External Debt and Adjustment: Prospects for African Economic Growth and Transformation

Abstract

Amid the persistence of the debt crisis in African economies, and the inefficacy of existing international debt relief initiatives, there is a strong opinion demanding that African states should seek ‘internal’ solutions through promotion of economic growth. The argument is that, by improving domestic economic management, African countries can achieve adequate growth to ensure sustainability of external debt accumulation. The persistence of the debt crisis is blamed on weak economic growth caused by poor domestic economic management.¹ Such a position follows the perspective of economists such as Bulow and Rogoff (1990), who view the external debt problems of developing countries as being symptoms of poor economic growth rather than its primary cause. However, other economists, including Bacha (1992), Sachs (1990), Kenen (1990) and Krugman (1989) see external debt overhang as a major cause of stunted economic growth in heavily indebted countries. Through an econometric model, Salih (1994) has shown that high external debt stocks discourage African economic growth by their negative impacts on capital formation. Woodward (1992) has analysed the negative investment and growth implications of debt-induced adjustment in developing countries.