The Price of Borrowing: Foreign Debt, Foreign Debt Service and Income Distribution in Developing Countries

Abstract: This study examines the relationship between foreign debt servicing and income inequality in 56 developing countries. The study measures foreign debt servicing by incorporating the principal and interest of these payments as a percentage of exports. The study finds non-linear effects of foreign debt servicing on the net Gini coefficient, revealing that while small levels of foreign debt service may reduce inequality, higher levels exacerbate it. The study finds a foreign debt service inflection point around 33 percent of exports. If foreign debt service payments are above 33 percent of exports, they can exacerbate income inequality. Keywords: Foreign Debt Servicing, Inequality, Developing Countries, Gini Coefficient JEL Classification Number: D63 F34 H63