Academic journal article Atlantic Economic Journal

Foreign Debt Service and Economic Growth

Academic journal article Atlantic Economic Journal

Foreign Debt Service and Economic Growth

Article excerpt

The paper uses the production-function approach to the sources of growth to estimate the effect of debt service on economic growth in a cross-section of 29 sub-Saharan African countries (SSA). The reduced form of the established model, which has been derived from the basic neoclassical production function in which output depends on capital, labor, and natural resources, is as follows:

Y = [a.sub.0] + [a.sub.1]K + [a.sub.2]L + [a.sub.3]X + [a.sub.4]D + [a.sub.5] + [E.sub.t]. (1)

Y is the average annual growth of real output; K is growth of the capital stock; L is population growth representing growth of the labor force; X is growth of exports; D is debt ratio; E, is a stochastic error term; and the coefficients of the variables are partial elasticities. A time trend has been included to capture changes in productivity or other relevant factors that have not been explicitly included in the specification.

Although export growth is not an input in the production function in the traditional specification, it has been included because exports increase real output for a given level of K and L [Ram, Economic Development and Cultural Change, 3, 1987]. Also, SSA countries are mostly agricultural or mineral exporters, depending on their resource endowment. Debt service can also be justified as an input in the production function since debt, which necessitates debt service, increases output by increasing K for a given labor force and natural resources endowment. …

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