Impact of Debt on Aggregate Investment and Productivity in Developing Asian Countries

This study attempts to investigate the empirical relationship between debt and productivity and debt and investment for the Developing Asian Countries over the period of 1984-2007. The study uses two methodologies for empirical investigation, first is panel fixed effect using 5 year average data and second methodology is GMM applied on the annual data for the larger data set and to tackle the issue of endogeniety. The results show negative relationship between debt and investment and debt and productivity for Developing Asian Countries which confirms the presence of crowding out hypothesis. The results indicate negative impact of government size and budget deficit on investment. Productivity has positive relationship with investment. Trade openness and population growth are positively related to the productivity models. Financial development shows a positive relation in investment and productivity models. The present study confirms the existence of non-linearity of debt in investment and in productivity models. The implication that comes out from analysis that government needs to adopt debt reducing polices and reducing deficit will enhance private investment and productivity.