Natural resource rents and public debts nexus in African resource-rich and most indebted nations: Issues with aggregation bias

Abstract

The relationship between natural resource of a country and its public debt profile has been a point of contention. Due to credit limits, countries endowed with natural resources employ their supposed resource huge windfalls as collateral. As a result, they are unable to settle their loans during these resource price fluctuations, particularly when the price lowers. Those countries who failed to implement adequate policies to address the commodity price boom-bust cycle suffer the consequences of the debt overhang, stifling their search for economic progress and trapping them in debt. In addition, aggregation bias, which can lead to incorrect estimation of aggregate relationships and mislead policymakers, is also a concern with aggregate estimations. The long-run relationship between total natural resource rents and public debt among the top African countries endowed with natural resources as well as the most indebted is examined. The study also makes efforts to determine whether or not aggregation bias exists. Trade openness, GDP per capita, and unemployment are among the other control variables included in the public debt model based on theoretical underpinning. The findings of a robust empirical estimation show that the relationship is negative at the aggregate level but positive at the disaggregated level, implying that the estimation of the public debt-resource rent relationship at the aggregate level is prone to aggregation bias. As a result, governments of resource-rich countries should engage in responsible borrowing and prudent fiscal management to minimize debt overhang. On the subject of estimating aggregation bias, policy could be drawn as follows: aggregation bias may lead to an incorrect total debt-resource rents postulation where policymakers may be misled by the incorrect evidence, resulting in poor resource-debt policies. Therefore, while formulating fiscal and growth strategies, policymakers should examine the resource-debt nexus at both the aggregate and country level.