Budget Deficits, economic growth and external balances in SADC countries: a panel data and time series analysis
The role fiscal policy plays as a macro-economic stabilisation tool remains a contentious issue in macro-economics. Yet an understanding of the role fiscal policy plays in influencing external balances as well as economic growth is instructive upon policy makers to craft stimulus packages in order to enhance sustainable economic growth, bearing in mind, as well, that lack of fiscal space underscores the limits of discretionary fiscal policy. In the same vain, an awareness of the role of budget deficits in driving external balances plays a principal role in adopting fiscal prudence as a way of harnessing the widening current account deficits which may have dire consequences on the economy. Notwithstanding the importance such an understanding is to the achievement of the Southern African Development Community (SADC)’s goals of fighting poverty and attaining economic integration through adoption of sound macroeconomic policies, the SADC region has received very little scholarly attention on this contemporary issue. This thesis fills this gap in the literature by providing empirical evidence that is SADC specific on the role of fiscal policy in driving the external balances as well as the impact of fiscal policy in accounting for economic growth in the region. This goal is achieved in three separate chapters; chapter4, chapter 5, and chapter 6 of this thesis. In chapter 4 of this thesis the study analysed the co-movement between budget deficits and the external balances in 14 SADC member countries. Relying on evidence from the cutting edge Common Correlated Mean Group Estimator (CCEMG) and the system general methods of moments (GMM) estimation approaches, the study found evidence in support of the twin deficits hypothesis in the case of the 14 SADC member countries included in our analysis. The implications of these findings underscore the need to adopt fiscal austerity measures in order to harness the widening current account deficits which are way beyond the SADC set targets in most of the SADC member countries. Chapter 5 of this thesis presents the panel empirical evidence on the impact of public debt on subsequent economic growth in an unbalanced panel of 14 SADC member countries. Utilising various panel estimation approaches including the Dynamic Ordinary Least Squares (DOLS), the Fully Modified Ordinary Least Squares (FMOLS), the system GMM from use of initial values, and system GMM from the use of five and three-year averages. The study documents contradictory results on the relationship between public debt and economic growth. However, the study discriminated in favour of the DOLS which provide evidence in favour of the growth engendering role of public debt. Furthermore, to the best of the researchers’ knowledge no other study in the SADC context analysed the growth effects of public debt, particularly the non-linearities and the public debt-investment channels through which public debt is related to economic growth. To this end, the study found overwhelming evidence in support of the non-linearities in the relationship between public debt and economic growth. The policy implications of these findings are that though SADC member countries may rely on public debt as a counter cyclical measure but they ought to exercise restraint as excessive dependence on public debt beyond a certain threshold has detrimental effects on long run growth. Moreover, the analysis found that for public debt to be growth promoting it has to be channelled through investment in human capital. The last set of empirical evidence in this thesis is presented in chapter 6. Chapter 6 reports the empirical evidence on the role of fiscal policy, specifically budget deficits, on economic growth in South Africa, Madagascar and Lesotho. Empirical evidence in this chapter, robust to some of the recent developments in time series literature- the DOLS, FMOLS, and the Canonical Cointegration Regression (CCR)-, overwhelmingly establish the growth promoting role of fiscal policy in South Africa, Madagascar and Lesotho. These findings may be taken to suggest that budget deficit in the three SADC countries could be dedicated to growth enhancing activities like investment in both physical and human capital, investment in technology and health that supports growth. In the case of South Africa, this study went further to analyse the growth effects of budget deficits in a pre and post democratic South Africa (1994) as well as the role of budget deficit in a pre and post inflation targeting era (2000). The overall conclusion of this study is that debt spending, within limits, done in conjunction with broader developmental goals like investment in physical and social infrastructure, is essential for promoting growth in SADC countries.
fiscal policy --economic growth --poverty alleviation --macroeconomic policies --SADC
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