Sub‐Saharan Africa's debt‐financed growth: How sustainable and inclusive?

Abstract

AbstractSub‐Saharan African (SSA) countries recorded impressive economic growth in the last two decades. The question however is, how inclusive and sustainable is this growth? With this in mind, this study examined the sustainability and inclusiveness of economic growth in a panel of 44 SSA countries, over a period of 38 years, while taking into account the diversity of the continent's institutional quality, income growth and resource endowment. The study adopts the innovative nonlinear fiscal reaction function and the dynamic panel threshold model to account for potential asymmetric phenomena in public debt series. The study also adopts Driscoll and Kraay's estimator to account for cross‐section dependency and cross‐country heterogeneity. The result shows that the recent increase in the economic growth rate in SSA is not sustainable and inclusive. This is tenable since if economic growth is debt induced, more money will be spent on servicing public debt, thus depriving governments of funds for critical intervention programs. Lastly, the study found a public debt/gross domestic product ratio threshold of 34% beyond which public debt impairs growth inclusiveness across SSA. The research and policy implications are discussed.