Sub‐Saharan Africa's debt‐financed growth: How sustainable and inclusive?

Abstract

Sub-Saharan African (SSA) countries recorded impressive economic growth in the last two decades. The question however is, how inclusive and sustainable is this growth? With this in mind, this study examined the sustainability and inclusiveness of economic growth in a panel of 44 SSA countries, over a period of 38 years, while taking into account the diversity of the continent's institutional quality, income growth and resource endowment. The study adopts the innovative nonlinear fiscal reaction function and the dynamic panel threshold model to account for potential asymmetric phenomena in public debt series. The study also adopts Driscoll and Kraay's estimator to account for cross-section dependency and cross-country heterogeneity. The result shows that the recent increase in the economic growth rate in SSA is not sustainable and inclusive. This is tenable since if economic growth is debt induced, more money will be spent on servicing public debt, thus depriving governments of funds for critical intervention programs. Lastly, the study found a public debt/ gross domestic product ratio threshold of 34% beyond which public debt impairs growth inclusiveness across SSA. The research and policy implications are discussed.

Effect of bilateral and multilateral concessional debts on public investment in Africa: A contingency analysis

“…Younsi et al (2021), Ekanayake and Chatrna (2010) and Olaoye (2022) suggest that foreign aid can help stimulate economic development by supplementing domestic sources of finance such as savings, which in turn increases investment and capital stock. However, studies show that the effect of concessional debt on investment has two phases: the first phase suggests that external debt can act as a base for financing public investment, which can stimulate private investment and economic growth.…”

“…Sub-Saharan Africa (SSA) is one of the poorest and most aid-dependent regions in the world, and there have been concerns about slow growth and low aid effectiveness in the region for decades, prompting ongoing analysis and reshaping of aid programmes to meet target objectives (Chatterjee et al, 2021;Ilorah, 2011). Younsi et al (2021), Ekanayake and Chatrna (2010) and Olaoye (2022) suggest that foreign aid can help stimulate economic development by supplementing domestic sources of finance such as savings, which in turn increases investment and capital stock. However, studies show that the effect of concessional debt on investment has two phases: the first phase suggests that external debt can act as a base for financing public investment, which can stimulate private investment and economic growth.…”

Macroeconomic implications of escalating stock of public debt: Evidence from sub‐Saharan African economies

“…One major issue that is attracting the attention of scholars and policymakers globally, and in sub‐Saharan African (SSA) countries, in particular, is the rapid increase in the level of public debts over the last few decades (Akram, 2016; Beqiraj et al, 2018; Carner et al, 2021; Fambeu et al, 2022; Kassouri et al, 2021; Law et al, 2021; Makun, 2021; Napo, 2022; Olaoye, 2022a, 2022b; Owusu‐Nantwi & Erickson, 2016; Sennoga & Balma, 2022; Wang et al, 2021). In the last two decades, the total public debt for SSA increased from an average of 27% of gross domestic product (GDP) in 2010 to over 56% in 2018.…”

Interrogating sub‐Saharan Africa's high economic growth rate and low poverty reduction rate: A poverty paradox?

“…The results show that public debt is a significant determinant of economic growth, indicating that economic growth in SSA might be debt‐induced (see Olaoye, 2022) and that the higher debt‐service costs associated with an increase in public debts may hamper economic growth by reducing the fiscal space for growth‐enhancing activities such as investment in infrastructure. This might be a clear indication of why economic growth in sub‐Saharan African countries does not translate to poverty reduction since a large chunk of national income is used to service public debt, thereby hindering investment in human capital and infrastructure (i.e., poverty‐reducing expenditures).…”

“…Available evidence shows that over the last few decades, after Asia, Africa is the second‐fastest growing economy in the world (ACBF, 2017), but the question is, is there a trickle‐down effect of the growth benefits on the poor? Although the early theory of economic development stresses that economic growth automatically benefits the poorer members of society or the needy (see Olaoye, 2022 (forthcoming); Vijayakumar, 2013), and the trickle‐down mechanism allows all citizens to benefit from economic growth (even if not equally), and therefore reduces the level of poverty (Kakwani & Pernia, 2000; Mulok et al, 2012), however, by the end of the 1960s, the trickle‐down effect of the growth benefits automatically toward poor people did not appear, especially in developing countries (ACBF, 2017). That is, in spite of the high economic growth rate, living conditions in sub‐Saharan Africa (SSA hereafter) have not improved as poverty levels remain high (see Figure 2), with more than half of the extremely poor people living in SSA (see Figure 3).…”