Foreign debt and economic development in developing countries: Dynamics, challenges, and socioeconomic implications

Abstract

Foreign debt has long been regarded as both a catalyst for economic growth and a source of vulnerability for developing countries. This article explores the multifaceted role of external borrowing in shaping economic development, highlighting its impact on investment, balance of payments, and social welfare. Drawing on definitions from international institutions such as the IMF, World Bank, and the United Nations, the study clarifies the conceptual framework of debt as both a stock and flow variable, emphasizing its dual nature as a financial instrument and a liability. The analysis categorizes loans by maturity, guarantees, and creditor type, distinguishing between bilateral, multilateral, and commercial sources of finance. The paper examines theoretical models such as the two-gap approach, which underscores the necessity of foreign capital to bridge savings-investment and export-import imbalances. Empirical evidence suggests that while external borrowing can accelerate capital formation and industrialization, it also creates structural dependencies that heighten exposure to global market fluctuations and interest rate shocks. Case studies reveal that debt servicing often diverts scarce resources from critical social sectors, leading to adverse consequences for health, education, and poverty alleviation. Moreover, persistent reliance on foreign loans risks entrenching debt traps, undermining economic sovereignty, and fostering political instability. Ultimately, the article argues that foreign debt must be managed within a framework that balances growth objectives with sustainability.

Keywords. Foreign loans; Debt; Development; Balance of payments; Donors; Social sector; Agriculture; Environment; Politics.

JEL. D02; D69; H81; F63.