The dynamic impact of external debt accumulation on private investment and growth in Africa

Abstract

The paper attempts, using recent empirical literature, to characterize the dynamic effects of external debt on private investment rates and growth performance. It shows that once the critical threshold of external debt accumulation is passed, the effects on private investment develop into a vicious circle and this has a negative effect on current and future growth. It shows that few countries in Africa have managed to reverse this trend in the sample period, 1970-1994. The argument in the paper is that the external debt problem in Africa has led to an investment pause and has reduced growth performance substantially. The paper shows that is difficult to stimulate investment and, therefore, growth under these circumstances, and explains why most African countries were found on the wrong side of the Laffer curve.