The Effect of Foreign Debt on the Economic Growth

Erni Panca Kurniasih ()
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Erni Panca Kurniasih: Department of Economics Faculty of Economics and Business Universitas Tanjungpura Jl. Prof. Hadari Nawawi Kota Pontianak 78121 INDONESIA

Jurnal Ekonomi Malaysia, 2021, vol. 55, issue 3, 125-136

Abstract: This study examines the effect of foreign debt on the economic growth. Using a time series Indonesian data over 1981 - 2017, we employ the Error Correction Model based on the debt overhang theory. Foreign debt was found to produce negative and significant effect on the economic growth both in the short- and long-run. The paper further found that Foreign Direct Investment (FDI) improves the economic growth. Foreign debt that continues to increase drastically in the long-run could slow down the economic growth which may indicate the economy experiencing a debt overhang. It is thus imperative for the government to ensure the debt ratio remain below a certain threshold. Further, foreign debt should be prioritized to develop infrastructure with a broad multiplier effect and the FDI likewise prioritized for labor-intensive sectors.

Keywords: Foreign debt; Foreign direct investment; Indonesia; economic growth; error correction model (search for similar items in EconPapers)
JEL-codes: E22 F34 O47 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:55:y:2021:i:3:p:125-136

DOI: 10.17576/JEM-2021-5503-09

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