International Economics Commons^™

Saving Less When There Is More? Foreign Debt And Domestic Savings In Developing Countries, Joanna Tyrowicz, Luke Okafor Emeka

Joanna Tyrowicz

Although literature has given considerable attention to the effects of foreign debt on the growth, we still know little about its effects on the internal potential for capital formation. Literature suggests a number of channels through which availability of foreign financing could affect domestic savings. We test empirically this relationship using data for Sub-Saharan Africa and Latin America and the Caribbean over 1975-2004. Controlling for endogeneity, we find that foreign debt adversely influences domestic savings especially in the long run. The results are not susceptible to the choice of countries, although few outliers should be noted.