Public Debt, Income Inequality and Macroeconomic Policies: Evidence from South Asian Countries

Abstract

Over the years most of the developing countries have failed to collect enough revenues to finance their budgets. As a result, they are facing the problem of twin deficits and are relying on public external and domestic debt to finance their developmental activities. NGO’s and anti-globalization movements have propagated the view that instead of reducing the poverty, public debt has increased the miseries of the poor. The present study examines the consequences of public debt for income regarding selected South Asian countries i.e. Bangladesh, India, Pakistan and Sri Lanka, for the period 1975-2010. The model is estimated by using the standard panel data estimation methodologies. The results show that neither public external debt nor external debt servicing has any significant relationship with income inequality, suggesting that public external debt is as good/bad for poor as it is for rich. However, domestic debt has a positive relationship with economic growth and a negative relationship with the GINI coefficient.