Public debt and pro-poor economic growth evidence from South Asian countries

Abstract

Over the years, most developing countries have failed to collect enough revenues to finance their budgets. As a result, they face the problem of twin deficits and are relying on public external and domestic debt to finance their developmental activities. NGOs and anti-globalisation movements have propagated the view that instead of reducing poverty public debt has increased the miseries of the poor. The current study examines the consequences of public debt for economic growth and poverty regarding selected South Asian countries, i.e., Bangladesh, India, Pakistan and Sri Lanka, for the period 1975–2010. It develops an empirical model that incorporates the role of public debt into growth equations and the model is extended to incorporate the effects of debt on poverty. The model is estimated by using standard panel data estimation methodologies. The results shows that although public debt has a negative impact on economic growth, neither public external debt nor external debt servicing has a 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 positive relationship with economic growth and a negative relationship with the GINI coefficient, indicating that domestic debt is pro-poor.