Public debt-investment nexus: the significance of investment-generation policy in West Africa

Abstract

Purpose

The main goal of the study is to explore the long run relationship between public debt and domestic investment in West Africa. Essentially, a study of this nature is to proffer major inroads into addressing low investment levels plaguing the region and securing critical fiscal policy measures.

Design/methodology/approach

The study examines the long-run relationship between public debt and domestic investment in 13 West African countries between 1986 and 2018 with the use of Panel Dynamic Least Squares (DOLS) and Panel Fully Modified Least Squares (FMOLS), and causality test based on Toda and Yamamoto.

Findings

Public debt (% of GDP) and external debt stocks have an insignificant effect on domestic investment in the long run, suggesting the negligible effect of public debt on the level of investments in the region. Further evidence shows that domestic investment Granger causes public debt indicators, implying that there is unidirectional causality. This suggests that any investment-generation policy could engender a rise in public borrowing, although such public loans might not be effective when there is pervasive mismanagement of public funds, as public debts need to be well managed for ensuring improved investment.

Research limitations/implications

The study suggests that maintaining a strong and effective debt-investment nexus requires fiscal consolidation efforts across countries, as such could lead to enhanced institutional capacity and sustainable investment-generation policy.

Originality/value

Since panel regression techniques used by the previous studies (Fixed and Random effects) could be susceptible to possible statistical errors due to endogeneity issue and might not be well suited for explaining long-run effect or capturing the part of investment sustainability, their conclusions could be misleading and remain untenable in West Africa' s context. Hence, the study adopts techniques (DOLS and FMOLS) which could account for endogeneity issue and provide better elucidations for long-term effects.

Citation

Fagbemi, F. and Adeosun, O.A. (2021), "Public debt-investment nexus: the significance of investment-generation policy in West Africa", Journal of Economic and Administrative Sciences, Vol. 37 No. 4, pp. 438-455. https://doi.org/10.1108/JEAS-05-2020-0070