Abstract

Although the theoretical postulations that public debt is dynamically growth dampening are well developed, empirical evidence is mixed and country specific. Using Malawi as a case study, this study examines this relationship using a theoretically guided estimation approach that differs from previous studies: thus, the study uncovers both direct and indirect effects of public debt through human capital development. We estimate these relationships using Autoregressive Distributed Lag Model (ARDL) in a two-step approach applied on time series annual data covering the period 1984 to 2019. While we find evidence of a human capital development channel, the results reveal that high stocks of public debt do not directly influence growth in Malawi, contrary to economic theory. Specifically in the long run, a 1 percent increment in public debt influences economic growth only through dampening human capital development by 0.65 percent on average ceteris paribus. And in the short run, the same percentage increase in public debt dampens economic growth through dampening human capital development by 0.42 percent on average all else being equal. By inference therefore, funds borrowed by Government should be used in human capital stimulating sectors of the economy in order to improve economic growth.

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School	: School of Law, Economics and Government
Issued Date	: 2021

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