 Public external debt, informality and production efficiency in developing countriesImed Drine () and Mahmoud Nabi Economic Modelling, 2010, vol. 27, issue 2, 487-495 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%. Keywords: Public; external; debt; Production; efficiency; Informality (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:27:y:2010:i:2:p:487-495 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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