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  1. The External Debt-Servicing Constraint and Public Expenditure Composition in Sub-Saharan AfricabyAugustin Kwasi FOSUUN University-WIDERHelsinki, FinlandFor presentation at the African Economic Conference (AEC), “Fostering Development in an Era of Financial and Economic Crises”Addis Ababa, Ethiopia11-13 November 2009 Fosu@wider.unu.edu

  2. Outline Introduction Theoretical Framework Estimation Sector Spending Trends Results Conclusion Fosu@wider.unu.edu

  3. Introduction Two main strands of existing relevant literature: Debt impact on growth (for published papers see, e.g., Elbadawi et al. [1997]; Fosu [1996, JED; 1999, CJDS]) Aid effect on public expenditures (see, e.g., Cashel-Cordo & Craig [1990, JDE]; Feyzioglu et al [1998, WBER]; Gang & Khan [1990, JDE]; Gbesemete & Gerdtham [1992, WD]; Ouattara [2006, EM]) Evidence on debt and public expenditures is scant, especially for low-income economies (e.g., CashelCordo & Craig [1990, JDE]; Mahdavi [2004, WD]; Ouattara [2006, EM]). Specific evidence on debt and the functional composition of public expenditures even more scant (e.g., Ouattara [2006, EM]; Fosu [2007, WD; 2008, ODS]) Present study extends analysis to include six functional sectors: agriculture, capital, economic services, education, health, and public investment. Fosu@wider.unu.edu

  4. Theoretical Framework • The government maximizes for J sectors: • (1) U(G1, G2,…, GJ), • subject to the budget constraint • (2) ΣjGj = R, • R is government revenue, which may be expressed as • (3) R = N + F – D, • The first-order conditions are: • (4) U1 = U2 = ...= UJ • (5) ΣjGj = R = N + F – D • The demand functions are: • Gj = Gj(RX ;W) • RX is exogenous component of R; W is country-specific factors defining the social welfare function. Fosu@wider.unu.edu

  5. Estimation Estimating model: (8j) gj = gj(DX, F; Q ,A, P, T; uj), j = 1,…, J gj : share of government expenditure in sector j DX : exogenous component of external debt service F: foreign aid; ODA as a proportion of GDP Q: income; per capita GNP A: economic structure; agricultural share of the population P: political structure; constraint on the executive T: set of time-period dummy variables uj: stochastic disturbance term Debt-service prediction model (PREDSR=D): (9) D = 16.00 + 0.015 NETDEBTX n =94, R2=0.597 (8.32) (4.31) Fosu@wider.unu.edu

  6. Sector Spending TrendsFigure 1. Trends in Sector Expenditures Shares in African Economies, 1975-94 Fosu@wider.unu.edu

  7. Sector Spending Trends (cont’d)Figure 2: Trends in Real Sector Expenditures on the Social Sector in African Economies, 1975-94 Fosu@wider.unu.edu

  8. Results Fosu@wider.unu.edu

  9. Results Cont’d, using DSR Fosu@wider.unu.edu

  10. Results (cont’d) Fosu@wider.unu.edu

  11. Conclusion The debt-servicing constraint: affects the composition of public expenditures in African economies is essentially a social-sector phenomenon reduces expenditure shares of both education and health about equally exhibits a partial elasticity of approx. 1.5 for social sector is more important than ODA, inter alia, affecting public budget allocation decisions Actual debt service ratios are a poor measure of the debt-servicing constraint Spending on the social sectors of education and health has been trending upward even following SAP Fosu@wider.unu.edu

  12. Thank you! 12 Fosu@wider.unu.edu

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