It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving. The rate at which they borrow abroad the "sustainable" level of foreign borrowing depends on the links among foreign and domestic saving, investment, and economic growth. The main lesson of the standard "growth with debt" literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings.
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