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Foreign Debt and Domestic Savings In Developing Countries

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  • Luke, Okafor
  • Joanna, Tyrowicz

Abstract

This paper approaches the question of potential causality between foreign debt and domestic savings in the context of developing countries. Literature provides evidence in as far as foreign debt and development is concerned, but little attention was given so far to internal potential for capital formation. We provide a theoretical framework and test its relevance using 1975-2004 data for two groups of countries: sub-Saharan Africa and Latin America with the Caribbean. With the use of instrumental variables we find negative impact of foreign debt on domestic savings especially in the long run. The results are not susceptible to the choice of countries or outliers. However, the relationship between foreign debt and savings seems to depend on debt accumulation gaining significance only after passing a country specific threshold.

Suggested Citation

  • Luke, Okafor & Joanna, Tyrowicz, 2008. "Foreign Debt and Domestic Savings In Developing Countries," MPRA Paper 14819, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:14819
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    References listed on IDEAS

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    1. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital – is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series qt31n8m3bt, Department of Economics, UC Santa Cruz.
    2. repec:aer:wpaper:13 is not listed on IDEAS
    3. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2007. "Sources for financing domestic capital - Is foreign saving a viable option for developing countries?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 682-702, September.
    4. Mbire, B. & Atingi, M., 1997. "Growth and Foreign Debt: The Ugandan Experience," Papers 66, African Economic Research Consortium.
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    6. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    7. Ndikumana, Leonce & Boyce, James K., 2003. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," World Development, Elsevier, vol. 31(1), pages 107-130, January.
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    9. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
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    More about this item

    Keywords

    Africa; foreign debt; domestic savings; Latin America; MIU;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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