<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This study investigates the debt overhang hypothesis for Pakistan in the period 1960-2007. The study examines empirically the dynamic behaviour of GDP, debt services, the employed labour force and investment using the time series concepts of unit roots, cointegration, error correlation and causality. Our findings suggest that debt-servicing has a negative impact on the productivity of both labour and capital, and that in turn has adversely affected economic growth. By severely constraining the ability of the country to service debt, this lends support to the debt-overhang hypothesis in Pakistan. The long run relation between debt services and economic growth implies that future increases in output will drain away in form of high debt service payments to lender country as external debt acts like a tax on output. More specifically, foreign creditors will benefit more from the rise in productivity than will domestic producers and labour. This suggests that domestic labour and capital are the ultimate losers from this heavy debt burden.</p></abstract>

This study investigates the debt overhang hypothesis for Pakistan in the period 1960-2007. The study examines empirically the dynamic behaviour of GDP, debt services, the employed labour force and investment using the time series concepts of unit roots, cointegration, error correlation and causality. Our findings suggest that debt-servicing has a negative impact on the productivity of both labour and capital, and that in turn has adversely affected economic growth. By severely constraining the ability of the country to service debt, this lends support to the debt-overhang hypothesis in Pakistan. The long run relation between debt services and economic growth implies that future increases in output will drain away in form of high debt service payments to lender country as external debt acts like a tax on output. More specifically, foreign creditors will benefit more from the rise in productivity than will domestic producers and labour. This suggests that domestic labour and capital are the ultimate losers from this heavy debt burden.

The Debt Overhang Hypothesis: Evidence from Pakistan

Zhongnan University of Economics and Law, China

Studies in Business and Economics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"The Debt Overhang Hypothesis: Evidence from Pakistan"}

This study investigates the debt overhang hypothesis for Pakistan in the period 1960-2007. The study examines empirically the dynamic behaviour of GDP, debt...

The Debt Overhang Hypothesis: Evidence from Pakistan

Published Online: Jun 29, 2016

Page range: 140 - 151

DOI: https://doi.org/10.1515/sbe-2016-0012

Keywords
debt overhang, GDP, ECM, Pakistan

© 2016 Shah Muhammad Imran et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The Debt Overhang Hypothesis: Evidence from Pakistan

Published Online: Jun 29, 2016

Page range: 140 - 151

DOI: https://doi.org/10.1515/sbe-2016-0012

Keywordsdebt overhang, GDP, ECM, Pakistan

© 2016 Shah Muhammad Imran et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
debt overhang, GDP, ECM, Pakistan