This paper investigates how indebtedness and capital flight have affected the
growth of 14 West African countries directly, and via investment and fiscal
balance mechanisms, using data from 1970 to 2008. This task was approached
through a standard growth framework through which debt and capital flight indicators
were incorporated. Two econometric specifications (linear and non-linear) were used,
and evaluated with the fixed effects and GMM estimation techniques on the relationship
between debt and growth. The hypothesis that external debt and capital flight affect
growth is well-supported by the results. All debt variables and the capital flight variable
have the expected signs and were statistically significant. The results reveal that
debt appears to have a non-linear effect on growth. The debt overhang hypothesis is
affirmed, given the existence of a threshold beyond which debt negatively contributed
to growth. The average impact of debt on per capita growth becomes negative for debt
levels above 60% to 74% of GDP. Thus, increasing debt beyond this threshold yields
a negative marginal contribution to growth. There is a pressing need to take measures
to not only stabilize external debts, but to place them on a downward trajectory in the
future.
