Public Debt And Pro Poor Economic Growth Cross Country Analysis With Special Reference To Pakistan

Over the years most of the developing countries have failed to collect enough revenues to finance their budgets.As a result, they have to face the problem of twin deficits and must rely on public external and domestic debt to finance their developmental activities.However, the earlier triumphal view about debt-financed growth has been replaced by a more balanced view about how it affects economic growth, employment, inequality of income and wealth and the incidence of poverty.The positive effects relate to the fact that in resource-starved economies debt financing if done properly leads to higher growth and adds to their capacity to service and repay external and internal debt.The negative effects work through two main channels--i.e., “Debt Overhang” and “Crowding Out” effects. NGO’s and anti-globalization movements have propagated the view that instead of reducing the poverty public debt has increased the miseries of the poor.The present study examines the consequences of public debt for economic growth, investment and poverty regarding selected South East Asian countries i.e. Bangladesh, India, Pakistan, the Philippines and Sri Lanka, for the period 1975-2006.It develops a hybrid model that explicitly incorporates the role of public debt in the budget constraint and growth equations.This model has been further extended to incorporate the effects of debt on income inequality and poverty. Using these model, two separate types of analysis have been conducted, i.e. One based on panel data and the other on time series data of individual country. The estimation based on panel data shows that public external debt negatively affects per capita GDP and investment, which points to the existence of the “debt overhang effect”. On the other hand, public external debt servicing has an insignificant relationship with per capita GDP and investment which confirms the non-existence of the “Crowding-out effect”. The domestic debt has a positive and significant relationship with per capita GDP and negative with investment. Neither public external debt nor external debt servicing has significant relationship with income inequality, suggesting that public external debt is as good/bad for poor as it is for rich. However, domestic debt has a negative relationship with the GINI coefficient indicating that domestic debt is helpful in reducing the income inequality.To strengthen these results, the time series estimation of the individual countries of the sample has also been conducted. In the case of Bangladesh, public external debt along with debt servicing has a negative relationship with per capita GDP and investment, which confirms the “Debt overhang effect” and “crowding out” effects have adversely affected economic growth. Domestic debt has a negative impact on the investment but positive impact on per capita GDP, which suggests that domestic debt to some extent enhances public investment but it crowds out private investment. Public external debt does not have any distributional effects.However, domestic debt is helpful in reducing the income inequality. For India, external debt servicing and domestic debt have had a negative relationship with per capita GDP. But for reasons explained in the text, the estimation results of the relationship of public external debt and per capita GDP are ambiguous. As far as income inequality is concerned, the estimation results are spurious so that we cannot infer any firm conclusions from them. In Pakistan and the Philippines, public external debt has negative relationship with per capita GDP and investment confirming the existence of “Debt Overhang effect”. But due to insignificant relationships of debt servicing with investment and per capita GDP, the existence of the crowding out hypothesis could not be confirmed. Similarly, domestic debt has a negative, though insignificant, relationship with investment and per capita GDP. In other words, it seems to have crowded out private investment. In Pakistan, public external debt and debt servicing have insignificant relationship with GINI coefficient However, domestic debt tends to enhance income inequality. But, in the Philippines, external debt tends to raise the level of income inequality; but domestic debt remains neutral for its distributional effects. In Sri Lanka, public external debt has helped the process of economic growth.But debt servicing has a negative relationship with per capita GDP and investment. Although external debt has played a crucial role in the development of this civil war-hit country, debt servicing is still a major concern there. Domestic debt has an insignificant relationship with per capita GDP.Also unlike other countries in the model public external debt has reduced income inequality and has proved to be beneficial for the poor. However, domestic debt remains neutral for its distributional effects.