1. The External Debt-Servicing Constraint and Public Expenditure Composition in Sub-Saharan Africa by Augustin Kwasi FOSU UN University-WIDER Helsinki, Finland For presentation at the African Economic Conference (AEC), “Fostering Development in an Era of Financial and Economic Crises” Addis Ababa, Ethiopia November 2009

2. Theoretical Framework Estimation Sector Spending Trends Results
Outline
Introduction
Theoretical Framework
Estimation
Sector Spending Trends
Results
Conclusion

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., Cashel Cordo & 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.
1. Probab. of Growth Collapse (3 consecutive yearly moving negative p.c. GDP growth): conditional p = .2 for SF vs. .5 for at least one syndrome, vs. marginal p of .4.

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.
SSA-SA > SSA since the mid-1970s
SSA-SA: Recent growth trend similar to that in the 1960s-early 1970s.

5. Estimation Estimating model: Debt-service prediction model (PREDSR=D):
(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 = NETDEBTX n =94, R2=0.597
(8.32) (4.31)

6. Sector Spending Trends Figure 1
Sector Spending Trends Figure 1. Trends in Sector Expenditures Shares in African Economies,

7. Sector Spending Trends (cont’d) Figure 2: Trends in Real Sector Expenditures on the Social Sector in African Economies,

8. Results
The top 26 SSA performers’ growth of 6.9% is comparable to India’s of 6.7%.
TOT appears to explain only 25% of the SSA cross-country growth variation during post-1995.

9. Results Cont’d, using DSR

10. Results (cont’d)

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 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

12. Thank you! 12