Implications of Public External Debt for Social Spending: A Case Study of Selected Asian Developing Countries

Abstract

For developing countries with budgetary and balance-of-payments gaps to meet, maintaining large stakes of external debt is not free of cost. Highly indebted countries have to set aside a sizeable fraction of their scarce resources to service their debt, which naturally affects their development spending in general and allocations for the social sector in particular. This study examines the behavior of seven developing Asian countries and analyzes the impact of public external debt on social sector spending. The panel dataset includes Pakistan, India, Bangladesh, Sri Lanka, Nepal, the Philippines, and Indonesia, and spans the period 1980–2010. Our empirical analysis is based on three interrelated equations for different spending categories, which are estimated using the general method of moments. The study’s results confirm the common wisdom that outstanding external debt and its servicing liability have an adverse impact on public spending, particularly on social sector spending. This suggests that developing countries need to mobilize their own resources and minimize their dependence on external borrowing as far as possible.