Jurnal Ekonomi Malaysia
55 (3) 2021 125 – 136
Department of Economics
Faculty of Economics and Business
Universitas Tanjungpura
Jl. Prof. Hadari Nawawi
Kota Pontianak 78121
INDONESIA
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.
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JEL Codes
Author’s Acknowledgement
Many thanks to Nindya Lestari for enlightening the statistical results and support from the MIICEMA committee
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Bibliography
@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},
}
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