THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA

SSA Research AGBEMAVOR KORSI FIAGBE 147 PAGES (34283 WORDS) Thesis
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ABSTRACT

Many economies in Sub-Saharan Africa have been experiencing high external debt stocks

over the past three or so decades, thereby deepening the problem of debt burden in the

Region. Growth performance, however, remains relatively moderate over the years. The

relationship between economic growth and external debt as espoused in theoretical and

empirical literature remains unclear. Whilst a school of thought postulate that external debt

supplements savings and investment, and hence promotes economic growth, others claim that

external debt serves as a substitute to savings and investment and hence impedes economic

growth. Moreover, some posit that there is an optimal level of debt that promotes growth and

beyond that threshold, debt is deleterious to growth. Earlier studies on debt-growth nexus

have suggested controversy in empirical literature. Most studies concluded that debt

negatively affects economic growth, some aver that debt positively affects growth whilst

others claim that debt has no influence on economic growth but most of these studies focused

on the developed economies. Some studies on Sub-Saharan Africa concluded that external

debt is deleterious to growth, but these studies are very scanty. This study uses a sample of 39

SSA countries for 24 years (1990-2013) to examine the effect of external debt on economic

growth in SSA.

System GMM estimation technique was adopted in the empirical analysis to obtain robust

estimates of the effect of external debt on economic growth. The study accounts for

unobserved country-specific time invariant effects, time series variations in the data, controls

for endogeneity, autocorrelation, heterogeniety and other biases that may characterize panel

estimation model. The estimation results reveal that external debt negatively affects economic

growth in SSA. Moreover, country classification based on the level of per capita income does

not significantly influence the external debt-growth relationship in the region. Furthermore,

the estimation result does not support a non-linear relationship between external debt and

economic growth. The study shows that control variables such as labour force, investment,

and export growth all have positive and significant effects on economic growth.

The study found that the Direct Effect of Debt Hypothesis (DEDH) holds for SSA. The

DEDH postulates that external debt discourages long term investments that is crucial for

growth. It is hence recommended that governments of SSA countries should channel

borrowed external funds into long-term investment projects to make up for the investment

loss, which also would generate sufficient future cash flow for amortization of the debt,

negotiate with creditors for more debt relief programmes, and pursue export-led growth

strategy and policies that would solve structural imbalances in their economies, improve their

tax efforts, and maintain macroeconomic stability.

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APA

SSA, R (2021). THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA. Afribary.com: Retrieved April 10, 2021, from https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa

MLA 8th

Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA" Afribary.com. Afribary.com, 01 Apr. 2021, https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa . Accessed 10 Apr. 2021.

MLA7

Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA". Afribary.com, Afribary.com, 01 Apr. 2021. Web. 10 Apr. 2021. < https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa >.

Chicago

Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA" Afribary.com (2021). Accessed April 10, 2021. https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa