Foreign Debt, Dependency, And Economic Growth in South Asia (Report‪)‬

Many developing countries are following a policy to attract foreign capital through loans and other means to enhance investment. The inflow of these resources is seen as an addition to investment for accelerating economic growth. However, there are only a few success stories where such resources have made any significant contribution to improve the economic conditions of recipient country. (1) Pakistan and other South Asian countries have received significant amount of foreign loans (2) but its role is critical [Chaudhary and Ali (1993, 1996)]. In spite of increasing foreign aid, South Asia has emerged one of the poorest and illiterate regions of the world, having more than 500 million poor living below poverty line and about 46 percent of the world's illiterate live in the South Asia [UNDP/MHHDC*(1997)]. This is the region, which has 22 percent of the world's population, while having only 1.3 percent of the world's income. It also appears one of the most indebted regions of the world [Anwar (1995)]. In spite of a significant inflow of foreign aid, the economic conditions remained poor in this region. Such a situation calls for an in depth analysis of the contribution of foreign aid. Therefore, this paper is focused to analyse the role and implications of international debt in South Asia. Besides, South Asia's dependency upon foreign debt is also analysed. (3) In addition, tendency of resources outflow from South Asia to other countries, in terms of debt services, is also identified. The debt cycle theory provides a rational for international aid in terms of its contributions to enable recipient countries to enhance economic growth. A country borrows in the first stage, generates additional resources and is able to stand on its own feet in the second stage. However, it continues to borrow in the second stage. In the third stage, the country may emerge as surplus of resources and it can repay the loans (debt cycle theory). (4) The process helps recipient countries to sustain and accelerate their economic growth. Thus, international aid is envisaged to help a country to develop faster and pay back the loans from its returns. Chenery's Pioneering dual-gap studies pointed out the need for foreign resources and their role in accelerating economic growth [Chenery and Bruno (1962); Chenery and Strout (1966)]. These studies indicate typical sequence of investment-saving gap and it was followed by export-import gap which was to be filled for accelerating growth in developing countries. A study by UNCTAD (1968) indicates no significant difference between investment-saving gap and export-import gap. These to gaps ultimately merge to budgetary gap. Some studies call them three gaps [Ahmed (1997)]. The basic problem is lack of resources, which emerge in terms of export-import gap and or saving-investment gap. These gaps are indicated by budgetary deficits, which include both the above-mentioned gaps. If the gap is filled through foreign borrowing and the foreign aid fails to improve leads the economic conditions of the recipient developing countries then the contribution of these resources remain a questionable.