article · Diponegoro Journal of Economics
An examination of ECOWAS countries from 2000 to 2023 explores how external borrowing influences economic growth and how institutional governance affects this relationship. Using an econometric model designed to address cross-sectional dependence in panel data, the findings identify a non-linear dynamic matching the Debt Laffer Curve. Moderate levels of external debt stimulate economic expansion, but borrowing becomes damaging once it turns excessive. Crucially, the quality of governance moderates these outcomes. Robust institutions amplify the growth benefits of acquired debt and provide a buffer against macroeconomic instability and exchange rate volatility. In contrast, weak governance intensifies the adverse consequences of borrowing. Effective debt management in West Africa relies directly on institutional reform, demonstrating that institutional capacity dictates whether external debt acts as an engine for development or a source of economic risk.
Developing nations frequently borrow abroad to finance development, yet heavy debt can trigger financial crises. Demonstrating that institutional strength determines whether loans aid growth or fuel instability provides critical guidance for regional policy. Improving governance standards enables West African governments to mitigate economic volatility and ensure that public borrowing translates into durable growth rather than economic vulnerability.
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The impact of external debt on economic growth remains a pivotal yet unresolved question for developing economies, particularly in the ECOWAS region. This study argues that the quality of governance is the key to unlocking this puzzle. While external debt can be a catalyst for development, its benefits are often contingent on the institutional environment in which it is managed. To investigate this dynamic, we employ the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model—a method chosen for its robustness in handling the statistical challenges of panel data, such as cross-sectional dependence. Our analysis of ECOWAS nations from 2000 to 2023 yields two central findings. First, we confirm a nonlinear relationship, consistent with the Debt Laffer Curve, where moderate debt supports growth, but excessive debt becomes detrimental. Second, and more significantly, we find that governance quality critically moderates this relationship. Strong institutions not only enhance the positive effects of debt but also act as a buffer, mitigating associated risks like macroeconomic instability and exchange rate volatility. Conversely, weak governance exacerbates the downsides of borrowing. These findings underscore that effective debt management is inextricably linked to institutional reform. We therefore contribute to the literature by providing empirical evidence of how governance mechanistically shapes the debt-growth nexus, offering actionable insights for policymakers aiming to harness debt for sustainable development in West Africa.
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DOI: 10.14710/djoe.53342
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