Relationship between Economic Growth and Debt: An Empirical Analysis for Sub-Saharan Africa

Abstract

In this study, we examine the connection between economic growth and debt, with the question in mind -“Is debt a burden and bad for economic growth? Employing several sophisticated statistical approaches to investigate the problem and to assess the impact of debt on economic growth in 48 countries of Sub-Saharan Africa from 1995 to 2012, we find evidence of Granger causality between debt and economic growth in 8 out of the 48 sub-Saharan countries during the period of study and validate for the existence of “Debt Laffer Curve.” We also study the relationship between debt and economic growth rate in Granger causality and Dynamic Arellano-Bond panel data estimation frameworks, and find evidence of a negative correlation between the two variables (Debt and GDP) and confirm the findings by testing several versions of the models. Political decision and economic policy are intertwined and need to be examined carefully when implemented for economic growth and our findings lend credence to the politically unpopular austerity measures (constraints on government spending financed by borrowing). There is a limit to the economic growth rate that the government financed expenditure can bring. If the burden of debt is too high then there is a negative impact of debt on the economic growth. Keywords. Economic Growth, Debt, Laffer curve and Investments. JEL. E20, E60, E24.