovative model and econometric techniques. It is of tremendous value to researchers on related topic and an effective policy guide to policymakers in Nigeria and other countries with similar characteristics.

Details

International Journal of Emerging Markets, vol. 3 no. 3
Type: Research Article
ISSN: 1746-8809

Keywords

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Article

Naeem Akram

Over the years most of the developing countries have failed to collect enough revenues to finance their budgets. As a result, they have to face the problem of twin…

Abstract

Purpose

Over the years most of the developing countries have failed to collect enough revenues to finance their budgets. As a result, they have to face the problem of twin deficits and to rely on external and domestic debt to finance their developmental activities. The positive effects of public debt relate to the fact that in resource-starved economies debt financing (if done properly) leads to higher growth and adds to their capacity to service and repay external and internal debt. The negative effects work through two main channels – i.e., “Debt Overhang” and “Crowding Out” effects. The purpose of this paper is to examine the consequences of public debt for economic growth and investment for the Philippines.

Design/methodology/approach

The present study examines the consequences of public debt for economic growth and investment for the Philippines during the period 1975-2010, by using autoregressive distributed lag technique.

Findings

The results reveal that in the Philippines, public external debt has negative and significant relationship with economic growth and investment confirming the existence of “Debt Overhang effect”. But due to insignificant relationships of debt servicing with investment and economic growth, the existence of the crowding out hypothesis could not be confirmed. The domestic debt has a negative relationship with investment and positive relationship with economic growth.

Research limitations/implications

First and foremost implication of the study is that heavy reliance on external debt must be discouraged. Therefore, in order to accelerate economic growth, developing countries must adopt those policies that are likely to result in reducing their debt burden, and it must not be allowed to reach unsustainable level. In the case of domestic debt, the present study finds that investment is negatively affected by domestic debt due to the crowding out effect; yet real GDP has a positive relationship with domestic debt. Thus, if policy makers want to use domestic debt as a tool to stimulate real GDP then it must keep an eye on the consequences of domestic debt on the investment.

Practical implications

First and foremost implication of the study is that heavy reliance on external debt must be discouraged. Therefore, in order to accelerate economic growth, the Philippines must adopt those policies that are likely to result in reducing their debt burden, and external debt it must not be allowed to reach unsustainable level. In the case of domestic debt, the present study finds that investment is negatively affected by domestic debt due to the crowding out effect; yet real GDP has a positive relationship with domestic debt. Thus, if policy makers want to use domestic debt as a tool to stimulate real GDP then it must keep an eye on the consequences of domestic debt for on the investment.

Social implications

It also follows from the estimation results that population growth rate is harmful for the economic growth. So in order to stimulate the growth performance, it must adopt effective population control policies. Similarly, since openness and investment are growth enhancing so there is need for the trade and investment supportive policies.

Originality/value

From the review of literature on the issue, it can be broadly summarized that most of the studies are on the relationship of external debt and economic growth, neglecting domestic debt entirely or mentioning it in the passing. Second, most of these studies have been conducted by using panel data. However, as the different countries vary in socio-economic conditions so it is better to conduct the country specific study. The present study is an attempt to fill these gaps in the existing literature.

Details

International Journal of Social Economics, vol. 42 no. 3
Type: Research Article
ISSN: 0306-8293

Keywords

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Article

Nisreen Salti

The purpose of this paper is to examine the redistributive effect of domestic public debt: lenders to the government lie on the higher end of the income distribution, but…

Abstract

Purpose

The purpose of this paper is to examine the redistributive effect of domestic public debt: lenders to the government lie on the higher end of the income distribution, but the burden of debt financing falls on the entire tax base, to the extent that taxes are used to service debt. Because domestic debt is typically held by domestic lenders, this involves a redistribution of resources.

Design/methodology/approach

The author uses cross-country panel data on debt composition, and run regressions of income inequality, as measured by the Gini coefficient, using various specifications, controlling for a variety of macroeconomic, fiscal and political variables.

Findings

The author finds that the composition of public debt is consistently a significant determinant of income inequality: the domestic share of public debt is regressive and significant across all specifications, even controlling for total and external debt servicing, political conflict, corruption and a variety of government spending variables.

Research limitations/implications

The data span 18 years (1990-2007) which means that long-run effects are hard to track. While the author has a good mix in the sample of observations from low-, middle- and high-income countries, the author is constrained in the choice of countries by the availability of data on inequality and on the composition of public debt.

Originality/value

This is the first paper to examine the composition of public debt in terms of domestic and external debt, and any bearing it may have on income inequality. The finding is also new for both the public debt and income inequality literatures: cross-country panel data are consistent with the belief that domestic debt redistributes resources from the entire tax base to wealthy holders of government debt in a way that external debt does not.

Details

Journal of Economic Studies, vol. 42 no. 5
Type: Research Article
ISSN: 0144-3585

Keywords

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Article

John Pastor Ansah and Muhammad Azeem Qureshi

The purpose of this paper is to present a dynamic macroeconomic framework that identifies the fundamental structure of public debt accumulation process in developing…

Abstract

Purpose

The purpose of this paper is to present a dynamic macroeconomic framework that identifies the fundamental structure of public debt accumulation process in developing countries and its two way linkages with economic growth and public finances. Within this framework, the objective of this study is to identify leverage points that may be utilized to slow down debt accumulation process without slowing down economic growth.

Design/methodology/approach

The paper uses the system dynamics (SD) method to model and analyze the debt accumulation process. This method allows us to analyze the relationship between structure and behaviour of complex dynamic systems. This paper considers fiscal policy as the strategic element of the debt accumulation process and hence it considers seignorage and consequent inflation to be outside the model boundary. In other words the paper assumes that there exists an effective monetary policy that satisfies the objectives of the fiscal policy.

Findings

Capping debt servicing (debt relief) increases the debtor country's capacity to invest and the higher investment will raise capacity to pay debt in the future, with some of the rewards going to the creditor. Financing public investment through borrowing produces the highest Debt-GDP ratio compared to all other polices considered. Widening of the tax base to include this informal sector without increasing the tax rate and reducing the extravagant non-debt current expenditure are effective endogenous policy options that help reduce considerably the Debt-GDP ratio. The best composite policy demonstrates that a reduction in the Debt-GDP ratio does not only require exogenous assistance (debt relief) but endogenous government and private sector responsibility to maintain fiscal discipline and generate growth.

Originality/value

The unique characteristic of this model is the transparent way in which it represents the two-way feedback relationship between the debt, public finance and economic development taking into consideration the delays and non-linearities involved in this process.

Details

African Journal of Economic and Management Studies, vol. 4 no. 3
Type: Research Article
ISSN: 2040-0705

Keywords

Content available
Article

Ankie Scott-Joseph and Treshauna Felecia Turner

This study takes a disaggregated approach to investigate the impacts of long-run GDP on changes in total government expenditure in the Eastern Caribbean Currency Union…

Abstract

Purpose

This study takes a disaggregated approach to investigate the impacts of long-run GDP on changes in total government expenditure in the Eastern Caribbean Currency Union (ECCU) economies. An understanding of the relationship between changes in total government expenditure and GDP (by sector categories) is expected to provide a working tool to understand the growth debt nexus of Caribbean countries. The purpose of the paper is to use an auto regressive distributed lag (ARDL) and error correction model (ECM) to examine and analyse short- and long-run dynamics of disaggregated approach to both output and government expenditure in a dynamic model to identify the growth in the Eastern Caribbean Countries.

Design/methodology/approach

In an attempt to examine the long-run dynamics, data for the period 1970-2015 were used in an ARDL and ECM framework. The authors examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for the ECCU countries to establish and analyse short and long-run dynamics.

Findings

The results suggest that total fiscal expenditure and disaggregated expenditure including debt services have both positively and negatively contributed to economic growth in the agriculture, manufacturing and mining sectors. Among others, the study found that high national debt in the region resulted primarily from increases in government expenses and diminishing income sources.

Originality/value

This paper is the first to take a disaggregated approach to investigate the relationship between economic growth and government expenditure in the Eastern Caribbean States. The authors’ empirical results suggest that debt servicing reduces economic growth both in the short and long run. The greatest impact being felt in the mining and manufacturing sectors, namely, 1 per cent increase in debt service will bring about 7.90 and 1.67 per cent decrease in economic growth. These results offer fairly strong support to the view that expenditure share variables can weaken sectoral growth, and hence force the overall growth to decline.

Details

International Journal of Development Issues, vol. 18 no. 1
Type: Research Article
ISSN: 1446-8956

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Book part

Victor Vaugirard

This paper sets up a model of strategic sovereign default, in which crony capitalism provides policymakers with incentives to service the debt beyond what is socially…

Abstract

This paper sets up a model of strategic sovereign default, in which crony capitalism provides policymakers with incentives to service the debt beyond what is socially optimal. It then considers reforms to deal with the supply side of clientelism: the private sector. This involves tackling agency problems between managers and corporate stakeholders, since a key element to constrain the ability of powerful economic interests to capture the state is good corporate governance. Economic hard times provide such an opportunity, as the implicit coalition between groups of cronies may break down. A model is built along those lines, which highlights international contagion of debt repudiation.

Details

Corporate Governance
Type: Book
ISBN: 978-0-76231-133-0

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Article

Nicolino Strizzi and Gurprit S. Kindra

Many countries in both the LAC region and Asia Pacific have large and growing foreign debts. Country risk ratios and the profile of foreign debts for the majority of these…

Abstract

Many countries in both the LAC region and Asia Pacific have large and growing foreign debts. Country risk ratios and the profile of foreign debts for the majority of these countries are near or exceed widely regarded warning thresholds. Chronic budget and funding problems regionwide, including massive infrastructure investment needs and rising social spending pressures, will lead to greater reliance on foreign borrowing. That will contribute to debt accumulation and rising debtservicing burdens. Economic slowdown, massive banking and financial sector restructuring, erosion of export competitiveness and declining foreign exchange reserves will increase the likelihood that these countries will be unable to fully meet their foreign debtservicing obligations. The risk of debt default will be greatly increased over the next decade. Mounting public criticism will make it tougher to arrange future international financial rescue packages, such as those extended to Mexico and Thailand, for cash‐strapped sovereigns. As Canada’s economic profile rises in emerging markets, greater monitoring of country risks is warranted.

Details

European Business Review, vol. 98 no. 4
Type: Research Article
ISSN: 0955-534X

Keywords

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Article

Robert E. Looney

The turbulent world economic conditions of the 1970s and 1980s have required major adjustments within individual Third World countries. Two distinct responses were made by…

Abstract

The turbulent world economic conditions of the 1970s and 1980s have required major adjustments within individual Third World countries. Two distinct responses were made by various governments: some reacted rather quickly with internal adjustment policies, while others borrowed heavily in order to finance high growth rates or at least to postpone economic contraction. Argentina is one of many countries that fall into the latter category.

Details

Journal of Economic Studies, vol. 14 no. 3
Type: Research Article
ISSN: 0144-3585

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