Indebtedness and economic growth the case of Senegal

Abstract

Indebtedness is a normal and critical phenomenon which has always accompanied the economic development process. It becomes a problem of concern only when the economy cannot generate enough resources to pay back debt service. The main schools of economic thought (classical, marxist, and neo-classical) have studied the debt issue following different directions but it is mainly the neo-classical economists who have investigated seriously the effects of external debt on the debtor's economy with the use of models. Adopting one of these models as developed by Kessler (1985) we extended it by Papanek's (1973) and Mosley's (1980) contributions, and used it to study the effects of debt on growth in the Senegalese economy. The interactions between savings and growth and the determinants of the savings function for Senegal were also examined. The results of the analysis indicate that different kinds of external resources (aid, debt, and direct investment) have different effects on the economy indeed. These results, show significant positive relationships between growth, on the one hand, and domestic savings, debt and exports growth rate, on the other. The savings function specification confirms the fundamental role of the income level as a determinant of saving capacity together with direct investment which shows a positive correlation with domestic savings. On the other hand, debt and taxation show negative relationships with domestic savings.