The External Debt-Economic Growth Nexus in West African Countries: Does Institutional Quality Matter?

Adewale Samuel Hassan, David Mhlanga

Abstract

The issues of rising external debt and weak institutions are two of the major challenges facing West African countries in modern times. This study lends a voice to the role of institutions in the discourse of the relationship between external debt and economic growth in West African countries. Using available panel data from the World Development Indicators and the International Country Risk Guide, spanning 1985-2020, the generalized method of moments was employed to analyze the data. The findings from the study confirm that institutional quality lessens the severity of external debt’s negative effect on economic growth. Moreover, the findings hint that the threshold of institutional quality beyond which the West African countries could reap the economic growth benefits of their external debt stock ranges from 5.98 to 6.82 on a 10-point scale. Therefore, this study demonstrates that the quality of institutional infrastructure matters in the way external debt influences economic growth in West Africa. As such, West African countries need to reinforce the institutional infrastructure within their debt management systems. They are also to orient their institutions toward controlled procurement and prudent use of external debt funds. This study contributes to the literature by comprehensively investigating the intervening role of institutions in the external debt-economic growth nexus in West Africa, including the role of each institutional quality indicator. The study also deviates from previous studies by determining the threshold of institutional quality beyond which external debt enhances economic growth in West Africa.

 

Keywords: external debt, economic growth, institutional quality, system GMM, threshold.

 

DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.61.53


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