Public debt and economic growth in East African Community : the role of corruption

Abstract

Having observed a number of research findings indicating that public debt negatively affects economic growth, this study set out to examine whether the impact of public debt is mediated by the level of corruption in the country. Linear panel data models were specified and estimated using Random Effect, Fixed Effect, and later feasible GLS. In the study, corruption was measured using both point estimate and percentile rank whereas public debt was measured as a percentage of GDP. The results of the analysis indicated that before interaction, public debt negatively affects GDP growth whereas controlling corruption results in high economic growth in the region. The interactive term of public debt and control for corruption is found to be positive, implying that the negative effect of public debt can be overturned by effectively controlling corruption. Using the percentile rank measure, the estimated threshold that would overturn the negative marginal effect of public debt to positive is found as 51.2 percent, which is far above the average rank for the region which stands at 27 percent. Based on the findings, the study recommends that countries should implement stringent measures to fight corruption if they are to benefit from public debt. It’s also important that countries keep their debt to GDP ratios at sustainable level.