External Debt, Public Investment and Economic Growth in Cameroon

Forbe Hodu Ngangnchi,Roland Joefendeh,Laisin Innocent

doi:10.32861/ijefr.81.23.29

Forbe Hodu Ngangnchi, Roland Joefendeh + Show 1 more

Open Access

https://doi.org/10.32861/ijefr.81.23.29

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Abstract

This study investigates the extent to which external debt and public investment contribute to economic growth in Cameroon-emphasizing how public investment modulates the effect of external debt on economic growth. Time series data spanning the period 1980-2021 obtained from the World Bank’s world development indicators were used, together with the Dynamic Ordinary Least Squares (OLS) approach to ascertain the nature of the long-run relationship between external debt, public investment, and economic growth in Cameroon. Consistent with the debt-overhang and crowding-out literature, the study reveals a negative significant influence of external debt on economic growth in Cameroon. Results also reveal that there is a positive and significant direct effect of public investment on economic growth in the long run. Further results indicate that public investment and external debt positively and significantly affect engender economic growth in Cameroon. This is evidence that public investment modulates the effect of external debt on economic growth in Cameroon. These findings suggest the need for the government of Cameroon to create an enabling environment for private sector investment while accompanying external debt resources with domestic revenue mobilization by broadening the tax base to include taxes on landed property.

Highlights

Economic growth and development remain a major concern of most developing countries, requiring resources mobilization and discipline to address
An increase in government or public investment by 1% will lead to an increase in gross domestic product (GDP) per capita by about 0.21% everything being equal in the long run
If public investment is carried out to improve the quality of infrastructure, this will reduce the cost of private investment and increase the return to investment and by so doing spur economic growth

Summary

Introduction

Economic growth and development remain a major concern of most developing countries, requiring resources mobilization and discipline to address. Sustainable economic growth is the prime concern of all countries, especially developing economies that frequently face burgeoning fiscal deficits mainly driven by higher levels of debt service, external debt servicing and widening current account deficits (Bernardin et al, 2018). The HarrodDomar growth model has been the source of inspiration for development economists in explaining the importance of external borrowing in closing the savings-investment gap in developing countries. The principal reason for government borrowing is to finance public goods that increase welfare and promote economic growth. It is expected that developing countries would benefit from external borrowing if the marginal product of capital is higher than the world interest rate (Ogunmuyiwa, 2011). Borrowing must be caucious as many poor nations become poorer after taking loans from international creditors such as the World Bank, the IMF and the Paris Club (Atique and Kamran, 2012)

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