The effects of External Debt on Growth in Sub Saharan Africa

Adonia Chiminya, John Dunne and Eftychia Nikolaidou
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Adonia Chiminya: School of Economics, University of Cape Town

No 2018-03, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: The paper contributes to the external debt and economic growth literature by providing empirical evidence from 37 Sub Saharan African countries over the period 1980-2012 using panel data methods. Special attention is paid to heterogeneity and non-linearity while stratification of the panel based on a range of factors (income, conflict and natural resource abundance) is used in order to test the robustness of results. The paper employs a recent panel analysis technique, the common correlated effects (CCE) estimator, which allows for heterogeneity across countries in model parameters and cross sectional dependence. In overall terms, the findings point to a negative linear effect of external debt on growth both in the short run and long run. When different groups of countries are considered, similar results supporting the negative effect of debt on growth are obtained for the sub sample of low income, resource abundant and conflict countries but not for the sub sample of non-conflict, non-resource abundant and middle income countries. In addition, when non linearity is considered, contrary to previous studies we do not find evidence of an inverted U shaped relationship.

Date: 2018
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