EuroEconomica, Vol 38, No 2 (2019)

Abstract

This study empirically investigates the relationship between government debt and economic growth in a sample of 10 Southern African Development Community (SADC) members from 1995 to 2017.   The study disaggregates the SADC data into different samples: full sample and a sample of non-Heavily Indebted Poor Countries and employs the fixed effects two-stage least squares (FE-2SLS) estimator to account for possible endogeneity bias due to reverse causation between government debt and economic growth.  Results are presented for the entire sample and sub-sample (non-Heavily Indebted Poor Countries). While the impacts of government debt are similar in direction (negatively related to economic growth) for the full and sub-sample, it is not significantly related with economic growth in the sub-sample. That is, the estimated coefficient varies substantially, depending on the particular sample of countries chosen. This implies that government debt, at moderate level, has no impact on growth while after a certain threshold the effects become growth reducing. Inflation, military expenditure and trade openness were also found to have a negative significant relationship with government debt in SADC.  However, population growth and investment were found to have a significant positive relationship with government debt.