Does External Debts Promote Sustainable Economic Development in Developing Countries?

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue I, January 2022 | ISSN 2454–6186

Does External Debts Promote Sustainable Economic Development in Developing Countries?

James Daniel Chindengwike*
Lecturer Faculty of Commerce and Business Studies, Department of Finance, Accounting and Economics, St. John’s University of Tanzania – Dodoma, Tanzania

Abstract: External debts is one of the major sources of revenue to developing nations that normally do not have an enough industrial support and is illustrated by a small human development index. The aim of this paper is to test whether external debts promote sustainable economic development in developing countries or not. The study opted a time series data research design where by secondary data were used. This study used economic data from 1999-2020 financial years (Quarterly data). The study involved 80 observations. Kenya was purposively sampled to be used as research area of this study. The data collected from different reliable sources which included the International Financial Statistics (IFS), World Bank’s Statistical Database, The Treasury of Kenya, Ministry of Devolution and Planning and the Kenya National Bureau of Statistics. The results of the study revealed that there is long – term associations between external debts and sustainable economic development with P- Value of 0.0001. Another finding revealed that there is statistical significantly in all other macro-economic variables in the predictable direction with P- Value of 0.0011, except broad inflation and money that have vague signs. In short-run revealed that external debts affect statistically significance economic development with a negative direction P- Value of 0.0064. The study recommends that the government should think about adopting other sources of finance articulate via taxation and reduce borrowing outside to minimize assistance from developed nations. The government should also assign extra resources to savings in human capital education as efficiently labor has the effect of promoting sustainable economic development crosswise all models in the short run. Particularly population expansion rate should be proscribed through increasing utilize of social services such as family planning or sensitization to reduce support pressure on imperfect resources which deject economic development.

Keywords: Developing Countries, External Debts, Kenya, Sustainable Economic Development

1.INTRODUCTION
External debts are one of the majority imperative policy gears that rich nations use for serving poor nations to change population wellbeing and help institutional and economic growth [3]. The idea of external debts is broadly used and established as a stream of financial resources from developed nations to developing nations on growth grounds. External debts are funds that one nation willingly transfer to another, which can take the form of loan. According to [10] debts include money transferred across borders by government organizations and international organization. Previous studies show that external debts are hypothetically believed to improve economic development [15]. Nevertheless, [1] argued that the impact of external debts on economic development which is the boost eventually of a country’s real output of goods and services are vague. Empirical evidence revealed that, economic development as ongoing and stable alter in the long run which comes about by a continuing raise in the rate of investments and population [2]. Empirical evidence observed that the economic development as an extension of the system in one or more magnitudes with no a change in its composition [5]. So economic development is connected to the sustained and quantitative increase in the nations per capita production or income attended by increase in its labor power, utilization level, capital and quantity of trade. Economic development is a raise in the capability of an economy to create goods and services, evaluated from one period of time to another. Nevertheless, the position and impact of external debts in the economic development of developing countries have been and are divisive issues to researchers and economists. This is because the usefulness of external debts has become the theme of wide examination, because of the recent growing realization that a large number of developing countries have had only limited success even with the increased influx of aid they receive [12].
According to [8] in 1930s and 1940s harassed those external debts can raise physical capital accumulation as results economic development they concluded that, external debts plug in the economy gap in developing nations. Their theory is reversed by Chenery and Strout, in the Two gaps where they recommended that, apart from economy gap, there are foreign exchange gap that deter the developing nations to importation of the capital goods. Thus, they argue that, external debts give money to the developing nations for the importations of capital goods. Developing nations are typified by reserve starving economies, particularly capital connected. Capital to increase economic development and welfare is basically insufficient nationally, which as a result warrants the need for outside capital. The only outside capital willingly obtainable to hold up growth activities have to come from external debt.

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