In an attempt to resolve the existing controversy about the cause and effect relationship between external debt and economic slowdown, Granger causality tests are conducted with data on twenty-nine highly indebted developing countries in four distinct geographical regions. The results of these tests indicate that the Bulow-Rogoff s proposition, that the external debts of the developing countries are a symptom rather than a cause of economic slowdown, is rejected. They also indicate that the Dombusch-Krugman's proposition that the external debts lead to economic slowdown is not rejected only in the cases of several Latin-American countries and Sudan. Moreover, a feedback-type relationship is not rejected for thirteen countries. These mixed results imply that there is no general coherent relationship between external debt and economic slowdown and hence there is no unique way to remedy the failing economies of the developing countries.
Available at: http://works.bepress.com/ewilson/18/