The External Debt-Servicing Constraint and Public
Expenditure Composition in Sub-Saharan Africa
by
Augustin Kwasi FOSU
UN University-WIDER
Helsinki, Finland
For presentation at the African Economic Conference
(AEC), “Fostering Development in an Era of Financial and
Economic Crises”
Addis Ababa, Ethiopia
11-13 November 2009
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1
Outline
•
•
•
•
•
•
Introduction
Theoretical Framework
Estimation
Sector Spending Trends
Results
Conclusion
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2
Introduction
•
Two main strands of existing relevant literature:
–
–
•
•
•
Debt impact on growth (for published papers see, e.g., Elbadawi et al.
[1997]; Fosu [1996, JED; 1999, CJDS])
Aid effect on public expenditures (see, e.g., Cashel-Cordo & Craig [1990,
JDE]; Feyzioglu et al [1998, WBER]; Gang & Khan [1990, JDE]; Gbesemete
& Gerdtham [1992, WD]; Ouattara [2006, EM])
Evidence on debt and public expenditures is scant, especially for
low-income economies (e.g., Cashel Cordo & Craig [1990, JDE];
Mahdavi [2004, WD]; Ouattara [2006, EM]).
Specific evidence on debt and the functional composition of
public expenditures even more scant (e.g., Ouattara [2006, EM];
Fosu [2007, WD; 2008, ODS])
Present study extends analysis to include six functional sectors:
agriculture, capital, economic services, education, health, and
public investment.
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3
Theoretical Framework
The government maximizes for J sectors:
(1)
U(G1, G2,…, GJ),
subject to the budget constraint
(2)
ΣjGj = R,
R is government revenue, which may be expressed as
(3)
R = N + F – D,
The first-order conditions are:
(4)
U1 = U2 = ...= UJ
(5)
ΣjGj = R = N + F – D
The demand functions are:
(6) Gj = Gj(RX ;W)
RX is exogenous component of R; W is country-specific factors
defining the social welfare function.
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4
Estimation
• Estimating model:
(8j)
gj = gj(DX, F; Q ,A, P, T; uj), j = 1,…, J
gj : share of government expenditure in sector j
DX : exogenous component of external debt service
F: foreign aid; ODA as a proportion of GDP
Q: income; per capita GNP
A: economic structure; agricultural share of the population
P: political structure; constraint on the executive
T: set of time-period dummy variables
uj: stochastic disturbance term
• Debt-service prediction model (PREDSR=D):
(9)
D = 16.00 + 0.015 NETDEBTX n =94, R2=0.597
(8.32) (4.31)
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5
Sector Spending Trends
Figure 1. Trends in Sector Expenditures Shares in African Economies,
1975-94
30.00
25.00
gec
20.00
gee
%
geh
15.00
geec
geag
10.00
puinv
gess
5.00
0.00
75 79
80 84
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85 89
90 94
Sector Spending Trends (cont’d)
Figure 2: Trends in Real Sector Expenditures on the Social Sector in African
Economies, 1975-94
40.00
35.00
30.00
25.00
geepcp
$ 20.00
gehpcp
gesspcp
15.00
10.00
5.00
0.00
75 -79
80 -84
85 -89
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90 -94
7
Results
VAR/EQ.
GEE
GEH
GESS
GEC
GEEC
GEAG
PUNIV
CONST
4.632b
6.580b
5.603a
0.946
4.651
4.940
7.901b
(2.15)
(2.34)
(2.80)
(0.25)
(1.47)
(1.58)
(2.03)
-1.551
0.320
0.014
0.003
-1.244
(0.36)
(0.02)
(0.00)
(-1.38)
PREDSR
ODAGDP
PCGNP
AGCON
XCONST
D7579
D8084
a
a
a
-1.497
-1.824
(-2.98)
(-2.79)
(-3.33)
a
a
a
0.212
0.199
0.212
0.041
-0.015
0.117
0.215b
(3.66)
(2.64)
(3.94)
(0.40)
(-0.18)
(1.39)
(2.06)
c
c
0.232
0.039
0.189
0.162
-0.215
-0.364
-0.145
(1.80)
(0.23)
(1.58)
(0.72)
(-1.13)
(-1.95)
(-0.62)
0.241
0.003
0.173
0.196
-0.082
-0.370
-0.348
(1.50)
(-0.01)
(1.16)
(0.69)
(-0.35)
(-1.57)
(-1.20)
b
b
0.026
0.142
0.052
-0.256
0.074
0.250
-0.092
(0.38)
(1.58)
(0.81)
(-2.12)
(0.73)
(2.48)
(-0.75)
b
a
a
-0.396
-0.564
-0.441
0.050
0.119
0.124
-0.117
(-2.43)
(-2.66)
(-2.92)
(0.17)
(0.50)
(0.53)
(-0.40)
-0.206
-0.357
-0.089
-0.076
-0.305
c
-0.158
-0.323
(-1.14)
(-1.79)
(-1.60)
(-1.46)
(-0.44)
(-0.38)
(-1.22)
-0.122
-0.163
-0.139
-0.430c
-0.064
0.186
-0.305
(-0.84)
(-0.87)
(-1.03)
(-1.67)
(-0.30)
(0.89)
(-1.17)
RSQ
0.51
0.49
0.57
0.15
ChiSQ
Breusch_Pagan 1*
Breusch_Pagan
2**
42.05 {.00}
38.82 {.00}
54.15 {.00}
0.20
10.52
{.23}
0.40
26.82
{.00}
0.33
20.14
{.00}
D8589
64.76 {.00}
78.45{.00}
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7.17 {.52}
Results Cont’d, using DSR
VAR/EQ.
GEE
GEH
GESS
GEC
GEEC
GEAG
PUNIV
CONST
-0.747
0.033
…
2.643
4.660a
4.785a
4.175c
(-0.53)
(0.02)
…
(1.18)
(2.48)
(2.59)
(1.80)
0.022
0.025
…
-0.138
0.010
0.040
-0.164
(0.23)
(0.20)
…
(-0.91)
(0.08)
(0.32)
(-1.04)
a
0.259
a
0.255
…
-0.007
-0.013
0.128
0.202c
(3.81)
(2.92)
…
(-0.06)
(-0.14)
(1.44)
(1.80)
0.407a
0.252
…
0.082
-0.214
-0.351b
-0.058
(3.09)
(1.49)
…
(0.39)
(-1.22)
(-2.04)
(-0.27)
0.159
-0.101
…
0.281
-0.086
-0.386
-0.325
(0.87)
(-0.43)
…
(0.98)
(-0.36)
(-1.62)
(-1.08)
-0.039
0.062
…
-0.235b
0.074
0.244a
-0.136
(-0.54)
(0.67)
…
(-2.06)
(0.77)
(2.59)
(-1.14)
-0.172
-0.294
…
-0.155
0.130
0.170
-0.145
(-0.86)
(-1.15)
…
(-0.49)
(0.49)
(0.65)
(-0.44)
-0.075
-0.223
…
-0.422c
-0.086
-0.061
-0.301
(-0.49)
(-1.13)
…
(-1.73)
(-0.42)
(-0.30)
(-1.18)
c
-0.064
0.188
-0.339
DSR
ODAGDP
PCGNP
AGCON
XCONST
D7579
D8084
D8589
RSQ
ChiSQ
Breusch_Pagan
-0.155
-0.204
…
-0.424
(-0.97)
(-0.99)
…
(-1.68)
(-0.30)
(0.90)
(-1.29)
0.400
0.389
…
0.217
0.148
0.396
0.316
11.40 {0.18}
7.17 {0.52}
26.98 {0.00}
18.97 {0.01}
27.35 {0.00}
26.12 {0.00}
80.86{0.00}
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Results (cont’d)
I. Predicted Debt Service
II. Actual Debt Service
GEE
VAR/EQ.
GEH
VAR/EQ.
GEE
Historical
Poverty 6.144
Record (Headcount
RatioCONST
in %): SSA
vs.
5.006
CONST
0.900
(3.88)
(2.51)
(0.90)
South
Asia
(SAS)
and
India
(Source:
WB,
WDI)
-1.615
-1.370
PREDSR
DSR
-0.062
a
ODAGDP
PCGNP
a
a
(-4.16)
0.072c
(1.94)
0.127
(1.32)
0.194c
(1.84)
0.009
(0.17)
-0.397a
(-3.30)
-0.291a
(-2.73)
-0.208c
(-1.85)
(-2.80)
0.134a
(2.90)
0.047
(0.39)
0.070
(0.53)
0.148b
(2.15)
-0.337b
(-2.23)
-0.310b
(-2.31)
-0.134
(-0.95)
1981
AGCON
SSA 42.3
SAS 49.6
XCONST
India -D7579
D8084
a
b
A. $1 Standard
1987
1993
47.2
45.5
45.1
36.9
46.1
41.8
B. $2 Standard
D8589
1981
1987
1993
SSA 74.5
77.4
76.1
RSQ
0.33
0.31
SAS
88.5
86.6
82.2
chiSQ
39.21{.00}
35.92{.00}
Breusch_Pagan
India -- 20.93{.00} 87.0
85.3
significance at the 0.01 two-tailed level
significance at the 0.05 two-tailed level
c
significance at the 0.10 two-tailed level
b
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ODAGDP
PCGNP
2004
AGCON
41.1
30.8
XCONST
34.3
D7579
D8084
2004
72.0
RSQ
77.1
chiSQ
Breusch_Pagan
80.4
D8589
(-1.25)
0.081c
(2.02)
0.255b
(2.57)
0.141
(1.23)
-0.018
(-0.30)
-0.249c
(-1.90)
-0.232b
(-2.01)
-0.216c
(-1.76)
0.20
19.85{.01}
25.70{.00}
GEH
0.501
(0.25)
-0.032
(-0.52)
0.144a
(2.96)
0.160
(1.33)
0.02
(0.14)
0.124c
(1.74)
-0.187
(-1.18)
-0.256c
(-1.84)
-0.143
(-0.96)
0.25
25.91{.00}
10
Conclusion
• The debt-servicing constraint:
– affects the composition of public expenditures in African
economies
– is essentially a social-sector phenomenon
– reduces expenditure shares of both education and health about
equally
– exhibits a partial elasticity of approx. 1.5 for social sector
– is more important than ODA, inter alia, affecting public budget
allocation decisions
• Actual debt service ratios are a poor measure of the
debt-servicing constraint
• Spending on the social sectors of education and health
has been trending upward even following SAP
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Thank you!
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12