Capital accumulation, external indebtedness, and macroeconomic performance of emerging countries

Abstract

This paper aims at presenting a nonlinear post Keynesian growth model to evaluate at the theoretical and empirical levels the relationship between external indebtedness and economic growth in emerging countries. To this end, a post Keynesian endogenous growth model is presented, in which: (1) the desired rate of capital accumulation is assumed to be a nonlinear function of external indebtedness as a share of capital stock; (2) an endogenous country risk premium is assumed to be an increasing (linear) function of external indebtedness (as a share of capital stock); (3) there is a fixed exchange rate regime and perfect capital mobility in the sense of Mundell and Fleming. The main theoretical result of the model is the existence of two long-run equilibrium positions, one of which has a high level of external indebtedness (as a ratio of capital stock) and a low profit rate and the other has a low level of external indebtedness and a high profit rate. This means that "excessive" external indebtedness can result in stagnant growth due to its negative effect on the rate of profit. To test the effects of external indebtedness on the rate of economic growth in emerging economies, a dynamic panel is estimated to evaluate whether external debt has an effective negative influence on economic growth in emerging countries. An empirical test of demand-led growth equations with a dynamic panel for fifty-five emerging countries confirms the potential negative effects of external debt on long-term growth rates in the sample countries.

Keywords:

• External debt
• balance of payments
• and capital accumulation