The external debt crisis and its impact on economic gowth and investment in Sub-Saharan Africa. A regional econometric approach of ECOWAS countries.

by Dauda Foday Suma

Institution: Vienna University of Economics and Business
Year: 2007
Keywords: QG 720; Black Africa / Economic Community Of West African States <ECOWAS> / foreign debts / economic development / investment policy / state / economic growth / econometric model /
Record ID: 1031764
Full text PDF: http://epub.wu.ac.at/1944/1/document.pdf


Development economists generally argue that poor countries at their early stages of development are often faced with limited domestic resources for development, and can therefore borrow from the developed nations to boost their rate of growth and development. This financing gap problem, which is based on the Harrod-Domar growth theory, has made developing countries, especially Sub-Saharan Africa, to accumulate large amount of external debt that they could no longer sustain. Moreover, there is now a growing concern that the large external debt service payment is retarding economic growth and investment in the heavily indebted poor countries (HIPCs), while also displacing current expenditure in priority sectors like health, education, and social infrastructure. This dissertation therefore, examines the impact of external debt on economic growth and investment in ECOWAS Sub-Saharan Africa over the period 1980-1999. Unlike the traditional debt and growth studies that use a-spatial methods, this study employs spatial autoregressive growth and investment models to determine the effects of spatial interaction and spatial dependence among ECOWAS countries during the period of the crisis. It is obvious that countries are spatial entities that interact with one another, and as such, the growth trends in one country may actually depend on the growth trajectories of others. Based on the above assumptions, the models use external debt service and total debt stock ratios, which are extracted from the World Bank and African Development Bank databases, as key or control variables plus other explanatory variables. The maximum likelihood estimation of both models yield mixed results across time. The results indicate the presence of both positive and negative spatial dependence in ECOWAS countries across time. While external debt service ratio is found to have an inverse relationship with economic growth in most periods under investigation, the total debt stock to GDP ratio only affect growth in fewer periods than expected. With regards to public investment, the external debt service ratio is found to have no impact on public investment in ECOWAS countries. However, the total debt stock to GDP ratio is found to have a negative relationship with public investment in most periods, which suggest that relying on foreign capital to boost growth and investment could be counter productive in Sub-Saharan Africa. (author's abstract)