Effects of political institutions on the external debt-economic growth nexus in Africa

Nounamo, Yann and Asongu, Simplice and Njangang, Henri and Tadadjeu, Sosson (2021): Effects of political institutions on the external debt-economic growth nexus in Africa.

Abstract

The main contribution of this study is the determination of an endogenous threshold of institutional quality, beyond which external debt would affect economic growth differently. The focus is on 14 countries of the African Franc zone over the period 1985-2015. Based on the panel Smooth Threshold Regression model, the results reveal that the relationship between external debt and economic growth is based on institutional quality. It is found that the level of indebtedness at which the effect of external debt on economic growth becomes negative is higher in countries with lower levels of corruption and high levels of democracy. This means that poor institutional quality prevents a country from taking full advantage of its credit opportunities. Thus, the more countries become democratic, the more debt helps finance economic growth. These results are robust to sensitivity analysis and Generalized Method of Moments estimation.

• Item Type: MPRA Paper
• Language: English
• Keywords: external debt, political institutions, economic growth
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General

References

Beah A. (2015), Historiographie de l’endettement des pays en développement: spécificité des pays de l’UEMOA, Document de Recherche du Laboratoire d’Économie d’Orléans n°2300.

Cadoret I., Payelle N. & Pommier S. (2014), Dette publique et croissance en Europe: le rôle des institutions,StudiaOeconomicaPosnaniensia, Vol. 2, n°12, pp.96-120.

Gonzalez A., Teräsvirta T. & van-Dijk D. (2005), Panel smooth transmission regression models, Stockholm School of Economics, Working Paper Series in Economics and Finance n°604.

Jalles J. T. (2011), The impact of democracy and corruption on the debt-growth relationship in developing countries, Journal of economic development, Vol. 36, n°4, pp.41-72.

Kourtellos, A., Stengos, T., & Tan, C. M. (2013), The Effect on Public Debt on Growth in Multiple Regimes,Journal of Macroeconomics, 38, 35-43.

Krugman P. (1988), Financing vs. Forgiving a Debt overhang, National Bureau of Economic Research, Working Paper n°2486.

Krugman P. (1989), Landing, American Economic Association, Vol. 79, n°2, pp.31-35.

Pattillo C., Poirson H. & Ricci L. (2002), External Debt and Growth, IMF Working Paper n°69, pp.1-47.

Sachs J. (1989), The debt overhang of developing countries, in Findlay R. (eds.) Debt, Stabilization and development: essays in memory of Carlos Diaz Alejandro, Oxford: Basil Blackwell, pp.80-102.

Shleifer A. & R. Vishny (1993),Corruption, Quarterly Journal of Economics, Vol. 108 n°3, pp. 599-617.