Emerging Theoretical Approach for Sustainable External Debt and Economic Growth

Abstract

The issue of external debt sustainability has evolved around the globe since World War II. A country requires foreign borrowing to support the continuality of its economic activities in good and poor times of economic performance. External debt can be growth-enhancing if it is not excessive. In contrast, successive external debt obligations faced by those substantially indebtedness countries can be detrimental. It can jeopardize the growth of developing countries that largely rely on external funding to support domestic development and growth. This paper reviews the emerging theoretical approach for sustainable external debt and economic growth. The predominant theories are the growth-enhancing debt theory, dual-gap theory, debt-overhang theory, and the crowding-out effect.