While there is a substantial body of literature on the effects of "debt overhang" on investment in heavily-indebted countries, there is surprisingly little empirical work available on this subject. This paper tests the hypothesis that the stock of foreign debt acts as a disincentive to private investment in the specific case of the Philippines. The empirical estimates provide support for this hypothesis, particularly after 1982. The estimates indicate that a .3 billion debt reduction (such as the one completed through the buyback operation in early 1990) would increase investment demand by something between one half and two percentage points of GNP.

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