Academic journal article International Review of Management and Business Research

Analysis on the Long Run Relationship between the Economic Growth and Its Determinants of Selected North African Countries

Academic journal article International Review of Management and Business Research

Analysis on the Long Run Relationship between the Economic Growth and Its Determinants of Selected North African Countries

Article excerpt

Introduction

The sharped and sustained increase in the proportion of developing countries resources given to the service of their foreign debt. The debt service ratio is influenced by the rate at which development occur affecting economic development. The inflow of capital at substantial rates will significantly reduce the need for external borrowing. Due to the amount of resources devoted to debt service positively related to the size of the debt, economic growth will increase, through the impact of capital inflows will reduce the ratio of debt service. At the global scene, external debt and foreign direct investment (FDI) have been considered as major sources of capital financing. FDI is the main form of capital inflow to many countries while nations experiencing account deficit are advised to borrow funds, external debt, from the international community to boost their economic growth (Malik, Hayat and Hayat, 2010). Unfortunately, external debt and its repayment have become a hindrance to several developing North African countries' economic growth like in Algeria, Egypt, Mauritania, Morocco and Tunisia. As noted by Malik et al., (2010), in the past thirty years it has been seen that foreign debt had been the major culprit in the decline in investment and growth performance of many countries. International debt can be likened to unnecessary tax paid by future generations on wasted services; in addition, the rise of debt servicing ratio can adversely affect economic growth of any country (Chowdhury, 1994).

Houssou and Heidhues (2005) stated that the international donor community has provided assistance to debtor countries to reduce their external debt trap to spur economic growth, alleviate poverty, and achieve external viability. This support has taken the form of concessional financing provision from IFIs, and debt relief from official donor creditors, such as the Paris Club. It should be pointed out that these measures have produced great success in reducing the external debt burden of most middle-income countries. Nonetheless, many poor countries continue to experience unacceptable levels of poverty and heavy external debt burden due to a combination of factors, including policies of inappropriate development, poor external debt management policy, give up the structural adjustment and reform economy, the decline of their terms of trade, and poor governance. In North Africa, high levels of external debt service have negatively affected savings and foreign exchange earnings resulting in the crowding out of public investment. This scenario, in return, has also affected the provision of social services for the populace in the affected countries. This study advances the argument that the real problem that impedes the process of economic development in the North African countries is the challenge of inadequate real resources for capital formation, due to high external debt servicing. In many instances, the countries are compelled to resort to high levels of foreign borrowing in order to mitigate the effects of worsening economic conditions. However, further foreign borrowings have aggravated the debt trap as most of these countries have a history of debt service arrears and difficulties.

Many resources that could have been channeled back in the form of investments have instead been used to service external debt. Some of the countries in North Africa have problems of funds available for debt- service commitments which, in their countries and economic systems have almost collapsed as they grappled to free themselves from the debt trap.

Clearly, the mounting debt stocks in the North Africa countries have discouraged the inflow of foreign direct investment as a result of fears of macroeconomic distortions. Ironically, instead of attracting out side capital, much needed national capital is fleeing to the rich countries either for debt servicing purposes or for safe keeping. Against this background, high debt-service commitments have not only made the North African economies to perform poorly, but also to rely heavily on foreign sources of budgetary support, thereby creating an unending cycle of economic crisis. …

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