Laffer curve of the relationship between public debt and growth in Africa: The importance of institutional quality

Abstract: Several studies support the idea that there is a debt level (turning point), beyond which public debt starts to reduce economic growth. However, the estimated threshold varies between studies and gives an incomplete picture of the level of debt that maximises growth. To the best of our knowledge, no study has explained the causes of this variation in the context of African countries. This study aims to show that the threshold of growth maximising debt depends on the level of corruption, the quality of democracy and the effectiveness of government. To do so, we used a sample of 45 African countries for the period 1996–2018. Our results using the LSDVC and GMM-SYS estimation methods suggest that the levels of public debt above which growth declines vary with institutional quality. More precisely, when institutional quality is good, the negative effect of public debt on growth occurs at higher debt levels.

Keywords: public debt, growth, institutions.

JEL classification : H68, O10, O43, O55.

DOI: https://doi.org/10.18559/RIELF.2021.2.1