Government Borrowing, Infrastructure and Human Development in Africa: A Panel Threshold Approach

Abstract

In this paper, we examine the effect of external borrowing on infrastructure, human development and economic growth in Africa. Using the panel threshold regression, we explored whether the threshold effect that often characterize the debt-growth nexus also applies to key drivers of economic growth, inequality and sustainable development such as infrastructure and human development. Data for the study covered the period 1990 to 2019 for 49 countries in Africa. Using the panel threshold test, findings showed non-existence of a threshold effect of external debt on infrastructure and on human development. The result from the fixed effect model showed insignificant effect of external borrowing on the index of infrastructure and significant negative effect on human development. The result support literature evidence of a threshold effect between borrowing and economic growth. Findings suggest that borrowed funds are not channeled towards growth-enhancing investment such as improvements in infrastructure and human condition, and the use of funds in this form undermine the income potential of future generation and chances of debt repayment. With the current global economic crisis initiated by the COVID-19 pandemic, external borrowings are notably on the increase and policy directive to ensure the use of borrowed funds for the advancement of infrastructure and human development is paramount in order to reduce the chances of falling deeper into an already existing financial distress in the African region.KeywordsGovernment debtInfrastructureHuman developmentThreshold regression