EXTERNAL DEBT, INVESTMENT AND ECONOMIC GROWTH IN GHANA
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Date
2012-07-01
Authors
Tuffour, Joseph Kwadwo
Journal Title
Journal ISSN
Volume Title
Publisher
UNIVERSITY OF BENIN
Abstract
The broad objective of this study is to empirically estimate the influence of external debt on economic growth and investment in Ghana. The specific objectives are to determine the: impact of external debt on GDP growth, the threshold level at which external debt becomes burdensome and the possible growth loss of exceeding external debt threshold and lastly to determine whether or not external debt crowds out investment. A macroeconomic framework of economic growth was developed with linkages to investment and external debt. This served as the methodological basis. The econometric model specifications entail equations explaining output and investment. The research used time series data over the period 1970 – 2009. Non-linear Least Squares and Two Stage Least Square estimation methods were used. In addition, summary statistics and graphical approaches were applied.
A non-linear relationship between external debt and output growth was established. The external debt threshold was estimated to be 46.2 percent, supporting the external debt Laffer curve hypothesis. The positive contribution of external debt (at lower levels up to the threshold) supports the notion that, a certain minimum requirement of external debt is necessary to support the growth process. On the other hand, beyond the threshold level of external debt accumulation, the impact of external debt on economic growth begins to fall.
The threshold level suggests that, Ghana encounters growth rate problems at a moderate external debt to GDP ratio. The research also reveals a cumulative economic growth loss of 12.28 percentage points (indicating the growth loss when the estimated external debt threshold is exceeded). This leads to an annual average growth loss of 0.31 percentage points, showing how high growth would have been if the external debt to GDP ratio had stayed at
46.2 percent. The research further shows that, beyond the threshold level, the positive impact of foreign debt on growth would begin to fall until the external debt to GDP ratio reaches 92
percent. Any foreign debt acquired further than the 92 percent of GDP would actually reduce output growth. In addition, the research unravels the existence of the debt overhang problem. This occurs in two ways through: crowding out effect on private investment, constraining public sector liquidity as well as discouraging private investment. Also, it was noted that, the accelerator effect applies in Ghana for the study period.
Description
HJ 8826
Keywords
Debts, External - Ghana , External Debts , Investment , Economic growth