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Jurnal Ekonomi Malaysia

55 (3) 2021 125 – 136

The Effect of Foreign Debt on the Economic Growth

Department of Economics
Faculty of Economics and Business
Universitas Tanjungpura
Jl. Prof. Hadari Nawawi
Kota Pontianak 78121
INDONESIA

erni.panca.k@ekonomi.untan.ac.id

Abstract

This study examines the effect of foreign debt on the economic growth. Using a time series Indonesian data over 1981 – 2017, we employ the Error Correction Model based on the debt overhang theory. Foreign debt was found to produce negative and significant effect on the economic growth both in the short- and long-run. The paper further found that Foreign Direct Investment (FDI) improves the economic growth. Foreign debt that continues to increase drastically in the long-run could slow down the economic growth which may indicate the economy experiencing a debt overhang. It is thus imperative for the government to ensure the debt ratio remain below a certain threshold. Further, foreign debt should be prioritized to develop infrastructure with a broad multiplier effect and the FDI likewise prioritized for labor-intensive sectors.

Keywords

economic growth; error correction model; Foreign debt; Foreign direct investment; Indonesia

JEL Codes

E22, F34, O47

Author’s Acknowledgement

Many thanks to Nindya Lestari for enlightening the statistical results and support from the MIICEMA committee

http://dx.doi.org/10.17576/JEM-2021-5503-09
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Bibliography

Export Bibliography

Kurniasih, E. P. (2021). The Effect of Foreign Debt on the Economic Growth. Jurnal Ekonomi Malaysia, 55(3), 125–136. http://dx.doi.org/10.17576/JEM-2021-5503-09

@article{kurniasih2021effect,
  title={The Effect of Foreign Debt on the Economic Growth},
  author={Kurniasih, Erni Panca},
  journal={Jurnal Ekonomi Malaysia},
  volume={55},
  number={3},
  pages={125—136},
 

year={2021},
}

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