Exploring the Role of Fiscal Policy and Sovereign Debt Shocks on Economic Growth among Southern African Developing Communities
Fiscal policy remains a key macroeconomic stabilisation mechanism at the disposal of governments and fiscal policymakers to influence economic activities consistent with balanced and sustainable economic growth. A thorough understanding of the role fiscal policy remains extremely paramount for fiscal authorities to consistently formulate prudent fiscal stimulus packages that enhances sustainable economic expansion. This thesis critically examines the role of fiscal policy and sovereign debt shocks on economic growth in the Southern African Developing Communities (SADC). Over the years, fiscal policy and austerity measures have triggered a deterioration in the fiscal position of these member countries primarily due to the relatively high budget deficits, inducing even further sovereign debt risk in long-term economic prosperity. The phenomenon of fiscal policy has gained immense scholarly popularity among both researchers and policymakers, stimulating intensive debate in the body of literature as to whether fiscal policy has been able stabilise macroeconomic fluctuations across different economies characterised by different phases of economic growth and development. The study starts by giving a thorough background and introduction in Chapter 1. Chapter 2 discusses a detailed review of existing theoretical frameworks on the role of fiscal policy and sovereign debt on economic growth. Chapter 3 analyses the role of fiscal policy and sovereign debt shocks on economic growth in the SADC region. In this chapter, a Panel Vector Autoregressive (PVAR) model was estimated using annual data for 13 SADC countries ranging from 2000-2018. The empirical results revealed that government expenditure, employment and public debt has a significant positive influence on economic growth while gross fixed capital formation exerts a negative effect on growth. The findings of the study are consistent with the Keynesian school of thought, which strongly argues that governments use countercyclical expansionary fiscal policy as a credible tool to spur economic activities and stabilise macroeconomic fluctuations during different phases of the business cycle. Chapter 4 estimates a Panel Smooth Transition Regression (PSTR) model to examine a nonlinear effect of public debt on economic growth among SADC members for the period viii 2000-2018. The findings show a significant asymmetric relationship between public debt and economic growth in the SADC region. The results further indicate a debt threshold of 60% at which public debt deters economic growth in SADC region. The empirical results of a linear and nonlinear effect of public debt on growth are consistent with several prior empirical studies conducted across different economies using different methodologies. In line with the Keynesian approach, the results further suggest that fiscal policy plays a central role in augmenting economic activities both in the low-debt regime and high-debt regime, indicating that, indeed, a positive shock in government spending positively influence economic growth in SADC economies, reinforcing the findings of the previous chapter. Furthermore, the results reveal a significant positive impact of public debt on economic growth during the low regime when the debt level is below the threshold of 60%. Moreover, there was a significant negative effect of debt on economic growth during the high-debt regime as debt level reach the threshold of 60%. This result indicates that there is an inverted U-Shape relationship between public debt and economic growth among SADC economies. Chapter 5 empirically interrogates the asymmetric relationships between public debt and economic growth among selected emerging and frontier SADC economies over the period 2000-2018. In this chapter, a Smooth Transition Regression (STAR) and Nonlinear Autoregressive Redistributed Lag (NARDL) is estimated to analyse the asymmetric effect of public debt on economic growth among selected SADC economies. The results revealed mixed findings on nonlinearity among emerging and frontier SADC members. The findings indicate a concave relationship between debt and economic growth in South Africa, while Botswana, Namibia, Zambia and Zimbabwe showed a U-shape relationship between debt and economic growth. This implies that public debt exerts a significant positive influence on economic growth during low-debt regime while there is a negative effect of debt on economic growth during a high-debt regime in South Africa. Conversely, Botswana, Namibia, Zambia and Zimbabwe show a negative effect of debt during the low-debt regime and a positive influence during a high-debt regime. Malawi, however, showed a positive impact of debt on growth during both low-debt and high-debt regimes.
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