External Debts and Economic Freedom in Sub-Saharan Africa: The Role of Political Institutions

Abstract

Over the years, economic freedom in Sub-Saharan Africa (SSA) has gone through different phases. The overall level of economic freedom in the area has been very bad, even though there have been some improvements. This study explores the interplay between external debt, political institutions, and economic freedom in SSA by employing a quantitative approach and the Generalized Method of Moments (GMM) to analyze data from 38 out of 48 SSA countries. The research aims to uncover how external debt affects economic freedom, the role of political institutions in this dynamic, and how political institutions moderate the relationship between external debt and economic freedom. The results indicate that high levels of external debt have a significantly negative effect on economic institutions in the region. Conversely, robust political institutions are positively associated with enhanced economic freedom, highlighting their crucial role in economic development. Furthermore, the study finds that political institutions can mitigate the adverse effects of external debt, thereby amplifying its positive impact on economic freedom. This is evidenced by the interaction term between external debt and political institutions, which suggests that well-functioning political frameworks help alleviate the detrimental effects of debt. Based on these findings, it is recommended that SSA countries prioritize strengthening their political institutions by fostering transparency, accountability, and good governance. Enhancing political rights, such as promoting freedom of expression and participatory governance, can further improve institutional quality and economic outcomes.