Preview

External Public Debt and Economic Growth: Empirical Evidence from Bangladesh, 1974 to 2010

Best Essays
Open Document
Open Document
4455 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
External Public Debt and Economic Growth: Empirical Evidence from Bangladesh, 1974 to 2010
ISSN-L: 2223-9553, ISSN: 2223-9944

Vol. 3, No. 2, September 2012

Academic Research International

EXTERNAL PUBLIC DEBT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM BANGLADESH, 1974 TO 2010
Mahmud Hasan Shah Department of Economics, Jagannath University, BANGLADESH. mhs_ju@yahoo.com Shahida Pervin Department of Economics, Jagannath University, BANGLADESH. Spervinruby@yahoo.com

ABSTRACT
This research paper investigates the relevance of the dependence of Bangladesh economy on external public debt. Using some econometric tools, the study is conducted to find out the effect of external public debt on economic growth from the perspective of Bangladesh economy for the period 1974 - 2010. The study will probe debt overhang and crowding out effect of external public debt to represent the effect. To specify the debt overhang and crowding out effect of external public debt, the debt burden has been segmented into two part; external debt stock and external debt service. Long run significant negative effect of external public debt service and positive effect of external public debt stock on GDP growth have been found from this investigation. In short run, only external debt service has negative effect but the debt stock does not have any significant effect. Thus the investigation did not find any evidence of debt overhang provided that there is no significant adverse effect of debt stock on GDP growth. But crowding out effect was originated from the fact that there is evidence of adverse effect of debt service payment on economic growth for the period. As more debt stock means more service payment, the study shows a dichotomy in obtained results. So the reconciliation of debt should be prudent to optimize the growth of Bangladesh. Short run disequilibrium in the path of long run is corrected at a good speed. Keywords: Crowding out effect, cointegration, debt overhang, external public debt, error correction mechanism.

INTRODUCTION It is a contentious issue


References: Ahmed, Mehboob & Maryam Shaku (2011). Debt (a real hurdle in the economic growth of Pakistan): A time series analysis. African Journal of Business Management, 5(28): 11532-11538. Bangladesh Economic Review (2010). Government Report, Finance Department, Finance Ministry. Bangladesh Economic Update Debt & Deficit, August (2011). Economic Policy Unit, Unnayan Onneshan, Dhaka. Chowdhury, Abdur R (2001). External Debt and Growth in Developing Countries(A Sensitivity and Causal Analysis). Discussion Paper No.2001/95, World Institute for Development Economics Research(WIDER) /United Nations University. Clements, Benedict, et.al., (2003). External Debt, Public Investment, and Growth in Low-Income Countries. IMF Working Paper WP/03/249, Fiscal Affairs Department. Cunningham, Rosemary Thomas (1993). The Effects of Debt Burden on Economic Growth in Heavily Indebted Nations. Journal Of Economic Development, 18(1): 115-126. Engle, Robert F. & C.W.J.Granger (1987). Co-Integration and Error Correction: Representation, Estimation and Testing, Econometrica, 55(2): 251-276. Gujarati, Damodar N. (2004). Basic Econometrics, 4th Edn. New Delhi: Tata McGraw Hill Publishing Company Limited. Gunter Bernhard G. & A. F. M. Ataur Rahman (2008). Analyzing Bangladesh’s Debt Sustainability Using SimSIP Debt, Bangladesh Development Research Working Paper Series 2, Bangladesh Development Research Center (BDRC). Islam, Md. Ezazul & Bishnu Pada Biswas (2005). Public Debt Management and Debt Sustainability in Bangladesh, BIDS, XXXI (1&2): 79-102. lyoha, Milton A (1999). External debt and economic growth in sub-Saharan African countries: An econometric study. AERC Research Paper 90, African Economic Research Consortium, Nairobi. Karagöl, Erdal (2002). The Causality Analysis of External Debt Service and GNP: The Case of Turkey. Central Bank Review 1:39-64. Kothari, C R. (1999). RESEARCH METHODOLOGY Methods & Techniques, 2nd Edn., New Delhi: Wishwa Prakashan. Krugman, Paul (1992). MARKET-BASED DEBT REDUCTION SCHEMES. CURRENCIES AND CRISES, Paul Krugman. Cambridge, Massachuettss, London, England: The MIT Press. Malik, Shahnawaz, et.al.,(2010). External Debt and Economic Growth: Empirical Evidence from Pakistan, International Research Journal of Finance and Economics, 44: 88-97. Ogunmuyiwa, M.S (2011). Does External Debt Promote Economic Growth in Nigeria?, Current Research Journal of Economic Theory 3(1): 29-35. Paudel, R., et al., (2009). Foreign Debt, Trade Openness, Labor Force and Economic Growth: Evidence from Sri Lanka, The ICFAI Journal of Applied Economics, 8 (1): 57-64. Rocha, Fabiana (2006). Are error correction models the best alternative to assess capital mobility in developing countries?, Economia Aplicada, 10(2): 267-285. Were, Maureen (2001). The Impact of External Debt on Economic Growth in Kenya, Discussion Paper 2001/116, United Nations University/World Institute for Development Economics Research. Wijeweera, Albert, et.al., (2005). Economic Growth and External Debt Servicing : A Cointegration Analysis of Sri Lanka, 1952 to 2002, Working Paper Series in Economics, University of New England, School of Economics. Copyright © 2012 SAVAP International www.savap.org.pk www.journals.savap.org.pk 515
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Satisfactory Essays

    The Effects Of National Debt
    • 415 Words
    • 2 Pages

    The Effects Of National Debt

    The national debt is increasing day by day, and the federal government is struggling to tackle it. As of now, the national debt has comprised to 18 trillion dollars. Americans and economists are concerned about the national debt, and the effect it will have in the country and even the world. As President George Washington once stated, “To contract new debt is not the way to pay old ones”, which is what seems to be happening recently. Debt needs to be addressed as a national issue along with the factors that contribute to its negative and positive traits .…

    • 415 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Debt Hinders Development of Poor Countries
    • 702 Words
    • 3 Pages

    Debt Hinders Development of Poor Countries

    The capacity of the country to develop is greatly undermined by debt crisis because the country is always involved in the repayment of the principle loans of the interests. This is a significant outflow of capital to finance debts. Excessive debt, burdens the poor nations since they are forced to drain away all the resources meant for development in order to finance their debts. Underdevelopment is worse when the money borrowed is embezzled hence ending up in private pockets which leads to the whole country repaying what they never used. The economy of the country is also undermined since all the sectors of the economy including health sector, education sector, agricultural sector, tourism sector and other sectors are compromised for the country to repay back the debts.…

    • 702 Words
    • 3 Pages
    Good Essays
    Read More
  • Powerful Essays

    Compare and Contrast the East Asian and Argentine Crisis
    • 3683 Words
    • 15 Pages

    Compare and Contrast the East Asian and Argentine Crisis

    Bibliography: 2. Sachs D, 1989. Developing Country Debt and Economic Performance: The international financial system. Chicago: The University of Chicago Press…

    • 3683 Words
    • 15 Pages
    Powerful Essays
    Read More
  • Better Essays

    Bangladesh Government Budget Deficit
    • 1365 Words
    • 6 Pages

    Bangladesh Government Budget Deficit

    Fiscal Policy generally refers to the use of taxation and government expenditure to regulate the aggregate level of economic activity in a country. Fiscal policy in Bangladesh basically comprises activities, which the country carries out to obtain and use resources to provide services while ensuring optimum efficiency of the economic units. The policy influences the behaviour of economic forces through public finance. Major objectives of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the country, promote economic growth, and develop a mechanism for equitable distribution of income. The main tools to achieve these objectives are variation in public revenue, variation in public expenditure, and management of public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis.…

    • 1365 Words
    • 6 Pages
    Better Essays
    Read More
  • Good Essays

    Causes and Consequences of Global Imbalances
    • 10217 Words
    • 41 Pages

    Causes and Consequences of Global Imbalances

    ———. 2006b. “Private Consumption in Emerging Asia.” In Asia and Pacific Regional Economic Outlook. International Monetary Fund, Washington, DC. ———. 2006c. “Asia’s Investment Decline: Is it Real?” In Asia and Pacific Regional Economic Outlook. International Monetary Fund, Washington, DC. James, W., D. Park, S. Jha, J. Jongwanich, A. Terada-Hagiwara, and L. Sumulong. 2008. The US Financial Crisis, Global Turmoil, and Developing Asia: Is the Era of High Growth at an End? ADB Economics Working Paper Series No. 139, Economics and Research Department, Asian Development Bank, Manila. Kujis, L. 2005. Investment and Savings in China. World Bank Policy Research Paper Series No. 3633, World Bank, Washington, DC. Mussa, M. 2004. “Exchange Rate Adjustments Needed to Reduce Global Payments Imbalances.” In C. F. Bergsten and J. Williamson, Dollar Adjustment: How Far? Against What? Institute for International Economics, Washington, DC. Park, D. 2007. Beyond Liquidity: New Uses for Developing Asia’s Foreign Exchange Reserves. ERD Working Paper No. 109, Economics and Research Department, Asian Development Bank, Manila. ———. 2008. Globalization, Erosion of Tax Base, and the Revenue Potential of Developing Asia’s Foreign Exchange Reserve Build-Up. ERD Working Paper No. 122, Economics and Research Department, Asian Development Bank, Manila. Park, D., and K. Shin. 2009. “Saving, Investment and Current Account Surplus in Developing Asia.” Mimeo. Roubini, N., and B. Setser. 2004. “The US as a Net Debtor: The Sustainability of the US External Imbalance.” Mimeo, New York University. Setser, B. 2008. “Will the U.S. Current Account Deficit Fall Faster than IMF Forecasts?” Council on Foreign Relations. Available: http://blogs.cfr.org/setser/2008/10/09/will-the-us-current-account-deficit-fallfaster-than-the-imf-forecasts/. Weimer, C. 2008. The Saving Story behind China’s Trade Imbalance. Working Paper, National University of Singapore, Singapore. Available: www.lkyspp.nus.edu.sg/wp/wp08_08.pdf. Wong, Y. C., and C. Adams. 2002. “Trends in Global and Regional Foreign Direct Investment Flows.” Paper presented at the Conference on FDI Opportunities and Challenges for Cambodia, Laos and Vietnam, jointly organized by the IMF and the State Bank of Vietnam, Hanoi, Viet Nam, 16–17 August.…

    • 10217 Words
    • 41 Pages
    Good Essays
    Read More
  • Better Essays

    Public Borrowing in the Philippines
    • 2791 Words
    • 12 Pages

    Public Borrowing in the Philippines

    Public debt - the total of the nation's debts: debts of local, state, and national governments; an indicator of how much public spending is financed by borrowing instead of taxation. [2]…

    • 2791 Words
    • 12 Pages
    Better Essays
    Read More
  • Powerful Essays

    Public Finance in the Philippines a Review of the Literature
    • 17823 Words
    • 72 Pages

    Public Finance in the Philippines a Review of the Literature

    It is the objective of this paper to take the initial step in bridging the gap between public finance and policy making in the Philippines by reviewing the existing literature on this subject. For purposes of the paper the field of public finance was divided into four areas: (1) taxation, (2) government expenditures, (3) the budget process and (4) public debt. A historical perspective of each of these sub-topics is presented. In addition, the various research and policy issues related to each of the said sub-topics are discussed and synthesized. Among others, these issues include: (1) the tax effort, (2) allocative effects of taxation, (3) taxation and inflation, (4) fiscal incidence, (5) the budget process and economic development and (6) the optimal level of debt.…

    • 17823 Words
    • 72 Pages
    Powerful Essays
    Read More
  • Best Essays

    Neo-Liberalism and “Sound Finance” in India: Viewing Economic Theory and Praxis from the Lens of the People
    • 6174 Words
    • 25 Pages

    Neo-Liberalism and “Sound Finance” in India: Viewing Economic Theory and Praxis from the Lens of the People

    The present economic crisis, while engulfing the whole capitalist world, has left its distinct imprint on the Indian economy. The latter has been characterized by a sharp decline in the GDP growth rate, a negative growth rate in agricultural and manufacturing sector, massive job losses and plummeting crop prices in the recent period. However, as one of the recent estimates of IMF reveals, the fiscal stimulus provided by the government under such an appalling situation is the one which is the fourth lowest among the G 20 countries. This apathy of the government to raise its expenditures adequately, nonetheless, has been one of the specific reflections of its “sound finance”[1] policies in the neo-liberal regime. Such a fiscal policy in the neo-liberal regime has been typically marked by deflationary policies and decline in the development expenditures in India. Nonetheless, it has found ‘adequate’ justification in economic theories, which have been typically haunted by the spectre of fiscal deficit and characterized by what Joan Robinson (1964) had once termed as the “humbug of finance”. However, the very fact that those economic theories continue to be in vogue both within the academia and policy circles, inspite of its inherent biasness against the common mass, leads one to examine its very relevance in the Indian context.…

    • 6174 Words
    • 25 Pages
    Best Essays
    Read More
  • Powerful Essays

    Study on Indian Government Debts and Deficits and Its Effect on the Growth Sustainability
    • 4361 Words
    • 18 Pages

    Study on Indian Government Debts and Deficits and Its Effect on the Growth Sustainability

    Study on government deficits and debts in India. How do government debt-deficit sustainability issues hinder India’s growth…

    • 4361 Words
    • 18 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    Internal and External Debt in the Philipoines
    • 1676 Words
    • 7 Pages

    Internal and External Debt in the Philipoines

    Our government borrows money for the purpose of financing the government’s budget deficits and makes some profitable and least cost projects for our country. A greater capital outlay from the national budget can support infrastructures for development, all planned for the advancement of the greater good. These budgets and debts may only depend on how the government handles these. These borrowings by our government are commonly known as “National debt”. Since the Government is generally the representative of people, Government debt or national debt is actually debt of the people or tax payers. Hence national debt is also known as public debt.…

    • 1676 Words
    • 7 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Evolution of Fiscal Policy
    • 310 Words
    • 2 Pages

    Evolution of Fiscal Policy

    Though a large fiscal deficit by itself is not bad, it can affect the country’s economic growth adversely. A large fiscal deficit implies high government borrowing and high debt servicing (the total debt servicing will be 37 per cent of revenue expenditure in 2009-10), which in turn could mean a cut back in spending on critical sectors like health, education and infrastructure. This reduces growth in human and physical capital, both of which have a long-term impact on economic growth. Large public borrowing can also lead to crowding out of private investment, inflation and exchange rate fluctuations (impacting exports). However, if productive public investments increase and if public and private investments are complementary, then the negative impact of high public borrowings on private investments and economic growth may be…

    • 310 Words
    • 2 Pages
    Good Essays
    Read More
  • Powerful Essays

    Research
    • 3167 Words
    • 13 Pages

    Research

    Therefore,we will review some key studies on the relationship between inflation rate, population growth rate and public debts growth rate with government expenditure by providing logical explanation on the direction of the relationship between those dependent and independent variables. Thus, we will conduct an empirical study by using twenty years of annually data.…

    • 3167 Words
    • 13 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Sources of Demo Data
    • 2306 Words
    • 10 Pages

    Sources of Demo Data

    Obadan, M. 2004. The External Debt Crisis: Strategies and policies. In African Development and Governance strategies in the 21st century. London . Zed Books. Pp. 140-164.…

    • 2306 Words
    • 10 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Public Debt
    • 6881 Words
    • 20 Pages

    Public Debt

    Almost every country in the world, while doing economic transformations, resorts to external sources of financing. Rational approach to foreign loans, credits and other types of help contributes into acceleration of economic development and solving social-economic problems. However the absence of complete integrated government policy in attracting and using external financial sources leads to formation of external debt which becomes a large barrier heading toward to economic transformations. Majority of developed countries, members of Paris club, are not only the largest creditors, but also greatest debtors. Starting from 17th century along with the development of government credit…

    • 6881 Words
    • 20 Pages
    Powerful Essays
    Read More
  • Good Essays

    India's Fiscal Deficit and Related Issues
    • 920 Words
    • 4 Pages

    India's Fiscal Deficit and Related Issues

    * There are two things that matter in government-debt dynamics. First consideration The simple r-g assumption is one of the most important in debt dynamics: an r-g of greater than zero (when interest rates are greater than GDP growth) means that the debt stock increases over time. An r-g of less than zero causes it to fall.…

    • 920 Words
    • 4 Pages
    Good Essays
    Read More

Related Topics