An analysis of the impact of democratization on debt-led growth : the Nigerian experience, 1970-2000

The debt-for democracy hypothesis is that undemocratic governments were largely responsible for not only the accumulation but also poor management of externally sourced capital resources. External borrowing had therefore failed to lead to growth of the economies of debtor countries under undemocratic political leadership. Despite this explanation of the debt problem conventional empirical analyses of the debt-growth relationship did not include political institutional variables. This study investigates the relationship between democratization and debt-led growth, using Nigeria, a typical debtor country whose politics was dominated by 'undemocratic ' governance, as a case study. Two broad research questions are investigated namely, whether available data support a negative or positive contribution of debt to the growth of the Nigeria economy during the period 1970-2000; and ifso was there any link between the levels of democratization in Nigeria and debt-led growth. Using a census of major political events in Nigeria around four dimensions of democratization, four primary indices of democratization and one composite index were constructed for the period. Using the Taylor (1983) marginal conditions to gauge the contribution of external debt to the growth of the Nigerian economy, the study found that external debt is capable of playing a double edged sword on the performance of the economy. Positive contributions coincided with the periods when Nigeria's oil dominated foreign exchange revenues were robust, and/ or when debt management strategies were better articulated and vice versa. The analyses of the link between democratization and debt-led growth using both correlation and regression techniques, yielded different results in two definitional contexts of debt-led growth. When defined purely in terms of the Taylor marginal conditions for a positive contribution of debt to the economy of a borrowing nation, the results support the pessimist view that democratization impeded growth. On the contrary, when debt-led growth was defined in a broader sense to incorporate variables such as domestic savings and investment, foreign direct investments, public and private consumption and debt burden, there was strong evidence that debt-led growth performed beller at higher levels of democratization than other wise. The result using the narrow definition was found to be a direct consequence of the overriding influence of export performance in the Taylor conditions. With Nigeria's exports almost entirely dominated by extractive industry the result derived using the narrow definition confirmed the theoretical links between natural resource endowment and regime type on the one hand, and external capital and the nature of the host country 's industry on the other. In the first resource dependence allowed the political leadership to be more detached and less accountable to the electorate since they did not need to levy taxes. Secondly foreign investors concerned with security of their sunk investments in the extractive oil induslly in particular favoured continuity of powerfol regimes with less democratic content. In both findings one thing was common: democratization was associated more with those factors whose decreases affect growth positively than with those whose increases improve growth. The conclusion from this is that the impact of democratization is stronger with negative than with positive growth factors. In other words, while democratization may be supportive of growth its greater impact appears to be in limiting the factors that themselves limit growth. To benefit from the favourable impact of democratisation on debt-led growth therefore the study suggests that improvements in the democratisation process in Nigeria is needed It identifies political education as central to this improvement. A model is developed to show how improvements in the political institutional framework may trickle down, through an enabling environment that is capable of engendering growth-enhancing domestic and international responses to lead in the direction of debt-led growth