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External Debt and Economic Growth in Sub-Saharan African Countries: An Econometric Study

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  • lyoha, Milton A.

    (African Economic Research Consortium)

Abstract

This econometric study takes a sumulation approach to investigate the impact of external debt on economic growth in sub-Saharan African countries using a small macroeconometric model estimated for 1970-1994. An important finding was the significance of debt overhang variables in the investment equation, suggesting that mounting external debt depresses investment through both a “disincentive†effect and a “crowding out†effect. Policy simulation was undertaken to investigate the impact of alternative debt stock reduction scenarios (debt reduction packages of 5%, l0%, 20% and 50%), effective in 1986, on investment and economic growth in the subsequent years. It was found that debt stock reduction would have significantly increased investment and growth performance. A 20% debt stock reduction would, on average, have increased investment by 18% and increased GDP growth by 1% during the 1987-1994 period. Thus, the results demonstrate that debt forgiveness could provide a much needed stimulus to investment recovery and economic growth in sub-Saharan Africa.

Suggested Citation

  • lyoha, Milton A., 1999. "External Debt and Economic Growth in Sub-Saharan African Countries: An Econometric Study," Working Papers 5374b5d85b10, African Economic Research Consortium, Research Department.
  • Handle: RePEc:aer:wpaper:5374b5d85b10
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    File URL: http://hdl.handle.net/123456789/36
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