An Empirical Investigation of Debt Overhang on Selected Asian Countries

Abstract

<jats:p> The impact of external debt on investment is a very popular issue which has been empirically tested by many scholars. But when such debt becomes unsustainable it threatens sustainable economic development of a country. Since the inception of debt crisis in the 1980s, when and how external debt burden creates a debt overhang paradox is a controversial issue. Debt overhang is a paradox because debt is expected to stimulate growth and development of a country, but contrary to this expectation debt after crossing a threshold limit hinders such growth and development. This article examines whether huge external debt build over time really has a detrimental effect on investment at the country level. The present study has been conducted on 18 Asian countries of the world for the period from 2000 to 2015 by using the data from the World Development Indicators. Panel regression technique has been applied to examine the impact of external debt on investment. A Granger causality test has also been conducted on external debt and investment to find out whether external debt has any causal impact on investment. The result shows the existence of the debt overhang paradox. </jats:p>