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External Debt and Nigerian Economic Development: An Empirical Investigation By ABUBAKAR, Salisu
Lecturer, Department of Accounting, Ahmadu Bello University, Zaria Nigeria Mobile Number: +234-803-3860665 e-mail: sabubakar@abu.edu.ng

Abstract
This study empirically investigated the relationship between external debt and economic development of Nigeria. The study covered the period from 2000 to 2009 and adopted a causality research approach. Data on the proxies of economic development were used in establishing the relationship and the degree of significance. Regression technique was used in order to establish the nature and degree of the relationship between the variables. The study found that both life expectancy rate at birth in the country and population of the populace below the poverty line can improve with external debt borrowing; while unemployment rate in the country will be reduced with external debt borrowing; although not significantly. The GDP per capita and literacy rate in Nigeria will simultaneously reduce when more external debt are borrowed as established by the study. The study, therefore, inferred that external debt in Nigeria has made both positive and negative contribution to the economic development of the country during the period covered by this study. However, the Nigerian government should investigate the reasons behind the non-contribution of external debt to the GDP per capita of the country with a view to unveiling the bottlenecks and correct them. Keywords: External debt, Economic development, Standard of living, Economic development theories, Nigeria.

Introduction
It is the objective of every sovereign nation to improve the standard of living of its citizenry and promote economic growth and development of the country. Due to the scarcity of resources and the law of comparative advantage, countries depend on each other to foster economic growth and achieve sustainable economic development (Adepoju, Salau & Obayelu, 2007). The necessity for governments to borrow in order to finance a deficit budget has led to the development of external debt (Osinubi & Olaleru, 2006; Obadan, 2004b). External debt is one of methods through which countries finance their deficits and carry out economic projects that are capable of increasing peoples standard

Page 2 of 15 of living and promote sustainable economic development. It is an important resource needed to support sustainable economic growth (Audu, 2004). By definition, external debt refers to the portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions (Arnone, Bandiera & Presbitero, 2005; Ajayi & Khan, 2000). These loans, including interest, must usually be paid in the currency in which the loan was made. In order to earn the needed currency, the borrowing country may sell and export goods to the lender's country (Obadan, 2004a). With the achievement of political stability in Nigeria since 1999, substantial level of the countrys debt stock was cancelled and/or relieved. The effort of Nigerian government to negotiate for debt cancellation and relief has dropped the external debt stock by a significant proportion (Omotoye et al, 2006). Though there are many studies on external debt and its impact on economic growth ( see Ayadi, 2008; Fosu, 2007; Hunt, 2007; Clements, Bhattarchanya & Nguyen, 2003), most of those studies concentrated on the servicing of the debt and the significance of accumulated interest payment effects on economic growth of debtor countries. Some studies were also carried out to investigate the application and management of the debt; but they failed to bring out clearly there implication on the individual components of economic development (see Omotoye et al, 2006; Arikawe, 2001). This study, therefore, assesses the degree to which external debt significantly impact on the basic components of economic development such as GDP per capita, life expectancy at birth, literacy rate, poverty level, and unemployment rate in Nigeria over the period of ten years. There is widespread recognition in the international community that excessive foreign indebtedness of many developing countries remains a major impediment to their growth and stability (Audu, 2004; Mutasa, 2003). Developing countries like Nigeria have contracted large amount of external debts, often at highly concessional interest rates. Does Nigeria achieve more economic development in terms of GDP per capita, life expectancy at birth, literacy rate, and reduction of

Page 3 of 15 poverty level and unemployment rate when more external debt are borrowed? To what extent does the level of external debt significantly affect the economic development of Nigeria? These are the questions that this study is tailored towards finding their answers. The study addressed the following null hypotheses: H01: External debt does not have significant impact on Gross Domestic Product (GDP) per capita of Nigeria. H02: External debt does not have significant impact on life expectancy at birth in Nigeria. H03: External debt does not have significant impact on literacy rate of Nigerian populace. H04: External debt does not have significant impact on population of Nigerians below the poverty level. H05: External debt does not have significant impact on unemployment rate in Nigeria.

Literature Review and Theoretical Framework

External debt is widely believed to enhance economic growth and development (Osinubi & Olaleru, 2006; Hirschman, 1958). That is the basic reason why the debt is usually borrowed in the first place. Both developed and developing nations seek for external debt to boost their economic performance (Kletzer & Wright, 1999; Eaton & Gersovitz, 1981). Available statistics have shown that the United States of America is the biggest debtor country in the world but yet the country enjoyed significant economic growth and development taken the global financial meltdown aside (Blakely & Leigh, 2009). Nigeria has been utilizing the external debt to the extent that the debt becomes so huge to water down substantial part of the countrys revenue. Despite the increasing nature of the debt stock, until the recent decline due to debt cancellation and relief, the economic development of Nigeria is not encouraging especially looking at the economic development in terms of its basic components such as employment creation and poverty reduction (Ayadi, 2008).

Page 4 of 15 Studies on external debt reveled divergent views on the implication of external debt to the debtor country. Audu (2004) studied the impact of external debt on economic growth and public investment in Nigeria. His study concluded that debt servicing pressure in Nigeria has had a significant adverse effect on the growth process of the country. He added that Nigeria frequently diverts resources to take care of pressing debt service obligations instead of being allocated to the development of infrastructures that would improve the well being of the citizenry. Osinubi & Olaleru (2006) examined how the use of budget deficits as an instrument of stabilization leads to the accumulation of external debt with the attending effects on growth in Nigeria between 1970 and 2003. Their study concluded that if debt-financed budget deficits are operated in order to stabilize the debt ratio at the optimum sustainable level debt overhang problems would be avoided and the benefits of external borrowing would be maximized. Adepoju, Salau & Obayelu (2007) studied the effects of external debt management on sustainable economic growth and development in Nigeria. Their study concluded that though debt is an important resource needed to support sustainable economic growth; a huge external debt without servicing as it is the case for Nigeria before year 2000 constituted a major impediment to the revitalization of her shattered economy as well as the alleviation of debilitating poverty. Their study concentrated only on the management aspect of the external debt. However, according to the study carried out by Ayadi (2008), external debt has more positive impact on South African economy than Nigeria. His study concluded that external debt performs better in South Africa than Nigeria as it contributed positively to the growth of the South African economy. His study, however, did not bring out the impact on the component of economic growth and neglected the long run impact on the economic development. Economic development began to appear in economic literature after the Second World War (Todaro & Smith, 2009). Emergence of economic development as major issue in the subject of

Page 5 of 15 economics was influenced mainly by the reconstruction of Europe after the war. According to Blakely & Leigh (2009), Cypher & Dietz (2008), and Hunt (1989), economic development encompasses a wide range of concerns including: an issue of more economic growth; involving the wise application of public policy that will increase a countrys competitiveness; a code phrase for industrial policy; sustainable development that harmonizes natural and social systems; a vehicle for increasing wages, benefits, basic education, and worker training; a way to strengthen inner city and rural economies in order to reduce poverty and inequality; and lastly it embodies the range of job creation programs in response to the decline of federal domestic assistance. Theories of economic development are plentiful. The theories vary in basic, fundamental ways, they make different behavioral assumptions, use different concepts and categories, explain the development process differently, and suggest different policies (Mookherjee & Ray, 2001). The Economic Base Theory is one of economic development theories, which viewed economic development as equivalent to the rate of local economic growth measured in terms of changes in the local levels of output, income, or employment. The essential dynamic of the theory is the response of the basic sector to external demand for local exports, which, in turn, stimulates local growth. The theory's major strengths are its popularity as a basis for understanding economic development in North America; and its simplicity as a theory or tool for prediction (Malizia & Feser, 1999). Its major weakness is its in-adequacy as a theory for understanding economic development, especially in the long term. Economic base theory strongly supports attracting industry through recruitment and place marketing. Another theory under economic development is called Staple Theory. This theory identifies industrial sectors as its basic categories. It defines economic development as sustained growth over the long term (Ray, 1998). The theory's major strengths are its historical relevance to North American economic development and its emphasis on understanding the region's economic history. Its major

Page 6 of 15 weakness is that it describes, more than explains, the development process (Hoff & Stiglitz, 1999). Sector Theory was developed as another theory under economic development. The theory uses three aggregate sectors as basic categories namely: the primary, secondary, and tertiary categories (Aghion & Bolton, 1997). The level of development depends on sectoral diversity, emphasizing a prominent tertiary sector, and labor productivity. Although Sector Theory is attractive because it can be applied and tested empirically, the primary, secondary, and tertiary categories are too crude to be useful in practice (Todaro & Smith, 2009). The overriding application is the need to attend to industries producing income-elastic commodities in order to achieve sustained growth. Under the Classical Liberal theory, economic development is understood as economic growth and capital-formation. The key to economic growth under this theory was capital formation. This led to an emphasis on large-scale infrastructure projects and on foreign aid loans (Fields, 1981). Social Theories of economic development emphasized the importance of human capital in development. The key to economic growth include education, health, and fertility. They shifted concerns from the overall rate of economic growth to considerations of poverty, inequality, urbanization and other social ills (Ferreira, Leite & Ravallion, 2010). Structural Theories of economic development emphasized the conditions unique to Third World countries. The key to economic growth was recognizing that the experience of Europe could be duplicated in the context of former colonies (Ray, 1998). The theory shifted concerns to "import substitution," high tariffs and government protectionism. The Neo-classical Theories of economic development emphasized the negative role often played in development. The key to economic growth is free markets. They shifted concerns from the role of government, which is often considerable in structural theories, to private investment and market efficiency. This set of theories is currently the most widely practiced (Mookherjee & Ray, 2001; Malizia & Feser, 1999). Other theories of economic

Page 7 of 15 development include growth pole theory, interregional theory, product-cycle theory, entrepreneurship theory, and flexible production theory. In this study, the Classical Liberal and Social theories are adopted because they recognize and incorporate human capital into the definition and measurement of economic development. The study used Human Development Index (HDI) variables to measure the economic development of Nigeria viz-a-viz the countrys external debt. This is because since 1990, HDI is adopted especially by the UN agencies and other international bodies to measure both economic and human development. HDI has become very popular among development economists (Nagel, 2007).

Methodology
This study empirically investigated the relationship between external debt and economic development of Nigeria and how the former impacted on the latter. The study covered the period from 2000 to 2009 and adopted a causality research approach. The reason behind the choice of the study period hinges on the political stability achieved by Nigeria since the return of democracy in the mid 1999 and the importance attached to economic growth and development. In order to find the impact of external debt on the economic development of Nigeria, the economic development is broken down into proxies namely: GDP per capita, life expectancy rate, literacy rate, and population rate below poverty line. The study used statistical secondary data on the identified proxies and regression was used to find the relationship and causality between the variables under consideration. The regression equations formulated are: GDPPC1 LEXAB2 LITRT3 = = = 1 2 3 + 1 EXTDT + 2 EXTDT + 3 EXTDT + + + 1 2 3 ------------------- (1) ------------------- (2) ------------------- (3)

Page 8 of 15 PBPVL4 UNEMR5 Where: GDPPC LEXAB LITRT PBPVL UNEMR EXTDT = = 4 5 + 4 EXTDT + 5 EXTDT + + 4 5 ------------------- (4) ------------------- (5)

= Gross Domestic Product Per Capita = = Life Expectancy at Birth Literacy Rate

= Population Below Poverty Line = Unemployment Rate = External Debt = The intercept = Beta coefficient of the independent variable. = Standard Error of the Estimate

Each of the four equations were formulated based on the study null hypotheses and were tested using the regression technique.

Results and Discussions

The table below presents the statistical records for ten years in respect of Nigerias external debt, GDP per capita, life expectancy rate at birth, literacy rate, population of Nigerians below poverty line, and unemployment rate in the country. Table 1: Ten-year Statistics of Economic Development Proxies in Nigeria Year External Debt GDP per Life Literacy Population below (US$ million) capita Expectancy Rate (%) Poverty Line (%) (US$) Rate at Birth (age) 2000 29,000 970 51.56 57.10 28.00 2001 32,000 950 51.07 57.10 28.00 2002 32,000 840 50.59 57.10 0.28 2003 29,700 875 51.01 68.00 28.00 2004 31,070 900 50.49 68.00 5.60 2005 30,550 1,000 46.74 68.00 5.60

Unemployment Rate (%)

34.10 45.00 45.00 60.00 60.00 60.00

Page 9 of 15 2006 32,450 1,400 47.08 68.00 2.90 2007 6,280 1,500 47.44 68.00 5.80 2008 8,010 2,100 46.53 68.00 4.90 2009 8,320 2,100 46.94 68.00 4.90 Source: World Bank Economic Statistics (http://www.indexmundi.com/nigeria) 60.00 60.00 70.00 70.00

The table below is generated from the information contained in table 1 above via the use of SPSS. Table 2: Statistical Results on the Dependent Variables Dependent Variables Statistical Variables GDPPC LEXAB LITRT PBPVL R 0.859 0.605 0.428 0.317 R Square 0.738 0.366 0.183 0.100 Adjusted R Square 0.705 0.286 0.081 -0.012 2155.116 46.224 69.474 3.680 -0.859 0.605 -0.428 0.317 267.785 1.807 5.047 11.644 F Statistics 22.544 4.612 1.797 0.894 t values -4.748 2.148 -1.341 0.945 Significance 0.001* 0.064** 0.217 0.372 Source: Computational Results using SPSS Note: * and ** indicate significance at 1% and 10% respectively.

UNEMR 0.584 0.341 0.259 70.552 -0.584 9.907 4.144 -2.036 0.076**

The statistical results in table 4.1 above indicate that only GDPPC has a significant correlation with the EXTDT (independent variable) since the R is about 0.9. The adjusted coefficient of determination (R2) under the GDPPC was computed as 0.705, which indicate that 70.5% of the variations in the GDPPC of Nigeria are explained by EXTDT. Moreover, the beta coefficient of -0.859 indicate a negative (inverse) relationship between the GDPPC and EXTDT. This means that as more external debts are borrowed by Nigeria, the GDP per capita of the country will decline. The t value of -4.748 indicate that when US$1 external debt is borrowed by Nigeria, the GDP per capita will reduce by US$4.75. The overall significance of 0.001 means that external debt has a significant negative impact on the GDP per capita of Nigeria at 1% level of significance. From these results, the study rejects the null hypothesis one (H01). Considering the correlation coefficient of LEXAB, its relationship with EXTDT is not significant since the R is less than 0.9. The adjusted coefficient of determination (R2) under the

Page 10 of 15 LEXAB was computed as 0.286, which indicate that only 28.6% of the variations in the LEXAB of Nigeria are explained by EXTDT. Furthermore, the beta coefficient of 0.605 indicates a positive relationship between the LEXAB and EXTDT. This means that as more external debts are borrowed by Nigeria, the life expectancy rate at birth in the country improves. The t value of 2.148 indicate that when US$1 external debt is borrowed by Nigeria, the life expectancy at birth of the citizens will increase by 2.15 years. The overall significance of 0.064 means that external debt has a significant positive impact on the life expectancy rate at birth in Nigeria only at 10% level of significance. There is no significant relationship between the two variables at both 1% and 5% levels of significance. From these results, the study accepts the null hypothesis two (H02). As for literacy rate in Nigeria (LITRT), the correlation coefficient of 0.428 indicates a weak relationship with EXTDT since the R is far less than 0.9. The adjusted coefficient of determination (R2) under the LITRT was computed as 0.081, which indicate that only 8.1% of the variations in the LITRT in Nigeria are explained by EXTDT. Additionally, the beta coefficient of -0.428 indicates a negative relationship between the LITRT and EXTDT. This means that as more external debts are borrowed by Nigeria, the literacy rate in the country declines. The t value of -1.341 indicate that when US$1 external debt is borrowed by Nigeria, the literacy rate in the country will decrease by 1.34%. The overall significance of 0.217 means that external debt has no significant negative impact on the literacy rate in Nigeria at 1%, 5% or 10% level of significance. From these results, the study accepts the null hypothesis three (H03). The 0.317 correlation coefficient of PBPVL also indicate a weak relationship with EXTDT since the R is far less than 0.9. The adjusted coefficient of determination (R2) under the PBPVL was computed as -0.012, which indicate that the variations in the PBPVL in Nigeria cannot singly be explained by EXTDT. Additionally, the beta coefficient of 0.317 indicates a positive relationship between the PBPVL and EXTDT. This means that as more external debts are borrowed by Nigeria, the

Page 11 of 15 population of Nigerians below poverty line improves. The t value of 0.894 indicate that when US$1 external debt is borrowed by Nigeria, the population below poverty line in Nigeria will increase by 0.89%. The overall significance of 0.372 means that external debt has no significant positive impact on the population of Nigerians below the poverty line at 1%, 5% or 10% level of significance. From these results, the study accepts the null hypothesis four (H04). Lastly, the correlation coefficient of UNEMR of 0.584 indicates a non-significance relationship between UNEMR and EXTDT since the R is less than 0.9. The adjusted coefficient of determination (R2) under the UNEMR was computed as 0.259, which indicate that only 25.9% of the variations in the UNEMR of Nigeria are explained by EXTDT. Furthermore, the beta coefficient of -0.584 indicates a negative relationship between the UNEMR and EXTDT. This means that as more external debts are borrowed by Nigeria, the unemployment rate in the country declines. The t value of -2.036 indicate that when US$1 external debt is borrowed by Nigeria, the unemployment rate in the country will decrease by 2.04%. The overall significance of 0.076 means that external debt has a significant negative impact on the unemployment rate in Nigeria only at 10% level of significance. There is no significant relationship between the two variables at both 1% and 5% levels of significance. From these results, the study accepts the null hypothesis five (H05). The regression equations are reproduced below substituting the intercepts and beta variables. Whereas LEXAB and PBPVL have positive relationships with EXTDT; GDPPC, LITRT, and UNEMR revealed negative relationships with the EXTDT. GDPPC LEXAB LITRT PBPVL UNEMR = = = = = 2155.116 46.224 69.474 3.680 70.552 - 0.859 EXTDT + 0.605 EXTDT - 0.428 EXTDT + 0.317 EXTDT - 0.584 EXTDT ------------------- (6) ------------------- (7) ------------------- (8) ------------------- (9) ------------------- (10)

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Conclusion and Recommendations

The impact of external debt on economic development in Nigeria was viewed in this study based on the proxies of the economic development. The findings from the study revealed that external debt cannot be said to have total negative or positive impact on Nigerian economic development during the ten-year period covered. Some of the proxies of economic development like life expectancy rate at birth in the country and population of the populace below the poverty line can improve with external debt borrowing. Also, the study found that unemployment rate in the country will be reduced with external debt borrowing; although not significantly. The GDP per capita and literacy rate in Nigeria will simultaneously reduce when more external debt are borrowed as established by the study. The study, therefore, inferred that external debt in Nigeria has made both positive and negative contribution to the economic development of the country during the period covered by this study. From the findings and conclusion of the study, it is recommended that: a) The Nigerian government should investigate the reasons behind the non-contribution of external debt to the GDP per capita of the country with a view to unveiling the bottlenecks and correct them. The bottlenecks could be as a result of mismanagement or higher cost of borrowing. b) Now that the external debt stock of the country has declined significantly due to cancellation and relief, the modalities of borrowing external debt and their application should be technically and tactically analyzed prior to accessing the debt. c) External debts are meant to boost the economic growth and development of the debtor country and improve the standard of living of the citizenry. Therefore, the Nigerian government should always consider the debts as means to long run development not just for solving short run problems.

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References
Adepoju, A.A.; Salau, A.S. and Obayelu, A.E. (2007). The Effects of External Debt Management on Sustainable Economic Growth and Developemnt: Lessons from Nigeria. Ibadan: MPRA Paper, University of Ibadan. Aghion, P. and Bolton, P. (1997). A Theory of Trickle-Down Growth and Development. Review of Economic Studies, Vol. 64, pp 151172. Ajayi, S.I. and Khan, M.S. (2000). External Debt and Capital Flight in Sub-Saharan Africa. IMF: International Monetary Fund Publication. Arikawe, A. (2001). Nigeria and the Highly Indebted Poor Countries (HIPC) Initiative (I). A Paper Presented at the Joint UNITAR/WAIFEN Sub-Regional Workshop on Debt Negotiation and Renegotiation for West African Nations, Banjul, Gambia. Arnone, M.; Bandiera, L. and Presbitero, A. (2005). External Debt Sustainability: Theory and Empirical Evidence. Retrieved from http://www3.unicatt.it/dipartmenti/DISES/allegati/ArnoneBandieraPresbitero.pdf Audu, I. (2004). The Impact of External Debt on Economic Growth and Public Investment: the Case of Nigeria. Dakar, Senegal: African Institute for Economic Development and Planning (IEDP). Ayadi, F.S. (2008). The Impact of External Debt on Economic Growth: A Comparative study of Nigeria and South Africa. Journal of Sustainable Development in Africa, Vol. 10, No. 3, pp 234-244. Blakely, E.J. and Leigh, N.G. (2009). Planning Local Economic Development: Theory and Practice. United Kingdom: SAGE Publication Ltd. Cipher, J.M. and Dietz, J.L. (2008). The Process of Economic Development. USA: Routledge. Clements, B.; Bhattarcharya, R. and Nguyen, T.O. (2003). External Debt, Public Investment and Growth in Low-Income Countries. IMF Working Paper No. 03/249. Eaton, J. and Gersovitz, M. (1981). Debt with Potential Repudiation: Theoretical and Empirical Analysis. Review of Economic Studies, Vol. 48, pp 289309. Ferreira, F. H. G.; Leite, P. G. & Ravallion, M. (2010). Poverty Reduction without Economic Growth? Explaining Brazil's Poverty Dynamics, 19852004. Journal of Development Economics. Vol. 93, Issue 1; Pp. 20-36 Fields, G. S. (1981). Poverty, Inequality and Development. London: Cambridge University Press. Fosu, A.K. (2007). The External Debt-Servicing Constraint and Public expenditure Composition: Evidence from African Countries. UNU-WIDER Research Paper No. 2007/36.

Page 14 of 15 Hirschman, A. O. (1958). The Strategy of Economic Development. New Haven, CT: Yale University Press. Hoff, K. and Stiglitz, J. (1999). Modern Economic Theory and Development. In G. Meier and J. Stiglitz (eds). Pioneers in Development. London: Oxford University Press. Hunt, S.D. (1989). Economic Theories of Development: An Analysis of Competing Paradigms. London: Harvester WheatSheaf. Hunt, S.D. (2007). Economic Growth: Should Policy Focus on Investment or Dynamic Competition? European Business Review, Vol. 19, No. 4, pp 279-291. Kletzer, K. and Wright, B. (1995). Sovereign Debt as Intertemporal Barter. Mimeograph, University of California, Santa Cruz. Malizia, E.E. and Feser, J.E. (1999). Understanding Local Economic Development. New Brunswick, NJ: Center for Urban Policy Research, Rutgers University. Mookherjee, D. and Ray, D. (2001). Readings in the Theory of Economic Development. New York: Blackwell Publishers. Mutasa, C. (2003). Regional Integration and Debt in Africa: A Comparative Report of Africas Regional Groupings. AFRODAD Research Series, March. Nagel, R. (2007). Human Development Index: An Elaborate means of Evaluating a Countrys HD. Norderstedt, Germany: Grin Verlag. Obadan, M.I. (2004a). External Sector Policy. CBN Bullion, Vol 28, No. 1, pp 30-40. Obadan, M.I. (2004b). Foreign Capital Flows and External Debt: Perspective on Nigeria and the LDCs Group. Ibadan: Ibadan University Press. Omotoye, O.R.; Sharma, H.P.; Ngassam, C.; and Eseonu, M. (2006). Sub-Saharan Africas Debt Crisis: Analysis and Forecast Based on Nigeria. Managerial Finance, Vol. 32, No. 7, pp 606-620. Osinubi, T.S. and Olaleru, O.E. (2006). Budget Deficits, External Debt and Economic Growth in Nigeria. Applied Econometrics and International Development, Vol. 6, No. 3, pp 27-32. Ray, D. (1998). Development Economics. Princeton: Princeton University Press. Todaro, M.P. and Smith, S.C. (2009). Economic Development, 10th Edition. USA: Addison-Wesley.

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It is recommended therefore that government should ensure that any deal with the London and Parish Clubs and other creditors should be deals that will open Nigeria to greater trade and investment and can stimulate the private sector since external debt and debt services to these creditors has negative impact on our economic performance (per capita income and employment). Secondly, Nigeria should devote a tangible proportion of her annual foreign exchange earnings for debt servicing.