Pakistan Institute of Development Economics



Debt Laffer Curve for South Asian Countries

The inflow of foreign capital is generally seen as an accelerating force to economic growth, due to provision of additional resources, and these funds are considered complementary to local savings. It could also help to transfer technology and, therefore, increase productivity. Besides it enhances purchasing power of the recipients [Mullick (1988)] and as a result stimulates growth. The purpose of foreign debt is to increase real transfer of resources from the developed countries to the developing countries, so that these countries could pick up momentum of economic growth and as a result improve their welfare.1 The rapid increase in the external debt obligations of the developing countries, during the 1970s, had given rise to concerns about the dangers of increasing trend in interest and amortisation payments and, therefore, this situation posed a threat to debtor countries. The foreign debt of the developing countries has become a threat to their economic growth. The debt servicing of some of the LDC’s exceeded to their growth rates.2 Initially, most analysts believed that debt servicing problem would be temporary. It was hoped that creditworthiness and more normal growth of most of the countries would be restored with the influx of foreign resources. However, the debt crises have demonstrated that this assessment was optimistic and seemed never to be realised.3

Sabahat Awar, Muhammad Aslam Chaudhary