3.5.2 private investment external debt stocks may also affects

3.5.2
Debt and Economic Growth           

Mainly
poverty, illiteracy, population growth 
makes South Asia lagged behind from the development path and motivated
them to attract developed countries for getting foreign capital as aid, grants
or loans. These capital works for enhancing investment as well as economic
growth. But the number of countries get benefitted is limited as Israel, Egypt,
etc. The process of debt cycle theory helps loan recipient countries for
sustaining and enhancing economic growth. In the three stage process, at first
the countries take loans with a view to producing additional resources then in
the next step try stand on its own feet but continues borrowing and finally if
all goes right it may produce surplus resource and repay the loan (Chaudhury
and Anwar, 2000).          When twenty-first century starts, two
major interrelated problems as heavy indebtedness and poverty appears in front
of the developing world which affects the growth possibilities (Akram, 2016).
From the theoretical perspective the relationship between economic growth and
external debt stocks always focuses on the bad effects of the debt overhang
theory as it discourages the economic growth of a country. It creates
uncertainty in the economy by discouraging investment and growth. Through
making changes in the public spending pattern or crowding out the private
investment external debt stocks may also affects growth (Nguyen et al., 2003; Cassimon and Van Campenhout, 2007).
Moreover higher debt service raises interest payment and creates the budget
deficit which decreases government savings. That is, these situation makes
slower or reduce the economic growth.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

           

The
existence of a huge debt service payment automatically changes the composition
of government spending through squeezing the resources availability. The
resources which can be used for development of infrastructure and human capital
then use to repay the loans thus economic growth lessens. In fact some
nongovernmental organizations (NGOs) presents their views against high external
debt servicein developing countries and refers it as one of the main hurdles
for meeting basic human needs (Nguyen
et al., 2003).

 

3.5.3
Tax Revenue and Economic Growth           

Tax
revenue is the main source for the sustainable growth in any of the country
around the world. It is using for the recurrent expenditure as well as for the
developing activities and tries to finance all kinds of needs of a country. It
also helps to overcome the aid dependence, debt liability of the government and
influences the economic policies of a country. That means tax revenue is the
fundamental instrument of government which helps to run the economy, meet up
all the government spending, decreasing economic burden thus try to enhance
economic growth  (Ilyas and Siddiqi,
2008;  Romer and Romer, 2010; Takumah,
2014).

 

There
is also debate on the effectiveness of tax revenue on economic growth. Specific
tax amount make some of the investment more profitable which negatively effects
the new investment entrepreneurial decisions. It has been observed empirically
that, higher tax burden can increase or
decrease the rate of economic growth. Low tax
revenue with higher government spending results budgetary deficit which has
negative impact on economic growth (Padda and Akram, 2009).

          

3.5.4
Government Spending and Economic Growth          

Government
spending and fiscal discipline emerged as important policy tools for economic
growth for many economies all over the world. In this era of liberalization the
impact of government spending on economic growth cannot be ignored (Njeru,
2003; Shonchoy, 2010; Shen et al., 2015) as traditionally it is a component of
fiscal policy and works as an instrument of the state for influence the
economic growth (Lahirushan and Gunasekara, 2015). For example- when government
made larger spending on sectors like health, education and infrastructural
development the state of social welfare and poverty improves thus economic
growth enhances (Shonchoy, 2010). It has been observed that, government
expenditures which used in the production of final output and technological
investment have large impact on long-run growth (Glomm and Ravikumar, 1997).

           

In
the developing countries a large amount of money of budget constitutes from
aid, grants and loans and recipient government use it for public spending and
development needs. So the government spending pattern of developing countries
largely influenced by the donor countries policies and decisions which somehow
make the growth process affected (Morrissey, 2012;
Herzer and Morrissey, 2013; Tagem,
2017). Lack of good governance that means poor quality of institutions, status of democracy,
tight controls over information, an absence of accountability, weak rule of
law, high levels of corruption etc. affects the fiscal behavior of a country.
That is pattern of government spending and economic growth is negatively
influenced through these and it is evident in many African countries. The
improving governance with better bureaucracy, reduction in corruption,
maintaining proper rule of law, managing expenditure and increasing scope for
revenue generation can make the growth procedure more sustainable (Bra¨utigam,
2004).

 

 

3.6
Research Gap

One
thing is clear after the above discussion that being the most important factors
in economic theory foreign aid, debt, tax revenue and government spending
become the subject of many researches. Most of the researches took place on its
importance, determinants, relationship with factor as trade, different aspects
of domestic resource mobilization or tax. The most happening one is the impact
of these factors on economic growth. But there is hardly any research done to
find the impact on government spending. A few researches have been done but
only in the Sub Saharan African countries. Existed with the developing
characteristics and strongly being connected with ODA there is no visible
research on this topic in South Asia. With many debatable issues the topic
contains enormous importance and thus the analysis took place to examine the
impact of foreign aid, debt and tax revenue on government spending in South
Asian countries.