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External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis

Received: 22 September 2021     Accepted: 8 October 2021     Published: 15 October 2021
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Abstract

Literature on the debt-growth nexus postulates that external debt is viewed as capital that closes the financing gap, boost investment and promote growth. Against this background, and given the low revenue mobilization drive, the ECOWAS Member States resort to external borrowing with a view to complement domestic revenue and enhance their ability to finance large infrastructural projects and boost economic growth. However, external debt accumulation has not translated into high growth in the ECOWAS Member States. Thus, the paper investigates the impact of external debt on economic growth in the ECOWAS countries, and determines the optimal threshold level of external debt that promotes growth. The study utilizes panel data for 15 countries spanning from 2000 to 2019, and employs four estimation techniques including the Pooled Ordinary Least Squares (POLS), Fixed Effect Model (FEM), Random Effect Model (REM) and Panel Corrected Standard Errors (PCSE) techniques. The empirical results suggest that external debt (ED), Openness to trade (Opn) and Control of Corruption (CoC) are the main determinants of economic growth in the ECOWAS countries. Specifically, openness has a positive effect on growth, while both external debt and control of corruption have negative impact on growth. Furthermore, the study reveals evidence of a nonlinear relationship between external debt and real GDP, and confirms that the optimal threshold level of external debt in the ECOWAS countries is 111%. Intuitively, the result indicates that any increase in external debt above 111% will reduce growth in the ECOWAS countries by 0.0001% while below the threshold level, economic growth will improve by 0.0222%. The policy implication is that, governments of the ECOWAS countries should ensure that, external debt are utilized in growth enhancing sectors, with a view to boost growth. Also, governments should develop debt management strategic policies, with a view to keep debt levels within sustainable limits.

Published in International Journal of Business and Economics Research (Volume 10, Issue 5)
DOI 10.11648/j.ijber.20211005.13
Page(s) 178-186
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

ECOWAS Countries, External Debt, Economic Growth, Panel Data Analysis

References
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    Abu Bakarr Tarawalie, Talatu Jalloh. (2021). External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis. International Journal of Business and Economics Research, 10(5), 178-186. https://doi.org/10.11648/j.ijber.20211005.13

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    Abu Bakarr Tarawalie; Talatu Jalloh. External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis. Int. J. Bus. Econ. Res. 2021, 10(5), 178-186. doi: 10.11648/j.ijber.20211005.13

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    AMA Style

    Abu Bakarr Tarawalie, Talatu Jalloh. External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis. Int J Bus Econ Res. 2021;10(5):178-186. doi: 10.11648/j.ijber.20211005.13

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  • @article{10.11648/j.ijber.20211005.13,
      author = {Abu Bakarr Tarawalie and Talatu Jalloh},
      title = {External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis},
      journal = {International Journal of Business and Economics Research},
      volume = {10},
      number = {5},
      pages = {178-186},
      doi = {10.11648/j.ijber.20211005.13},
      url = {https://doi.org/10.11648/j.ijber.20211005.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20211005.13},
      abstract = {Literature on the debt-growth nexus postulates that external debt is viewed as capital that closes the financing gap, boost investment and promote growth. Against this background, and given the low revenue mobilization drive, the ECOWAS Member States resort to external borrowing with a view to complement domestic revenue and enhance their ability to finance large infrastructural projects and boost economic growth. However, external debt accumulation has not translated into high growth in the ECOWAS Member States. Thus, the paper investigates the impact of external debt on economic growth in the ECOWAS countries, and determines the optimal threshold level of external debt that promotes growth. The study utilizes panel data for 15 countries spanning from 2000 to 2019, and employs four estimation techniques including the Pooled Ordinary Least Squares (POLS), Fixed Effect Model (FEM), Random Effect Model (REM) and Panel Corrected Standard Errors (PCSE) techniques. The empirical results suggest that external debt (ED), Openness to trade (Opn) and Control of Corruption (CoC) are the main determinants of economic growth in the ECOWAS countries. Specifically, openness has a positive effect on growth, while both external debt and control of corruption have negative impact on growth. Furthermore, the study reveals evidence of a nonlinear relationship between external debt and real GDP, and confirms that the optimal threshold level of external debt in the ECOWAS countries is 111%. Intuitively, the result indicates that any increase in external debt above 111% will reduce growth in the ECOWAS countries by 0.0001% while below the threshold level, economic growth will improve by 0.0222%. The policy implication is that, governments of the ECOWAS countries should ensure that, external debt are utilized in growth enhancing sectors, with a view to boost growth. Also, governments should develop debt management strategic policies, with a view to keep debt levels within sustainable limits.},
     year = {2021}
    }
    

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  • TY  - JOUR
    T1  - External Debt and Economic Growth Nexus in the Ecowas: A Threshold Analysis
    AU  - Abu Bakarr Tarawalie
    AU  - Talatu Jalloh
    Y1  - 2021/10/15
    PY  - 2021
    N1  - https://doi.org/10.11648/j.ijber.20211005.13
    DO  - 10.11648/j.ijber.20211005.13
    T2  - International Journal of Business and Economics Research
    JF  - International Journal of Business and Economics Research
    JO  - International Journal of Business and Economics Research
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    EP  - 186
    PB  - Science Publishing Group
    SN  - 2328-756X
    UR  - https://doi.org/10.11648/j.ijber.20211005.13
    AB  - Literature on the debt-growth nexus postulates that external debt is viewed as capital that closes the financing gap, boost investment and promote growth. Against this background, and given the low revenue mobilization drive, the ECOWAS Member States resort to external borrowing with a view to complement domestic revenue and enhance their ability to finance large infrastructural projects and boost economic growth. However, external debt accumulation has not translated into high growth in the ECOWAS Member States. Thus, the paper investigates the impact of external debt on economic growth in the ECOWAS countries, and determines the optimal threshold level of external debt that promotes growth. The study utilizes panel data for 15 countries spanning from 2000 to 2019, and employs four estimation techniques including the Pooled Ordinary Least Squares (POLS), Fixed Effect Model (FEM), Random Effect Model (REM) and Panel Corrected Standard Errors (PCSE) techniques. The empirical results suggest that external debt (ED), Openness to trade (Opn) and Control of Corruption (CoC) are the main determinants of economic growth in the ECOWAS countries. Specifically, openness has a positive effect on growth, while both external debt and control of corruption have negative impact on growth. Furthermore, the study reveals evidence of a nonlinear relationship between external debt and real GDP, and confirms that the optimal threshold level of external debt in the ECOWAS countries is 111%. Intuitively, the result indicates that any increase in external debt above 111% will reduce growth in the ECOWAS countries by 0.0001% while below the threshold level, economic growth will improve by 0.0222%. The policy implication is that, governments of the ECOWAS countries should ensure that, external debt are utilized in growth enhancing sectors, with a view to boost growth. Also, governments should develop debt management strategic policies, with a view to keep debt levels within sustainable limits.
    VL  - 10
    IS  - 5
    ER  - 

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Author Information
  • Department of Economics and Commerce, Fourah Bay College, University of Sierra Leone, Freetown, Sierra Leone

  • Department of Economics, University of Ghana, Accra, Ghana

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