Models of External Debt Growth Relationship for Pakistan
Author: Muhammad Ramzan

External debt is an important source of financing for developing countries through capital accumulation, infrastructure development and human resource development. The two-gap model of Chenery and Strout (1966) provides motivation for reliance on external debt. According to this model in less developed countries (LDC) the demand for investment cannot be met from domestic savings and exports earning are also insufficient to finance imports. Accordingly, domestic savings are insufficient to finance the level of investment in developing countries which are at their early stages of development. In order to fill the saving-investment gap, the less-developed countries tend to borrow from the developed countries. The theoretical foundation for the role of external finance in helping economic growth of developing countries is based on the famous Harrod-Domar growth model. According to this model, as the economic growth rate in labor abundant developing countries depends solely on investment, the key to enhance economic growth is to invest more. Developing countries, however, may not be able to save enough to finance the desired level of investment. Essentially, there will be a gap between domestic saving and the desired level of investment. In such circumstances, external finance fills the gap between saving and investment. The increase in investment financed by external resources may boost economic growth in the recipient country.

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Keywords : External Debt, Growth Relationship, Pakistan
Supervisor: Eatzaz Ahmed

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