Literature Review On Public Debt

CHAPTER THREE: LITERATRUE REVIEW

3.1 Introduction

As the Nation’s investment grows, so also does the economy. The need for an extra and safer economic growth has made developing countries seek to improve their institutional, human, and infrastructural capability. More often than not, this has brought about inadequate revenue generation, an expansion of government expenditures, and subsequently, increasing its debt level. Ajayi(1991) in his work noted that developing countries typically borrow to finance their development because extra support and funding is needed at this stage. Therefore, with public debt, a country finds a balance between saving and investing, and gets extra investment required for reaching the needed growth stage. Several countries in the developing stage have policies to draw foreign capital from loans and to boost growth. Mohammad and Sabahat (2010)

Also, Ahmad (2000) was of the opinion that foreign debt is used to produce a constant growth for the economy which might not have been possible within using the local resources and level of technology existing in the country. Siddiqui and Malik (2001) also attributed the increased resource availability and economic growth in South Asia to foreign borrowing. The reasoning behind public debt is discussed in what is called the debt cycle theory.

The debt cycle is made up of stages. The first stage has countries borrowing to produce further resources required for growth. This helps them stand on their