Most developing countries are dependent on external borrowing to achieve economic growth. However, external borrowing requires fixed payments independent of the actual return on the invested funds. If a country either invests the money inefficiently or is subject to unexpected difficulties, it may not be able to meet contracted service payments. Potential debt servicing problems have existed for many years, and recently, the actual occurrence of service interruptions has become more frequent. Despite the difficulty of servicing debt, it is optimal, in an economic sense, for selected Arab countries to borrow from abroad. Foreign capital goods are usually scarce in the selected countries, so their productivity is relatively high. External borrowing allows more imports of capital without forcing down consumption. As long as the productivity of the capital exceeds its cost, debt servicing problems should not arise. A study of three Arab countries indicates that, real GDP growth can be increased through external borrowing. However, a higher level of debt raises the likelihood of debt servicing difficulties. Even when the use of debt is efficient, a heavier debt burden makes these selected Arab countries more susceptible to unexpected shocks. However, if GDP growth is not overly ambitious, the debt servicing burden stabilizes and may eventually begin to decline. The greatest danger arises when future debt servicing requirements are ignored. A sharp increase in external debt may allow high GDP growth in the short run, but eventually the resulting debt service will become unsustainable. This study therefore, examines the impact of external debt on economic growth and external debt service on investment in three Arab countries from the middle income group in North Africa over the period 1982-2005. This study employs developed Chowdhury growth and investment models to determine the impact of external debt on economic growth during the period after the debt crisis. Moreover, a single equation model is inappropriate to analyze the relationship between external loans, economic growth, debt servicing and investment due to there being a circular relationship among them and other macroeconomic variables. Therefore, if only the output equation or investment equation are estimated, this is likely to understate the impact of external debt on economic growth. In addition, the relationship between external debt, investment and economic growth is not a simple one for a number of reasons. Firstly, the relationship between external debt, debt servicing, investment and economic growth, both indirectly and directly, must be viewed in terms of their impact on domestic savings and exports. Secondly, a complex relationship exists between external debt servicing and economic growth. Therefore, this study uses two equations to investigate the impact of external debt on economic growth and external debt service on investment in three Arab countries (Tunisia, Egypt and Morocco) using a macro econometric model estimated for the period 1982-2005. The empirical findings reveal that external debt does not affect growth directly. The results indicate that external debt affects investment positively and is statistically significantly indicating external debt in selected countries encourages investment rather than depresses it. The findings of this research are consistent with the economic theory that external loans stimulate economic growth in less developed countries. Therefore, investment plays a very important role in the growth of selected Arab countries‟ economies. Furthermore, the result also confirms that there is no sign of a crowding out effect through which external debt service is hypothesized to affect investment. The important finding that external debt tends to have a relationship with investment and growth suggests that relying on external debt to enhance economic growth is a good policy. In addition, these countries need to supplement their lack of domestic saving with external loans and other forms of foreign capital such as foreign direct investment.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:546313 |
| Date | January 2011 |
| Creators | Abuzaid, Lotfi Elhadi Mohamed |
| Contributors | Ward, Philippa ; Zhu, Nong |
| Publisher | University of Gloucestershire |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://eprints.glos.ac.uk/1185/ |
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