- Working Paper 374 - Africa’s Growing Sovereign Debt and Growth: Which Institutional Quality Indicator(S) Matter?0.68 MB
There is extensive literature that examines the role of public debt on economic growth. But while sufficient attention is paid to differences between developed and developing countries in governance, threshold effects and debt overhang, there is a striking lack of attention given to Africa and the role of institutional factors in the debtgrowth relationship.
Using longitudinal data for 48 African countries spanning the period 1991 to 2018, we find that the influence of public debt on growth depends on the quality of institutions. Our contribution highlights the importance of providing country-specific disaggregated estimates of the debt-growth link to address the overgeneralisation prevalent in the extant literature. Our study unveils a more detailed and country-specific picture of the relationship between public debt and economic growth, controlling for quality of institutions than previous work.
Our analysis identifies the institutional factors that matter the most for the debt-growth link in Africa among a set of possible institutional variables obtained from the World Governance Indicators (WGI) database. We show that not all institutional factors matter and a supposedly negative relationship between debt and growth is not observed across all sub-sample of countries studied. The policy implications of our findings relate to the importance of voice and accountability and country specificities in the debt-growth link. Debt is found to be growth enhancing in contexts where citizens participate in democratically choosing their governments, with greater freedom of expression and association and free media. In such contexts, there is a higher likelihood of allocating foreign aid and borrowed funds to productive sectors that in turn improve overall economic growth.
Report by the African Development Bank
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