...paper would discuss the effect of external debt on economic growth with four areas, the effect on private local investment, foreign direct investment, government expenditure and export growth. Three theoretical models are adopted, namely Debt Overhang Theory, Liquidity Constraint Hypothesis and Crowding-out Effect respectively. Two policy implications on debt relief and debt restructuring are analyzed. And finally, the paper will include the discussion on the necessary tradeoff with inflation and contractionary fiscal budgeting after debt servicing. KEY Words: Heavily In-debt Poor Countries (HIPC), External Debt/Foreign Debt) Sustainability, Debt-GNI Ratio, Debt-Export Ratio, Debt Service Ratio Word count (excluding table of content, tables and reference): 2974 Topic: The Effect of External Public Debt in Developing Countries on Economic Growth - An Empirical Study on Argentina Abstract P.1 1. Introduction P.3 1.1 Literature Review P.4 1.2 Structure and Magnitude of External Debt of Argentina P.4 1.3 Theoretical Relationship between External Debt and Economic Growth P.6 1.4 Research Question(s) and Framework P.7 2. Data Collection and Empirical Analysis P.7 2.1 The effect of external public debt on: ...
Words: 3688 - Pages: 15
...consistent economic growth in their early years of independence (World Bank, 2004). Although majority of these countries succeeded in expanding their basic infrastructure and social services among others. It was therefore anticipated that much progress will be achieved in terms of raising the average income per head and improving on the general welfare of Africa following the average growth in real per capita income of about 3.8 % per annum between 1967 and 1970 (Mbanga, 2008). In the early 1970s, developing countries borrowed to finance their current account deficit. Such borrowing was geared towards boosting the level of economic growth and development. By 1980s, the developing countries’ debt had accumulated and the international financial institutions from this period started to provide both technical and financial debt-management assistance to debtor countries. However, this effort still aimed at fostering economic growth, was also equally meant to reduce both debt burdens and poverty level of these...
Words: 1339 - Pages: 6
...In the past as today, the deficit budget policy is famous instrument of fiscal policy used to increase the rate of economic growth of the country. That way of financing was establish after the two world wars, oil crises and current financial and economic crises. The objective in seeking deficit financing is to finance the shortfall between government expenditures and tax receipts. Tax increases are not politically palatable. Governments often resort to deficit financing when other components of GDP such as private consumption decline during recessionary periods. Such deficits, if undertaken for a short period with an action plan to create equivalent surplus in near future, could reverse decline in real GDP and stimulate growth in real GDP for the benefit of citizens of the nation. Structural deficits are indicative of inability to reduce entrenched government expenses. The sustainable level of accumulated deficits can also be determined with reference to both the deficit servicing requirements and deficit servicing sources. This analysis will entail identification of cause and effect relationships that determine the factors influencing each of these two areas. As shown by other researchers, the explanatory variables leading to deficits include domestic budgetary receipts; tax structure; budgetary endowments; budgetary discretionary expenses; trade deficit; growth in real GDP; private consumption; domestic capital formation; and foreign direct investment flows. Deficit servicing...
Words: 5493 - Pages: 22
...Non-linear Effects of Fiscal Deficits on Growth in Developing Countries Christopher S. Adam and David L. Bevan(*) Department of Economics, University of Oxford August 2001 Revised December 2001 Abstract This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. It finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP. While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. There is also evidence of interaction effects between deficits and debt stocks, with high debt stocks exacerbating the adverse consequences of high deficits. Keywords: Fiscal deficits, growth, threshold effects, developing countries. JEL Codes: H3 , H6 , O4 The original version of this paper was prepared for the Cornell/ISPE Conference Public Finance and Development held at Cornell University, September 7-9, 2001. We thank our discussant, Mick Keen, conference participants, and also Jon Temple for helpful comments on the paper. Corresponding author: David Bevan (david.bevan@economics.ox.ac.uk) Department of Economics, Manor Road, Oxford OX1 3UL Tel: +44 (0) 1865 271075 Non-linear Effects of Fiscal Deficits on Growth in Developing Countries 1. Introduction A great deal of attention has been devoted in both theoretical and empirical literatures to the possible impact of various fiscal magnitudes on growth. In general, the theoretical...
Words: 10618 - Pages: 43
...| Debt Management Program in the Philippines | The first debt and debt service reduction operation the World Bank financed was the Debt Management Program Loan to the Philippines, approved in 1990. Its main objective was to help restore the Philippines' creditworthiness by reducing the destabilizing pressures exerted by an excessive debt-service burden. The government, having inherited a huge debt service obligation, formulated a debt restructuring program for the country and a request for debt-relief from creditors, with assistance from the Bank and the IMF. Several events helped improve the Philippines' creditworthiness. Three of them are particularly relevant to the operation. First, the government adopted a program of deep structural and macroeconomic reform. Second, it reduced the debt stock by about $650 million equivalent, or about 2.3 percent of its outstanding debt at the time, using Bank and IMF financing to buy back $1.46 billion of debt from commercial banks at 50 percent discount. And finally, by signaling confidence in the Philippines' commitment to sound macroeconomic reform, the Debt Management Loan opened up international financial markets for the country. However, the program's success also led to a new problem. It encouraged new loans and other inflows of capital, which eventually became a major source of monetary problems and instability. The resulting increase in inflation forced the government to rein in the economy, suppressing growth; the currency...
Words: 1717 - Pages: 7
...performance. The resources and funds required to fuel the sustained future growth of these firms as they compete with global powerhouses from developed markets therefore become important factors. In recent decades the process of globalization has made it increasingly common for developing country firms to internationalize and gain access to developed country capital markets. Developping countries are playing a significant role in the developpment of their home-country economies because of a higher use of external financement, which could give these firms the opportunity of operating in countries with more developped financial markets and a better access to external funds. In addition, developed financial markets can reduce the problem of asymmetric information. To evaluate the role that both the level of financial market development and firm-level characteristics have in the relationship between internationalization and debt financing, they employ three-variable interactions. The purpose was to find out how the relationship between the level of foreign sales and financial development differs for types of firms as classified by levels of financial constraint and asymmetric information. It reveals that firms from developing countries that expand into international markets have better access to more and cheaper external funds. Moreover such firms are able to raise these funds at lower costs, even though higher growth opportunities lead to higher asymmetric information...
Words: 5212 - Pages: 21
...Global Economic Crisis – Immediate Solution The turbulence we are going through is unprecedented in the world History. What started as A financial institution failure, affected not only the leading financial institutions in the world but also the major developed economic systems in the world leading to a systemic failure. Unlike in the past , when it had an impact on only a few countries and few asset classes, this time, the crisis had its effect on almost all countries in the world and all asset classes. The crisis had a contagion effect and spread far and wide without an end in sight creating more and more uncertainties day by day. When Government creates stimulus it goes to increase the government debt making the government vulnerable to financial weakness. In a few cases , where there was a government failure, investors have taken an hair cut in their investments. But in General, Sovereign debt is supposed to be more trustworthy since Central Banks can print money to lend it to the government when in need. Governments in an effort to stop economic slide, tried many measures including Monetary and Fiscal Stimulus but black swan events had overtaken the efforts of governments. Many of the developed countries printed more money and tried to stimulate the Economic Growth and reduce the unemployment. But it has gone into a spiral. The only effect is the outstanding debts of governments are going up, their credit rating is being downgraded and there was a lot of trust...
Words: 1253 - Pages: 6
...FundContentsPrefaceIntroductionWhy May Fiscal Adjustment Be Needed? The Impact of Fiscal Policy on Macroeconomic Policy Objectives Inflation External Current Account Growth Fiscal Adjustment to Ensure Sustainability Links to Other Policy InstrumentsHow Should the Fiscal Stance Be Assessed? Fiscal Impact of Alternative Methods of Deficit Financing Other Measures Used to Assess the Fiscal Stance The Sensitivity of a Fiscal Assessment to the Time Frame of Analysis Definition of Government Accounts for Macroeconomic Analysis Coverage of Government Operations Timing of the Impact of Fiscal Transactions Defining the "Overall Fiscal Balance"How Much Fiscal Adjustment Is Required? A Framework for Fiscal Adjustment Determining the Amount of Fiscal Adjustment Reducing the Fiscal Deficit Quality of AdjustmentHow Should Fiscal Adjustment Be Effected? Measures to Improve the Tax System and Increase Revenue Characteristics of a Desirable Tax System Design of Major Taxes Rationalization of Expenditure Policies Expenditure Reduction in the Short Run Structural Public Expenditure ReformReferencesBoxes1. Adverse Consequences of Excessive Fiscal Expansion for Growth2. The Exchange Rate Effects of Fiscal Policy3. Quasi-Fiscal Activities of Public Financial Institutions4. When Should a Country Run a Fiscal Surplus?5. Technical Assistance for...
Words: 15497 - Pages: 62
...org/en/development/desa/policy/wesp/index.shtml World Economic Situation and Prospects Executive Summary 2012 1 Executive Summary Global economic prospects for 2012 and 2013 The world economy is on the brink of another major downturn The world economy is teetering on the brink of another major downturn. Output growth has already slowed considerably during 2011 and anaemic growth is expected during 2012 and 2013. The problems stalking the global economy are multiple and interconnected. The most pressing challenges lie in addressing the continued jobs crisis and declining prospects for economic growth, especially in the developed countries. As unemployment remains high, at nearly 9 per cent, and incomes stagnate, the recovery is stalling in the short run owing to the lack of aggregate demand. But, as more and more workers are out of a job for a long period, especially young workers, medium-term growth prospects will also suffer because of the detrimental effect on workers’ skills and experience. The rapidly cooling economy has been both a cause and an effect of the sovereign debt crisis in the euro area, and of fiscal problems elsewhere. The sovereign debt crises in a number of European countries worsened further in 2011 and aggravated weaknesses in the banking sector. Even bold steps by the Governments of the euro area countries to reach an orderly sovereign debt workout for Greece have been met with continued financial market turbulence and heightened concerns of debt default in some of the larger...
Words: 6774 - Pages: 28
...7431 AGRICULTURE FINANCING AND ECONOMIC GROWTH IN NIGERIA Obansa S. A. J. Departments of Economics University of Abuja I. M. Maduekwe Departments of Economics and Agric. Economics Department University of Abuja Abstract The importance of agricultural surplus for the structural transformation accompanying economic growth is often stressed by development economists. This lead to the question: Does agriculture financing matters in the growth process? To this end, the need to investigate the impact of agriculture financing on economic growth appears more imperative for Nigeria. This paper employed secondary data and some econometric techniques such as Ordinary Least Square (OLS); Augmented Dickey-Fuller (ADF) unit root test; Granger Causality test. The results of the various models used suggest that there is bidirectional causality between economic growth and agriculture financing; and there is bidirectional causality between economic growth and agricultural growth. It further suggests that productivity of investment will be more appropriately financed with foreign direct private loan, share capital, foreign direct investment and development stocks. And also capital-output ratio will be more appropriate financed with multilateral loan, domestic savings, Treasury bill, official development assistant, foreign direct investment and development stock. It is recommended that maintenance of credible macroeconomic policies that is pro-investment; and debt-equity swap option are necessary...
Words: 11108 - Pages: 45
...CAD ESSAY Analyse the causes and effects of Australia’s on-going current account deficit. The balance of payments is the record of all of a country’s international financial transactions in a given year and consists of the current account and the capital and financial account. The current account consists of non-reversible, external transactions and includes Balance on Goods on Services as well as Primary and Secondary Income components. Australia’s persistently high current account deficit (CAD) is contributed to by structural and cyclical factors and a sustained CAD may have both positive and negative impacts on an the Australian economy Australia’s current account has persistently been in large deficits since the mid-1980s and Australia has continued to pay out considerably large amounts of money for goods, services and other income and transfer payments. As of 2013 is balance on the current account was recorded as a deficit of $ -47.7 billion dollars. The CAD is influenced by cyclical factors, such as changes in global demand for commodities, Australia’s terms of trade and the demand for imports from Australian consumers and businesses. In the domestic economy, expansionary economic activity will contribute to a higher CAD. These are determined by the level of economic growth in Australia relative to that of major trading partners. If economic activity is high, Australian demand for imports will exceed overseas demand for Australian exports, representing a leakage...
Words: 1043 - Pages: 5
...significant impact on youths and families with low income. It effects on the American economy has triggered a vast debate currently in the US with a focus on the international poverty reduction proponents and opponents. Therefore, a comprehensive analysis of the effects on America based on its economy is highly recommended for organizations as well as professionals supporting such international initiatives. Currently, the impact of foreign poverty today is immense among youths. Therefore, each foreign poverty reduction proponents in the United States of America must first involve the analysis of its meaning, theories, and causes as well as its effects...
Words: 546 - Pages: 3
...Indonesian Domestic & Foreign Debt Since the Old Order (Orde lama), Indonesia has used foreign borrowing to finance development. Indonesia utilized foreign debt during the first period of 1966 . In the early 1960’s as a new independent country, government needs fund to finance country’s development. While only limited domestic fund source available with undeveloped domestic capital market, to fill domestic saving–investment gap external fund was the only available source. It is defined the primary goal of external fund was to accelerate urgently needed economic growth, where the external debt would turn into government’s spending which in turn would generate investment and to accelerate the growth. As economy developed, it was expected that the government could earn sufficient foreign exchange to service foreign obligations, to accelerate the development process, and gradually to lessen the country’s dependence on external resources. And still in the 1990’s, external public debt actually was not solely addressed to fill the financing gap of the government but rather to fill up budget deficit in order to foster the economic growth rapidly. The huge growing number of external debt used however has not always significantly contributed to the growth expected. It’s true that the economic growth used to reach the level of 7% in the middle of 1990’s. But on the other hand, the debt service also increased significantly. The debt burden indicators proved...
Words: 1299 - Pages: 6
...Impacts of Globalisation Globalisation, an important characteristic within the contemporary economic environment, is a term to describe the forces that transform an economy into one characterised by the embracement of the freer movement of trade, investment, labour and capital. The drive for globalisation has resulted in greater economic growth globally with an increased access to goods and services provided around the world. However, this increase in world output is often associated with detrimental effects in relation to the stability of a national economy being extremely susceptible to the ups and downs of the international business cycle, and also both positive and negative effects on the standards of living. It is often difficult to categorize an economy as being globalised, yet there are several key indicators that suggest economic management decisions undertaken by government’s have, resulted in globalisation. The main evidence to suggest the globalisation of nations has been the growth in global markets, changes in global consumption and resource use patterns, and the establishment of international agreements as well as the rise transnational corporations. Globalisation has been essentially driven by the breaking down of economic barriers between nations over recent decades that have resulted in greater worldwide economic growth. This has been spurred on by the trend towards the deregulation of national economies, as well as reforms to encourage greater competitiveness...
Words: 1244 - Pages: 5
...Frances Santos Angelito Laderas Antonio Vitan Jr. Ma. Lourdes Cuenco SUBMITTED TO PROFESSOR CYNTHIA RAVELA CUBOS June 28, 2011 THEORIES OF EXPENDITURE GROWTH Three prominent theories that used the time-pattern of expenditure in the long-run to explain the expansion of the public sector are discuss in this chapter. Although this theories were formulated based on the experience of the now developed countries, the general idea of government expansion and the underlying concepts provide some explanations as to the pattern and growth of our government. Adolph Wagner a 19th century German political economist. Who made one of the earliest attempts to explain public sector growth. Observe the tendency of the public sector in a number of industrialize countries such as Britain, USA, France, Germany, etc. to grow, both absolutely and relative to the rest of the economy. He predicted a public sector that would grow continuously, and considered society’s economic and social structure as factors that influenced this continuous growth. Wagner’s prediction was called the “law of increasing public and particularly state activities” or the “Wagner’s Law”. The equation below shows Wagner’s presumption that the existence of a functional cause and effect relationship between growth of an economy and the relative growth of its public sector. RPCOPG1 RPCOPG2 ____________ < _____________ RCPI1 ...
Words: 3839 - Pages: 16
