Comparative Performance of Trade Openness and Sovereign Debt Accumulation in Fostering Economic Growth of Sub-Saharan African Countries

Published date01 February 2024
DOIhttp://doi.org/10.1177/00157325221145452
AuthorSamson Edo
Date01 February 2024
Subject MatterArticles
Comparative Performance
of Trade Openness
and Sovereign Debt
Accumulation in
Fostering Economic
Growth of Sub-Saharan
African Countries
Samson Edo1
Abstract
In the last four decades, sub-Saharan African countries have witnessed a sub-
stantial increase in trade openness and sovereign debt (foreign public debt and
domestic public debt). The direct and interactive effects of these factors on eco-
nomic growth are investigated in this study. The investigation covers the period
1980–2020 and employs the generalised method of moment methodology. The
estimation results reveal that the direct effect of trade openness and domes-
tic public debt is significantly favourable. The direct effect of foreign public debt
is, however, found to be unfavourable. The results also reveal that the interac-
tive effect of trade openness and domestic public debt is significantly favour-
able, whereas the interactive effect of trade openness and foreign public debt
is fairly favourable. The estimation results thus imply that trade openness and
sovereign debt are complementary drivers of economic growth in sub-Saharan
African countries. In spite of the favourable role of trade openness and sovereign
debt, economic growth has yet to achieve the desired level, which does not augur
well for employment and welfare. The prospects of growth could be enhanced by
strengthening the impact of trade openness and sovereign debt. However, policy
makers should be aware of the direct negative impact of foreign public debt on
economic growth, and the need to put measures in place to manage it.
JEL Codes: F23, H63, F43, O55
Article
1 Department of Economics, University of Benin, Benin City, Nigeria
Corresponding author:
Samson Edo, Department of Economics, University of Benin, P.M.B 1154, Main Gate, Benin -Ore
Rd, Benin City, Nigeria.
E-mail: samsonedo@gmail.com
Foreign Trade Review
59(1) 98–116, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325221145452
journals.sagepub.com/home/ftr
Edo 99
Keywords
Trade openness, Sovereign debt, economic growth, developing countries
Introduction
Trade openness generates resources for developing countries, through capital
inflows and tariff revenue. Countries sometimes resort to sovereign debt (domes-
tic and foreign) when resources generated from various sources are insufficient to
facilitate economic growth (Eaton & Gersovitz, 1981). Thus, sovereign debt plays
a complementary role to trade openness in facilitating growth and development
(Combes & Sedik, 2002). Over the past four decades, trade openness has improved
in developing countries, particularly sub-Saharan African (SSA) countries, due to
economic liberalisation policies (International Monetary Fund (IMF), 2021). The
important role of trade openness in facilitating economic growth is demonstrated
in the classical theory of trade (Heckscher, 1950; Ohlin, 1933; Samuelson, 1949)
and endogenous growth theory (Grossman & Helpman, 1990; Romer, 1986,
1990), which posit that trade openness creates welfare gains and stimulates eco-
nomic growth. Indeed, several Asian and Latin American countries such as China,
Brazil, India, Malaysia, Indonesia and Chile have achieved tremendous openness-
growth over the years, and consequently lifted a large proportion of the population
out of poverty (Lin, 2011). However, SSA countries have been unable to achieve
similar feats; hence, the poverty level remains considerably high (UNCTAD,
2016). Bunje et al. (2022) confirmed this situation by observing that trade open-
ness has adversely affected per capita gross domestic product (GDP) in most
African countries.
In regard to sovereign debt, the Keynesian theory argued that public expendi-
tures financed through debt have a multiplier effect on national output (Elmendorf
& Mankiw, 1999). This theory is based on the principle that the stimulating effect of
public debt on the economy exceeds its crowding out effect (Ncanywa & Masoga,
2018). This view suggests that public debt is important for boosting growth, pro-
vided it is not used for consumption. In this way, the impact of debt on growth is
optimised, with moderate inflation (Driessen & Gravelle, 2019). On the contrary,
the neoclassical theory argued that debt impairs economic growth by reducing
budgetary discipline and private sector access to credit (Broner et al., 2014).
Furthermore, debt repayment tends to crowd out economic growth by discouraging
domestic investment (Saungweme & Odhiambo, 2019). However, the Keynesian
view on sovereign debt seems to be more appealing to SSA countries, hence the
obsession with massive borrowing to fill the resource gap. Again, these countries
are encouraged to borrow, due to the incentives granted by external creditors, in the
form of competitive interest rates and long moratorium periods (Reisen, 2007).
Over time, the levels of trade openness and sovereign debt have been on the
increase in SSA countries, which is partly attributed to the consistent use of

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