The Impact of National Debt on Economic Growth in Liberia: A Vector Error Correction Model

Lester Zomatic Tenny

doi:10.11648/j.ijber.20200906.13

Abstract

This research investigated empirically the impact of the government of Liberia (GOL) debt on economic growth from 1970 to 2020. The findings from several studies in different regions of the world present mixed result and at times, controversial results on the impact of debt on the health of a country’s economy. Its objective was to ascertain whether debt, both domestically and foreign, has an impact on economic growth in Liberia over the period of 50 years. Despite the theoretical foundation that debt stymied economic growth, the result from the analysis prove contrary to existing body of literature relative to the Liberian economy. The paper reviewed several literatures from various sources and regions to build the foundation for this work. The work used annual time series data of National debt (both domestic and foreign) and Gross domestic product (GDP) as well as annual data for revenue and expenditure for the periods under research. Data for national debt and GDP were obtained from the world development index, the World Bank and the international monetary fund while data for government revenue and government expenditure were both obtained from the fiscal outturn from the ministry of finance and development planning in Liberia. The paper established that there exists a long run relationship between national debt and economic growth in Liberia. It also established that there exist a bidirectional relationship between national debt and economic growth in Liberia.

Highlights

This paper attempts to understand the impact of national debt on the economy and despite the mixed findings that debt can have several consequences on various economies, this paper showed empirically the specific impact of debt on the growth of the Liberian economy between 1970 and 2020
Reinhart & Rogoff opined that the ratio of debt to Gross domestic product (GDP) should be at most 90%; and that a country will experience economic growth if the threshold is less than the 90% mark
The research adds to existing body of literature and has established another argument to existing debates of the impact of debt on economic growth

Summary

Introduction

This paper attempts to understand the impact of national debt on the economy and despite the mixed findings that debt can have several consequences on various economies, this paper showed empirically the specific impact of debt on the growth of the Liberian economy between 1970 and 2020. If the debt to GDP ratio exceeds a given threshold, debt is said to have an adverse condition in that economy. Reinhart & Rogoff opined that the ratio of debt to GDP should be at most 90%; and that a country will experience economic growth if the threshold is less than the 90% mark. They asserted that any number above the set threshold will ruined national growth and set the economy into spiral [11]. It is shown empirically that a threshold of 88.2% for developing countries can produce growth of the economy [8]. In Liberia, the heavily indebted poor countries arrangement (HIPC) alleviated the country’s debt in 2008, renewing the country’s pledge to follow the mandate of the United Nation’s SDG no. 8 which calls for countries to achieve higher economic growth by 2030 [13]

Literature Review

Johanssen Cointegration Test

C Error Correction

Findings

Conclusion