External Debt and Economic Growth Nexus in Low- Income Countries: The Role of Commented [DM1]: Ignore this

is second independent variable

because you have only three variables. This study has four
Institutional Quality variables.
Commented [DM2]: Economic Growth: This should be your
dependent variable
David Mensah Commented [DM3]: Please modify this section accordingly.
Department of Finance, Your study may cover all of Africa or banks etc.
University of Professional Studies, Commented [DM4]: Type in Title of Your paper here.
Box 149, Legon Commented [DM5]: This is should be your moderating variable.
Accra, Ghana
david.mensah@upsamail.edu.gh

Name of Co-Author Commented [DM6]: Name of Student (Your Name)

Department of ……………,
University of ……………, Commented [DM7]: Name of the department and University.

Email Address of Co-Author Commented [DM8]: Your email address

Commented [DM9]: To be filled out by Co-author
Abstract

Purpose – This study investigates the relationship between Independent Variable(s) eg.Foreign
Direct Investment - FDI interacted with Financial Discipline on one hand, and Dependent
Variable eg. Economic Growth on the other. We test the hypothesis that Independent
Variable(s), FDI of an economy has a statistically positive and significant effect on Dependent
Variable, economic growth but this relationship is dependent on eh level of financial discipline
of the recipient country.

Design/methodology/approach – Data was obtained from a cross section of 24 Sub Saharan

African countries over the period 1970 – 2015. Both linear and non-linear panel data
specifications were employed to establish the relationship between independent variable(s) and
dependent variable. First we establish the influence of moderating variable on independent
variable and the subsequently establish the relationship between independent variable and
dependent variable

Findings – The results from all panel regressions indicate that independent variable(s) affects
dependent variable positively, but this relationship is dependent on the level of moderating
variable eg. Financial Discipline in the host country. Moderating Variable affects independent
variable, eg. FDI inflows to Sub Saharan Africa positively and Independent Variable affects
dependent Variable positively.

Practical implications – On the basis of the findings, the study concludes that policy makers in
the selected region must strive to improve budgetary and financial processes in order to take
advantage of the full economic benefits of foreign direct investment.

Originality/value – This study is among the few in the world that examines the channels by
which independent variable eg. Foreign direct investment can be made more effective in a poor
region like Sub Saharan Africa

Keywords: Independent variable, Moderating variable, and dependent variable. Commented [DM10]: Ignore this section for now. This will be
the last section to be written.

Introduction
The important role of foreign capital and institutional quality in the development agenda of low-
income countries has been well recognized (Amevor, 2015; Mensah, 2016; and Afotey, 2017). It
has also been established that the major challenge of developing countries is the lack of savings
necessary to undertake growth enhancing projects (David, 2015; and Mensah, 2016). The low
level of revenue coupled with high levels of government expenditures (David, 2015; Mensah,
2016) lead to a situation that make developing countries even more dependent on external capital
such as foreign aid and external borrowings. The reliance on foreign capital to fill the savings
and investment gap has been shown by classical economists to be inadequate for raising
economic growth to its potential levels in less developed countries (David, 2015). This is due to
the law of diminishing returns on additional capital invested in less developed countries. To
stimulate economic growth to optimal levels, there is a need to create an enabling environment
that will increase the marginal productivity of external capital. This can be achieved with better
quality of institutions which leads to higher efficiency of capital (Agnor and Montiel, 2010).
According to North (1992), the quality of governance institution enables a country to
establish fair and consistent rules that are critical for the achievement of prolonged economic
growth. The empirical evidence on quality of institutions shows that counties with higher quality
of institutions are able to have higher economic growth rate in periods of increased capital flows
(David, 2015; and Mensah, 2016). On the other hand Hall et al (1990) have shown that countries
with low levels of institutional quality are able to divert capital inflows away from productive
use through rent seeking processes thereby leading to a decline in growth rates. Good institutions
can also influence economic growth by lowering transaction and production cost. Institutions
therefore embody formal and informal rules, and enforcement process that shape the behavior of
economic agents (David, 2015; Mensah, 2016). The evolution of institutional process is perhaps
the key driver of economic performance today. The application of neoclassical economic theory
is of little relevance in explaining the difference in economic performance for the simple reason
that it ignores the role of institutions (David, 2015; Mensah, 2016).
There are different types of institutions, however the relevance of each type of institution
greatly depend on the type of economic market and agents under consideration. For instance, it
has been shown empirically that governance and economic institutions are necessary conditions
for a thriving factor and product market because they lead to reduction in transaction costs and
improvements in trust among economic agents through property rights (David, 2015; Mensah,
2016).
Despite the positive correlation between institutional quality and economic performance
in developed regions, empirical evidence of developing countries has received very little
attention (David, 2015; Awusi, 2016). The role of institutions in developed countries may play
out according to the theoretical script; “institutions promote economic growth”. However, the
same cannot be said about the role of institutions in developing regions like Africa. African
countries lack the efficacy of governance institutions necessary to boost economic growth. This
situation is largely the case because vital rules, regulation and process that lead to economic
growth are the preserve of political elite who control the political institutions. The findings of
political institutions on economic growth and development are mostly inconsistent with the
general interest of the larger public (Raphael, 2015; Yussif, 2016). For instance, despite the fact
Commented [DM11]:
Just read the comments and make the necessary changes to this
template. In most case you will be replacing the items in your with
your variables. You would also have to change the context of the
discussion to suit your topic.
Comments for specific sentences appear on the FULL STOP
(PERIOD) after the sentence.
Introduction or Background of the Study:
You can decide to use INTRODUCTION or BACKGROUND OF THE
STUDY.
Commented [DM12]: The first sentence:
In this opening sentence you should try to highlight the importance
of your topic in the literature. The highlighted variables are should
be replaced with your variables of interest.
Try to keep the literature as current as possible (possibly within the
last seven years)
Commented [DM13]: Here I am seeking to tie the low rate of
economic growth (dependent variable) in developing countries to
the lack of investment capital (independent variable) with support
from the literature.
...
Commented [DM14]: Here I try to give more empirical reasons
why my independent variable (external capital) is important in the
developing African countries. I point to low revenue from taxes and
high government expenditure with relevant literature.
Commented [DM15]: I further show that reliance of foreign
capital alone (my first independent variable) is inadequate to
stimulate changes in economic growth (my dependent variable) this
is supported by both theoretical and empirical literature. ...
Commented [DM16]: The last statement of paragraph one
brings the mediating variable into the picture of EXTERNAL CAPITAL
and ECONOMIC GROWTH in my case.
Commented [DM17]: In the second paragraph I have stated
how my moderating variable (quality of institutions) help improve
economic growth and external capital relationship. You should ...
Commented [DM18]: Here I show how the absence of the
moderating variable can adversely affect the relationship between
the other two variables.
Commented [DM19]: I still present ways by which the
moderator variable can affect the others.
Commented [DM20]: In the last sentence of this paragraph I
try to make the point that examining the role of institutional quality
(Moderator variable) is the way to go in recent times. You can do
same for your paper in your own words.
Commented [DM21]: In this last paragraph I recognize the fact
that there are different dimension to my moderating variable –
Institutions. Only political and Economic Institutions would be ...
Commented [DM22]: In this paragraph, I seek to make a case
for the region under consideration. This adds up to the relevance of
the study. I also argue that the role of institutions (moderating ...
that Senegal for a long time has boasted of a democratic or multiparty governance system, in
reality only a single party has ruled the country for the past few decades. The ruling government
obviously has diverted disproportionate portions of state resources to ensuring its successive
wins (Fiakofi 2018). The misallocation of state resources in this case manifests in the form of
bribery, corruption, and the award of large public contracts to cronies and family members at the
helm of vital public institutions (Akladey 2015; Tettey 2016; and Obosu, 2017). Moreover,
access to quality education in Africa is a preserve of the elite (Kwadzodze, 2014). The majority
of the citizens do not have access to quality education thereby leading to a massive crowding out
on formal jobs, credit market, and production opportunities (Essigyan, 2017). In this paper we do Commented [DM23]: The sentences preceding this section
explains how the moderating variable can affect the other two
not argue that there is a lack of institutions in developing Africa, rather the impact of these variables adversely. This also adds to my case in this paper. You
institutions on economic performance with regards to external capital inflows may be mixed in may not have to argue in this line in your paper. Just modify this
the African context. section according to your hypothesis.

Figure 1 below show the scatter plot between average quality of governance institutions
and economic growth of some selected Sub-Saharan African countries. The figure clearly
demonstrates a negative correlation between the average measure of institutional quality and
economic growth over a period 1998 to 2016.
8
Commented [DM24]: In an attempt to further strengthen my
point, I insert a scatter plot of institutional quality and economic
growth. The graph really shows that African may represent a special
case as fare as institutional economics is concerned. You should
produce a scatter plot of your moderating and dependent variable.
This will tell you the story.

Commented [DM25]: This graph was created from stata. If you

are not familiar with Stata, just organize your document in excel
6
4
2
0
-2

-.7 -.65 -.6 -.55

Quality of Institutions

Economic Growth Fitted values

INSERT FIGURE 1: Scatter Plot of Institutional Quality and Economic Growth

The negative correlation between institutional quality and economic growth seem to contradict
the conclusions of earlier studies such as Acemoglu and Robinson (2008) and Hall, et al. (2010)
who argued that the difference in the economic performance is primarily due to the differences in
the quality of institutions. The findings however do buttress our earlier proposition that the
impact of institutions in less developed countries worsen growth for a while before improving
economic performance. This hypothesis for a U- shaped relationship between institutions and
economic growth may be explained by the fact that a country that has less quality institutions
must devote a part of its resources to the development of such institutions. The majority of Sub-
Saharan African countries are at the infant stages of developing these institutions. This cost can
be substantial at the onset but rewarding in the longer term. For instance the economic giant of
SSA, Nigeria, only became an official democratic secular state in 1999. The majority of African
countries find themselves in this very spot. Again, the process of altering the quality of
institutions is not an easy one for the sheer reason that such changes will require a collective
political will of government. Commented [DM26]: In the sentences above, I try to explain
the graph (Scatter Plot) alongside the literature, and real life
The correlation between external debt and economic growth in Sub-Saharan African examples.
countries has been very controversial to say the least. One strand of research claims that external
debt affects economic performance positively (Gborse, 2015; Gawugah, 2016; Awudu, 2015; You can explain the diagram that tells your story at this point.

Appiah, 2016). In other empirical studies external debt has been found to worsen economic
performance (David, 2015; Bissi, 2016 Tettey, 2017; Yirenkyi, 2018; and Sogah, 2018). A
simple scatter plot of the relationship between external debt and economic growth is presented in
Figure: 2. The result shows weak negative correlation between relationship between external
debt and economic growth in different Sub- Saharan Africa. Commented [DM27]: In this section You should examine the
graph your other independent variable (external debt in my case)
and the dependent variable (Economic Growth in my case).

The graph should be explained in the context of existing literature.

8

Make your that the graph tell your story.

6
4
2
0
-2

0 50 100 150
External Debt to GDP Ratio

Economic Growth Fitted values

INSERT FIGURE 2: Scatter Plot of External Debt and Economic Growth

The weak results from the scatter plot analysis apparently tell us why the empirical
literature has struggled to find a robust positive relationship between external debt and economic
growth in the majority of developing countries. The mixed evidence has led to a third strand of
researchers advocating for external debt to be channeled to regions with higher quality of
institutions (Gyebi, 2015; Enyaah, 2016; Iddrisu, 2016). Starting with the most controversial
Burnside and Dollar (2000) paper, the researchers examined the impact of an interaction between
external debt and institutions on economic growth using panel data methodology. Their
conclusion was that external debt worsens economic growth in its linear specification but
becomes more growth enhancing when interacted with the institutional quality variable. The
results of the Burnside and Dollar (2000) study attracted a pool of researchers to re-examine the
effectiveness of external debt in regions with good institutional frameworks. The results were
again mixed with researchers such as Brumm (2000) arguing that external debt worsens
economic growth even when interacted with institutional quality. The negative relationship
between external debt and economic growth is possible in rent seeking societies where
governments are less accountable to the public and for that matter can use the proceeds of
external borrowing for non-growth enhancing agenda (Mensah-Ackman, 2016; Yussif, 2017).
Indikuma and Boyce (2005) have consistently shown that most African countries suffer from
extensive capital flights through corrupt government officials. Commented [DM28]: Highlight the issues raised in previous
studies. This should include relevant literature at the right
Unlike previous studies that have focused on a panel of developed and developing locations.
countries, this study argues the Sub-Saharan context may present special case of external debt,
institutional quality and economic growth relationship. This paper seeks to argue the
effectiveness of institutions in Sub-Saharan Africa may have a U-shape relationship with
economic growth. Second, we argue the impact of institutions on the external debt and economic
growth nexus may be positive, negative or mixed as a result of the U- shape effect of institutions.
In other words, it is possible for rent seeking governments in Africa to undermine the institutions
when borrowing from external sources. This paper deviates from previous studies by testing the
two hypotheses above. The rest of the paper is structured as follows: Section two presents the Commented [DM29]: Conclude by presenting your case clearly
and also distinguish your work from earlier studies.
literature review. Section three presents the model specification and data for analysis. In section
four, we discuss the results of the estimation. Finally, Section five presents the conclusions from Clearly state the Hypothesis (Hypotheses) you are going to text.
the study. Commented [DM30]: Tell us how the research paper will be
organized in terms of chapters or sections.
Commented [DM31]: Please reword this section according to
your preference.