External debt and economic growth in Zambia:An empirical investigations(1975-2000)
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Date
2011-04-08
Authors
Koyi, Grayson
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Abstract
The objective of this study was to contribute to the knowledge about the effects of external debt on economic growth in Zambia during the period 1975 to 2000. The results
were expected to help substantiate the case for significant debt reduction and even
outright cancellation for developing countries like Zambia. However, such a study was also relevant from a more general policy perspective since results would hopefully help attempts at debt relief become more cognisant of both opportunities and limitations of debt relief initiatives. The problem investigated was how external debt influenced Zambia's economic growth
during the period 1975 to 2000. The study used a deductive method of analysis. As such, the research methodology involved two main stages: first, a review of important
documents that shed light on external debt and growth in general and those specific to
Zambia. Second, the study tested econometrically the hypothesis that Zambia's external debt acts through the combined effects of high debt-to-income ratios and high debt
service-to-export ratios to reduce Gross Domestic Investment (GDI), and thus depress
Gross Domestic Product (GDP). On this basis, a two-stage least squares (2SLS)
regression method was used to estimate the econometric model. A major finding of the study was that Zambia's external debt and debt service payments reduce investment and thus depress the economy through a combined effect of high debtto-income ratios and through high debt service-to export ratios. The existence of two
separate channels of influence, i.e. through the 'debt overhang' and crowding out effects proved inconclusive, however. Nonetheless, the overall hypothesis that Zambia's external debt acts through the combined effects of high debt-to-income ratio and a high debt
service-to-export ratio was found to be valid. Thus, the conclusion the study reached was that the attainment of sustainable levels of economic growth in Zambia would be difficult without aggressive measures to significantly reduce the stock of external debt. In view of this, the study's major recommendation was for accelerated debt reduction that would be
sufficient to allow for recovery of both investment and economic growth in Zambia.
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Keywords
Debt relief -- Zambia , Debts, external -- Zambia , Investments -- Zambia