Main Article Content
Abstract
Purpose ― This study contributes to the empirical literature on the nonlinear relationship between public debt and economic growth in Nigeria using threshold regression methodology. It provides insight into how Nigeria can grow out of debt sustainably in the face of the prevailing level of corruption as an institutional indicator.
Method ― Stata's threshold command is used for data analysis, and this command fits time-series threshold models in finding the optimal number of thresholds. It does this by minimising an information criterion and using conditional least squares to estimate the parameters of the threshold regression model.
Findings ― The results show that the relationship between public debt and economic growth is nonlinear. The threshold effect of public debt on growth depends on the debt-to-GDP ratio and the level of corruption. Substantial evidence supports two threshold levels of debt-to-GDP ratio and corruption in the debt-growth nexus. The two threshold levels of corruption are 63.21 and 64.27 (on a scale of 0 to 100), with the growth effect of public debt being positive and significant in the second regime only.
Implication ― Public debt exerts significant positive effects on growth as long as corruption is kept at a moderate level. Thus, the government of Nigeria needs to ensure that corruption is pegged at a fairly moderate level that will guarantee the positive contribution of accumulated debt to economic growth.
Originality ― Unlike previous works, the study addresses the problem caused by the mechanical effect of a change in the real GDP growth rate on debt. It is based on the assumption of a maximum of two thresholds.
Article Details
Copyright (c) 2022 Eyitayo Oyewunmi Ogbaro
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References
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- African Development Bank. (2021). African economic outlook 2021 – From debt resolution to growth: The road ahead for Africa. Retrieved July 24, 2021, from https://www.afdb.org/en/documents/african-economic-outlook-2021
- Aigheyisi, O., & Ogbebor, O. (2019). Public debt, foreign direct investment and economic growth in Nigeria. Finance & Economics Review, 1(1), 1–24.
- Akinwunmi, A. A., & Adekoya, R. B. (2018). Assessment of the impact of external borrowing on the economic growth of the developing countries-Nigerian Experience. Asian Business Research, 3(1), 29–40. https://doi.org/10.20849/abr.v3i1.331
- Alagba, O. S., & Idowu, E. (2019). Effect of public debt on economic growth in Nigeria: An empirical analysis. International Journal of Business and Economic Development, 7(2), 10–18. https://doi.org/10.24052/ijbed/v07n02/art-02
- Anderu, K. S., Omolade, A., & Oguntuase, A. (2019). External debt and economic growth in Nigeria. Journal of African Union Studies, 8(3), 157–171. https://doi.org/10.31920/2050-4306/2019/8n3a8
- Atil, A., Lahiani, A., & Nguyen, D. K. (2014). Asymmetric and nonlinear pass-through of crude oil prices to gasoline and natural gas prices. Energy Policy, Elsevier, 65, 567–573. https://doi.org/10.1016/j.enpol.2013.09.064
- Augustine, B., & Rafi, O. M. (2021). Public debt-economic growth: Evidence of a nonlinear relationship (BASE University Working Paper Series No. 11). Retrieved from https://base.ac.in/wp-content/uploads/2021/10/BASE-University-WP-Series-11-2021.pdf/
- Baum, A., Checherita-Westphal, C., & Rother, P. (2013). Debt and growth: New evidence for the euro area. Journal of International Money and Finance, 32, 809–821. https://doi.org/10.1016/j.jimonfin.2012.07.004
- Caner, M., Grennes, T. J., & Köhler-Geib, F. (2010). Finding the tipping point - When sovereign debt turns bad. (World Bank Policy Research Working Paper No. 5391). https://doi.org/10.2139/ssrn.1612407
- Cecchetti, S. G., Mohanty, M., & Zampolli, F. (2011). Achieving growth amid fiscal imbalances: The real effects of debt. In Economic Symposium Conference Proceedings (pp. 145–196). Federal Reserve Bank of Kansas City. Retrieved from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.297.2
- Chang, T., & Chiang, G. (2009). The Behaviour of OECD public debt: A panel smooth transition regression approach. The Empirical Economics Letters, 8(1), 7–46.
- Chudik, A., Mohaddes, K., Pesaran, M. H., & Raissi, M. (2017). Is there a debt-threshold effect on output growth? Review of Economics and Statistics, 99(1), 135–150. https://doi.org/10.1162/rest_a_00593
- Croi, K. F., & Diaw, A. (2020). Debt and growth in West African Economic and Monetary Union Countries (WAEMU): The role of institutional quality. Modern Economy, 11(9), 1505–1521. https://doi.org/10.4236/me.2020.119107
- Daud, S. N., & Podivinsky, J. (2014). Government debt and economic growth in Malaysia: The role of institutional quality. Applied Economics Letters, 21(17), 1179–1183. https://doi.org/10.1080/13504851.2014.916378
- De Pascale, G., & Scrocco, A. (2022). How does institutional quality shape the impact of public debt on economic growth? A threshold panel analysis over EU-28. SSRN. https://doi.org/10.2139/ssrn.4145370
- Devarajan, S., Gill, I. S., & Karakulah, K. (2019). Africa’s debt: Three concerns, three remedies (Duke Global Working Paper Series No. 09). https://doi.org/10.2139/ssrn.3422880
- Ebi, B. O., Abu, M., & Clement, O. D. (2013). The relative potency of external and domestic debts on economic performance in Nigeria. European Journal of Humanities and Social Sciences, 27(1), 1414–1429.
- Égert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43, 226–238. https://doi.org/https://doi.org/10.1016/j.jmacro.2014.11.006
- Elom-Obed, F. O., Odo, S. I., Elom-Obed, O., & Anoke, C. I. (2017). Public debt and economic growth in Nigeria. Asian Research Journal of Arts & Social Sciences, 4(3), 1–16. https://doi.org/10.9734/arjass/2017/36095
- Eze, O. M., Nweke, A. M., & Atuma, E. (2019). Public debts and Nigeria’s economic growth. IOSR Journal of Economics and Finance, 10(3), 24–40.
- Gómez-Puig, M., & Sosvilla-Rivero, S. (2022). The relationship between public debt and economic growth in advanced, emerging and developing economies: Differences and determining factors. SSRN. https://doi.org/10.2139/ssrn.4048038
- Hassan, A. S., & Meyer, D. F. (2021). Moderating effect of institutional quality on the external debt-economic growth nexus: Insights from highly indebted poor countries (HIPC). African Journal of Business and Economic Research, 16(2), 7–28. https://doi.org/10.31920/1750-4562/2021/v16n2a1
- Ijirshar, V. U., Joseph, F., & Godoo, M. (2016). The relationship between external debt and economic growth in Nigeria. International Journal of Economics & Management Sciences, 06(01), 1–5. https://doi.org/10.4172/2162-6359.1000390
- International Monetary Fund. (2020). World Economic Outlook Database, October 2020. Retrieved from https://www.imf.org/en/Publications/WEO/weo-database/2020/October
- Judge, G. G., Griffiths, W. E., Hill, R. C., Lutkepohl, H., & Lee, T. C. (1985). The theory and practice of econometrics (2nd ed.). New York: Wiley.
- Kim, E., Ha, Y., & Kim, S. (2017). Public debt, corruption and sustainable economic growth. Sustainability, 9(3). https://doi.org/10.3390/su9030433
- Kourtellos, A., Stengos, T., & Tan, C. M. (2013). The effect of public debt on growth in multiple regimes. Journal of Macroeconomics, 38(Part A), 35–43. https://doi.org/10.1016/j.jmacro.2013.08.023
- Laosebikan, J. O., Alao, J. A., Ajani, J. O., Alabi, F. A., & David, J. O. (2018). Federal government domestic and external debt: Implications on nigeria’s economic growth (1981 -2015). International Journal of Innovative Finance and Economics Research, 6(4), 95–106.
- Matthews, R. C. O. (1986). The economics of institutions and the sources of growth. The Economic Journal, 96(384), 903–918. https://doi.org/10.2307/2233164
- Minea, A., & Parent, A. (2012). Is high public debt always harmful to economic growth? Reinhart and Rogoff and some complex nonlinearities.
- Mustapha, S., & Prizzon, A. (2018). Africa’s Rising debt: How to Avoid a New Crisis. ODI. Retrieved from https://odi.org/en/publications/africas-rising-debt-how-to-avoid-a-new-crisis/
- North, D. C. (1990). Institutions, institutional change and economic performance. Political Economy of Institutions and Decisions. Cambridge: Cambridge University Press. https://doi.org/DOI: 10.1017/CBO9780511808678
- North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9780511819438
- Nur-tegin, K., & Jakee, K. (2020). Does corruption grease or sand the wheels of development? New results based on disaggregated data. The Quarterly Review of Economics and Finance, 75, 19–30. https://doi.org/10.1016/j.qref.2019.02.001
- Ogbaro, E. O., Young, A. O., & Bank-Ola, R. (2021). Investigating the existence of non-linearity in the debt-growth nexus in Nigeria. Journal of Economics, Business and Market Research (JEBMR), 2(4), 452–466.
- Ogege, S., & Ekpudu, J. E. (2011). The effects of debt burden on the Nigerian economy. Journal of Research in National Development, 8(2). https://doi.org/10.4314/jorind.v8i2.66829
- Sani, A., Said, R., Ismail, N. W., & Mazlan, N. S. (2019). Public debt, institutional quality and economic growth in sub-saharan Africa. Institutions and Economies, 11(3), 39–24.
- Tarek, B. A., & Ahmed, Z. (2017). Institutional quality and public debt accumulation: An empirical analysis. International Economic Journal, 31(3), 415–435. https://doi.org/10.1080/10168737.2017.1354906
- Udeh, S. N., Ugwu, J. I., & Onwuka, I. O. (2016). External debt and economic growth: The Nigeria experience. European Journal of Accounting Auditing and Finance Research, 4(2), 33–48.
- Umaru, A., Hamidu, A., & Musa, S. (2013). External debt and domestic debt impact on the growth of the Nigerian economy. International Journal of Educational Research, 1(2), 70–85.
- Williamson, O. E. (1985). The economic institutions of capitalism. New York: The Free Press.
- World Bank. (2018). Africa’s Pulse 17. Washington DC: World Bank Group.
- World Bank. (2020). Nigeria - Country Partnership Framework for the Period FY21-FY25 (English). Washington, DC. https://doi.org/10.1596/35098
- Yolcu Karadam, D. (2018). An investigation of nonlinear effects of debt on growth. The Journal of Economic Asymmetries, 18, e00097. https://doi.org/10.1016/j.jeca.2018.e00097
References
Abula, M., & Ben, D. M. (2016). The impact of public debt on economic development of Nigeria. Asian Research Journal of Arts & Social Sciences, 1(1), 1–16. https://doi.org/10.9734/arjass/2016/27263
African Development Bank. (2021). African economic outlook 2021 – From debt resolution to growth: The road ahead for Africa. Retrieved July 24, 2021, from https://www.afdb.org/en/documents/african-economic-outlook-2021
Aigheyisi, O., & Ogbebor, O. (2019). Public debt, foreign direct investment and economic growth in Nigeria. Finance & Economics Review, 1(1), 1–24.
Akinwunmi, A. A., & Adekoya, R. B. (2018). Assessment of the impact of external borrowing on the economic growth of the developing countries-Nigerian Experience. Asian Business Research, 3(1), 29–40. https://doi.org/10.20849/abr.v3i1.331
Alagba, O. S., & Idowu, E. (2019). Effect of public debt on economic growth in Nigeria: An empirical analysis. International Journal of Business and Economic Development, 7(2), 10–18. https://doi.org/10.24052/ijbed/v07n02/art-02
Anderu, K. S., Omolade, A., & Oguntuase, A. (2019). External debt and economic growth in Nigeria. Journal of African Union Studies, 8(3), 157–171. https://doi.org/10.31920/2050-4306/2019/8n3a8
Atil, A., Lahiani, A., & Nguyen, D. K. (2014). Asymmetric and nonlinear pass-through of crude oil prices to gasoline and natural gas prices. Energy Policy, Elsevier, 65, 567–573. https://doi.org/10.1016/j.enpol.2013.09.064
Augustine, B., & Rafi, O. M. (2021). Public debt-economic growth: Evidence of a nonlinear relationship (BASE University Working Paper Series No. 11). Retrieved from https://base.ac.in/wp-content/uploads/2021/10/BASE-University-WP-Series-11-2021.pdf/
Baum, A., Checherita-Westphal, C., & Rother, P. (2013). Debt and growth: New evidence for the euro area. Journal of International Money and Finance, 32, 809–821. https://doi.org/10.1016/j.jimonfin.2012.07.004
Caner, M., Grennes, T. J., & Köhler-Geib, F. (2010). Finding the tipping point - When sovereign debt turns bad. (World Bank Policy Research Working Paper No. 5391). https://doi.org/10.2139/ssrn.1612407
Cecchetti, S. G., Mohanty, M., & Zampolli, F. (2011). Achieving growth amid fiscal imbalances: The real effects of debt. In Economic Symposium Conference Proceedings (pp. 145–196). Federal Reserve Bank of Kansas City. Retrieved from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.297.2
Chang, T., & Chiang, G. (2009). The Behaviour of OECD public debt: A panel smooth transition regression approach. The Empirical Economics Letters, 8(1), 7–46.
Chudik, A., Mohaddes, K., Pesaran, M. H., & Raissi, M. (2017). Is there a debt-threshold effect on output growth? Review of Economics and Statistics, 99(1), 135–150. https://doi.org/10.1162/rest_a_00593
Croi, K. F., & Diaw, A. (2020). Debt and growth in West African Economic and Monetary Union Countries (WAEMU): The role of institutional quality. Modern Economy, 11(9), 1505–1521. https://doi.org/10.4236/me.2020.119107
Daud, S. N., & Podivinsky, J. (2014). Government debt and economic growth in Malaysia: The role of institutional quality. Applied Economics Letters, 21(17), 1179–1183. https://doi.org/10.1080/13504851.2014.916378
De Pascale, G., & Scrocco, A. (2022). How does institutional quality shape the impact of public debt on economic growth? A threshold panel analysis over EU-28. SSRN. https://doi.org/10.2139/ssrn.4145370
Devarajan, S., Gill, I. S., & Karakulah, K. (2019). Africa’s debt: Three concerns, three remedies (Duke Global Working Paper Series No. 09). https://doi.org/10.2139/ssrn.3422880
Ebi, B. O., Abu, M., & Clement, O. D. (2013). The relative potency of external and domestic debts on economic performance in Nigeria. European Journal of Humanities and Social Sciences, 27(1), 1414–1429.
Égert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43, 226–238. https://doi.org/https://doi.org/10.1016/j.jmacro.2014.11.006
Elom-Obed, F. O., Odo, S. I., Elom-Obed, O., & Anoke, C. I. (2017). Public debt and economic growth in Nigeria. Asian Research Journal of Arts & Social Sciences, 4(3), 1–16. https://doi.org/10.9734/arjass/2017/36095
Eze, O. M., Nweke, A. M., & Atuma, E. (2019). Public debts and Nigeria’s economic growth. IOSR Journal of Economics and Finance, 10(3), 24–40.
Gómez-Puig, M., & Sosvilla-Rivero, S. (2022). The relationship between public debt and economic growth in advanced, emerging and developing economies: Differences and determining factors. SSRN. https://doi.org/10.2139/ssrn.4048038
Hassan, A. S., & Meyer, D. F. (2021). Moderating effect of institutional quality on the external debt-economic growth nexus: Insights from highly indebted poor countries (HIPC). African Journal of Business and Economic Research, 16(2), 7–28. https://doi.org/10.31920/1750-4562/2021/v16n2a1
Ijirshar, V. U., Joseph, F., & Godoo, M. (2016). The relationship between external debt and economic growth in Nigeria. International Journal of Economics & Management Sciences, 06(01), 1–5. https://doi.org/10.4172/2162-6359.1000390
International Monetary Fund. (2020). World Economic Outlook Database, October 2020. Retrieved from https://www.imf.org/en/Publications/WEO/weo-database/2020/October
Judge, G. G., Griffiths, W. E., Hill, R. C., Lutkepohl, H., & Lee, T. C. (1985). The theory and practice of econometrics (2nd ed.). New York: Wiley.
Kim, E., Ha, Y., & Kim, S. (2017). Public debt, corruption and sustainable economic growth. Sustainability, 9(3). https://doi.org/10.3390/su9030433
Kourtellos, A., Stengos, T., & Tan, C. M. (2013). The effect of public debt on growth in multiple regimes. Journal of Macroeconomics, 38(Part A), 35–43. https://doi.org/10.1016/j.jmacro.2013.08.023
Laosebikan, J. O., Alao, J. A., Ajani, J. O., Alabi, F. A., & David, J. O. (2018). Federal government domestic and external debt: Implications on nigeria’s economic growth (1981 -2015). International Journal of Innovative Finance and Economics Research, 6(4), 95–106.
Matthews, R. C. O. (1986). The economics of institutions and the sources of growth. The Economic Journal, 96(384), 903–918. https://doi.org/10.2307/2233164
Minea, A., & Parent, A. (2012). Is high public debt always harmful to economic growth? Reinhart and Rogoff and some complex nonlinearities.
Mustapha, S., & Prizzon, A. (2018). Africa’s Rising debt: How to Avoid a New Crisis. ODI. Retrieved from https://odi.org/en/publications/africas-rising-debt-how-to-avoid-a-new-crisis/
North, D. C. (1990). Institutions, institutional change and economic performance. Political Economy of Institutions and Decisions. Cambridge: Cambridge University Press. https://doi.org/DOI: 10.1017/CBO9780511808678
North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9780511819438
Nur-tegin, K., & Jakee, K. (2020). Does corruption grease or sand the wheels of development? New results based on disaggregated data. The Quarterly Review of Economics and Finance, 75, 19–30. https://doi.org/10.1016/j.qref.2019.02.001
Ogbaro, E. O., Young, A. O., & Bank-Ola, R. (2021). Investigating the existence of non-linearity in the debt-growth nexus in Nigeria. Journal of Economics, Business and Market Research (JEBMR), 2(4), 452–466.
Ogege, S., & Ekpudu, J. E. (2011). The effects of debt burden on the Nigerian economy. Journal of Research in National Development, 8(2). https://doi.org/10.4314/jorind.v8i2.66829
Sani, A., Said, R., Ismail, N. W., & Mazlan, N. S. (2019). Public debt, institutional quality and economic growth in sub-saharan Africa. Institutions and Economies, 11(3), 39–24.
Tarek, B. A., & Ahmed, Z. (2017). Institutional quality and public debt accumulation: An empirical analysis. International Economic Journal, 31(3), 415–435. https://doi.org/10.1080/10168737.2017.1354906
Udeh, S. N., Ugwu, J. I., & Onwuka, I. O. (2016). External debt and economic growth: The Nigeria experience. European Journal of Accounting Auditing and Finance Research, 4(2), 33–48.
Umaru, A., Hamidu, A., & Musa, S. (2013). External debt and domestic debt impact on the growth of the Nigerian economy. International Journal of Educational Research, 1(2), 70–85.
Williamson, O. E. (1985). The economic institutions of capitalism. New York: The Free Press.
World Bank. (2018). Africa’s Pulse 17. Washington DC: World Bank Group.
World Bank. (2020). Nigeria - Country Partnership Framework for the Period FY21-FY25 (English). Washington, DC. https://doi.org/10.1596/35098
Yolcu Karadam, D. (2018). An investigation of nonlinear effects of debt on growth. The Journal of Economic Asymmetries, 18, e00097. https://doi.org/10.1016/j.jeca.2018.e00097