Ave high levels of foreign debt harmed investment in LDCs?

The dissertation question is i??Have high levels of foreign debt harmed investment in LDCs?i??
The basic outline given for what is essential in answering the question is the following:


Do large foreign debts have a negative effect on domestic investment in LDCs. This question is important since investment is a major determinant of economic growth. The method used should be a cross-country econometric analysis. Since it might be that the link between debt and investment has not always been the same (for instance, it might be held that such a link only emerged as a result of the 1982 debt crisis), it would be worthwhile to look at more than one cross-section, so that conclusions about the link, say, during 1975-82 and during 1983-90 or even a later period could be contrasted with one another. To gain a feel for the issues, read the relevant sections of Sachs and Larrain (1993) and the Journal of Economic Perspectives, Vol. 4, Winter 1990
There are two main reasons why external debt and investment might be linked. The debt overhang hypothesis states that investment incentives are weakened if investors believe that a significant fraction of the returns to investment will be taxed away to repay foreign creditors. The liquidity constraint hypothesis states that highly indebted countries will find it difficult to borrow abroad, since potential lenders will fear default. One question much discussed in the literature, and that you will need to consider, is whether it is possible to distinguish these two possibilities empirically.

You will naturally need to begin with a benchmark theory of investment. In a cross-section study, the effects of variables which take the same values for all countries cannot be measured (since they will not produce any cross-country variation in the dependent variable), so that although you may think that the world rate of interest, for example, should be included as a determinant of investment, it cannot be included.
So a reasonable benchmark theory might be a simple accelerator, with the rate of growth of GDP (current or lagged) on the right hand side of the equation and the share of investment in GDP on the left hand side.
Note that there is a difficulty, which you should acknowledge, with using the current rate of growth of GDP one would expect causation to run both ways between it and the investment share.
As implied above, you should aim to run cross-country regressions for one or several time intervals, in which the investment share in GDP is the dependent variable and as independent variables you include, at least, an accelerator term and alternative proxies of debt (follow the literature on this).
Additional notes:
The Method of answering the question is what is very important though. The question needs to incorporate a regression analysis to derive a relation between Investment and external debt. However, other variables that could affect Investment needs to be incorporated into the regression in order to reduce the omitted variable bias. There needs to be a description as to why those variables were included as well to explain how the variable is believed to affect the Investment level in a country.
The data analysis NEEDS to be done on STATA software, as well as including the STATA output with the results and the coefficients of the variables derived. This must be copy and pasted into the dissertation from STATA. The adequate interpretation of the STATA results are also required as a result.
The data to run the regression needs to be sourced from the following sites preferably: See the data sources suggested for the other growth topics for macro data on developing countries: eg Penn Word Tables, World Development Indicators; Barro-Lee data set; World Trade Organisation all of which are available online.
When running the regression it will need to include quadratic variables, logs, and any other statiscal manipulation needed to make the regression analysis statistically significant and efficient.
Some of the explanatory variables that might need to be included apart from external debt to gdp and (external debt to gdp)^2 to account for the debt overhang hypothesis, are: Debt Service to gdp, GDP per capita, openness at constant prices, control/proxy variable to account for infrastructure such as mobile phones per 100 residents, currency depreciation, amongst other variables that must be thought of that could have an effect on investment.
Graphs such as scatter plots that help show the negative relation between investment and external debt should also be included into the dissertation.
You could also do a comparison between how external debt affects investment in developing countries vs LDCs. Doing a regression for both of these, using data from developing and comparing it with the data from LDCs.
As previously stated this needs to be a cross-country analysis, so for the regression analysis of the LDCs there should be data on all the countries that lie within the definition of LDC. If a comparison with general developing countries is done, this should include the data on all developing countries.
The data can be put onto an excel sheet and then put onto STATA from there.

Key readings
Deshpande, A. (1997), The debt overhang and the disincentive to invest, Journal of Development Economics
Cohen, D. (1993), i??Low investment and large debt in the Eighties: an empirical analysisi??, American Economic Review, Vol. 83, pp.437-49
Sachs, J. and F. Larrain (1993), The developing country debt crisis. Ch. 22 in Macroeconomics in the Global Economy, Harvester Wheatsheaf
Warner, A. (1991), Did the debt crisis cause the investment crisis?, US Federal Reserve System Board of Governors: International Finance Discussion Papers, 418
Erdal Karagol, The Causality Analysis of External Debt Service and GNP: The Case of Turkey University of York Department of Economics and Related Studies
Foreign Direct Investment for Development MAXIMISING BENEFITS, MINIMISING COSTS
Stock Market Development and Corporate Finance Decisions
Marco Arnone, Luca Bandiera and Andrea Presbitero, External debt sustainability: Theory and Empirical Evidence
Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff by Yeva Nersisyan L. Randall Wray
External Debt in Post-Conflict Countries Patricia Alvarez-Plata* and Tilman Bruck
Fiscal Limits, External Debt, and Fiscal Policy in Developing Countries Huixin Bi,Wenyi Shen, and Shu-Chun S. Yang
External debt of developing countries (crisis of growth) G C da Costa
Finding solutions to the debt problems of developing countries Report of the Executive Committee on Economic and Social Affairs of the United Nations (New York, 20 May 1999)
External debt sustainability and development, United Nations, General Assembly, A/68/203
Can Debt Relief boost growth in poor countries? Benedict Clements, Rina Bhattacharya, Toan Quoc Nguyen
External Debt, Economic Growth and Investment in Nigeria OKE Michael. O & Sulaiman.LA
External debt and capital flight in sub-saharan Africa, mr mohsin s khan
Jay H. Bryson, Global Economist, Erik Nelson, Economic Analyst, Which Countries Have External Debt i??Issuesi???
External debt and developing countries, Warren c. hutchins
The impact of external debt on economic growth: a comparative study of Nigeria and South Africa
Does External Debt Affect Economic Growth: Evidence from Developing Countries Safia Shabbir
Impact Of External Debt Service Payment On The Investment Of PAKISTAN Muhammad Kazim Jafri
The Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiative A Test Case for the Validity of the Debt Overhang Hypothesis Martin Knoll

Added on 06.04.2015 11:15
As a side note, alternate graphs apart from scatter plots are also useful to get more marks.

Added on 13.04.2015 07:09
There are some grammar mistakes in the intro, like As such, a good percentage of these countries are the ones categorised in as third world countries”.
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