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Public External Debt, Informality and Production Efficiency In Developing Countries

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  • Drine IMED
  • Mahmoud SAMI NABI

Abstract

This paper proposes an alternative approach to investigate the non-linear effect of external debt on growth. In the theoretical part, we develop an endogenous growth model with formal and informal sectors to analyse the effect of the public external debt on the production efficiency. We show that an increase of the public external debt share increases the production efficiency through a positive externality effect. However, it generates an opposite effect via the reduction of the formal sector's size in favour of a less efficient informal sector. The resultant effect becomes negative beyond an optimal level. Besides, we show that a large stock of public external debt reduces the production efficiency when it leads to a tight fiscal policy which reduces the formal sector size. Empirically, using a stochastic frontier technique with unobserved heterogeneity, for a panel of 27 developing countries for the period of 1970-2005, we confirm that the turning point associated to the effect of the share external public debt is apparent at 84%.
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  • Drine IMED & Mahmoud SAMI NABI, 2009. "Public External Debt, Informality and Production Efficiency In Developing Countries," EcoMod2009 21500043, EcoMod.
    • Handle: RePEc:ekd:000215:21500043
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    2. Panagiotis Pegkas, 2018. "The Effect of Government Debt and Other Determinants on Economic Growth: The Greek Experience," Economies, MDPI, vol. 6(1), pages 1-19, February.
    3. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    4. Dimitris K Christopoulos & Gregorios Siourounis & Irene Vlachaki, 2016. "Democratic Reforms, Foreign Aid and Production Inefficiency," Manchester School, University of Manchester, vol. 84(3), pages 363-389, June.
    5. Panagiotis Pegkas & Christos Staikouras & Constantinos Tsamadias, 2020. "On the determinants of economic growth: Empirical evidence from the Eurozone countries," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 23(2), pages 210-229, June.
    6. Wang, Ruohan & Xue, Yi & Zheng, Wenping, 2021. "Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality," Economic Modelling, Elsevier, vol. 103(C).
    7. Tuncer GÖVDELİ, 2019. "External Debt and Economic Growth in Turkey: An Empirical Analysis," Sosyoekonomi Journal, Sosyoekonomi Society.
    8. Gebs, Mehdi & Nabi, Mahmoud Sami, 2021. "The economic impacts of digitalization through an extended input-output model: theory and application to Tunisia," MPRA Paper 113299, University Library of Munich, Germany.
    9. Adewale Hassan & Daniel Meyer, 2021. "Exploring the Channels of Transmission between External Debt and Economic Growth: Evidence from Sub-Saharan African Countries," Economies, MDPI, vol. 9(2), pages 1-16, April.

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