Foreign debt, economic growth and economic crisis
| DOI | https://doi.org/10.1108/17544401211233534 |
| Pages | 157-167 |
| Date | 15 June 2012 |
| Published date | 15 June 2012 |
| Author | Xuan Changyong,Sun Jun,Yan Chen |
Foreign debt, economic growth
and economic crisis
Xuan Changyong
School of Business, Huaihai Institute of Technology, Jiangsu,
People’s Republic of China and
School of Business, Renmin,
University of China, Beijing, People’s Republic of China
Sun Jun
School of Business, Huaihai Institute of Technology, Lianyungang City,
People’s Republic of China, and
Yan Chen
School of Economics and Management,
Beijing University of Posts and Telecommunications,
Beijing, People’s Republic of China
Abstract
Purpose – The purpose of this paper is to examine the relationship between foreign debt, economic
growth and economic crisis.
Design/methodology/approach – This paper constr ucts a Ramsey-Cas s-Koopmans mode l
theoretically and examines empirically the relationship between foreign debt, economic growth and
economic crisis using US data over the period of 2003 and 2008.
Findings – The paper finds that if the debt transformation rate is low when the debt ratio rises over a
certain point; economic growth will be hindered, and may even trigger economic crisis. In contrast,
high debt transformation rate may facilitate economic growth. However, the paper also shows that
when the debt ratio exceeds a certain point, the debt will become a barrier to economic growth. These
results will be of interest to policy makers not only in developed countries but also in emerging
economies such as China.
Originality/value – These findings suggest that the relationship between debt, economic growth
and economic crisis is not uniform, but depends on debt transformation rate.
Keywords Foreign debt,Economic growth, Economic crisis, Debttransformation rate,
United States of America
Paper type Research paper
1. Introduction
The last few years have seen a global financial crisis unmatched since the great
depression. In many countries, foreign debt accumulated exceeds the borrowers’ ability
to pay it off and results in defaulting on their repayment commitments or deferring their
debt. After the Second World War, especially from the 1960s onward, an increasing
number of developing countries adopted a policy of using foreign funds to facilitate
economic development. Indeed, foreign funds helped the economic development of these
developing countries, created the “economic miracles” of Brazil, and the economic
take-off of some emerging Asian economies. However, after the 1980s, some developing
countries, especially Latin American countries, such as Brazil, Argentina, and Mexico,
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Foreign debt
157
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 2, 2012
pp. 157-167
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211233534
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