Interactive Effects of External Debt and Domestic Investment on Global Competitiveness Among West African Countries

Abstract

West African countries face significant challenges of high external debt accumulation, soaring external debt burdens, inadequate investment and weak global competitiveness which hampers their level of economic growth and development. Thus, this study investigated the interactive effect of external debt and domestic investment on global competitiveness among West African countries from 1990 to 2023. The Study used non-stationary heterogeneous panel model of pooled mean group estimator (PMG)based on the suggestion of the Hausman Test results. The findings revealed that a combination of external debt and investment produced a negative and significant impact on global competitiveness among West African countries. This implies that, if external debts are used for domestic investments, it will improve real effective exchange rate which is used as a proxy for global competitiveness. This is because higher REER connotes weakening competitiveness and vice versa and hence variables that have inverse relationship with it make it better. The study also found that external debt service has a tendency to weaken global competitiveness in West Africa. The study recommended among other measures prudent debt management practices to ensure that external debts are allocated effectively to productive sectors such as infrastructure, education, and innovation. This will help maximize the long-term benefits of external borrowing and reduce the negative impact of high debt servicing on economic growth and global competitiveness.