CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Governments have long employed fiscal policies, including taxation, public debt and expenditure as a key tool to influence economic growth, making them a persistent forcus of global economic policy discussions (Yamin et al., 2023). Though the causes and influences of foreign public debt and other policies have been extensively discussed in the past, the emergence of financial crises that has affected both the developed and developing countries, as well as the wide variation in economic growth rates across world economies, have reignited the interest among development economists to investigate the impact of government policies regarding public debt on growth (Yamin et al., 2023). Many countries in an attempt to improve on their economic situations have resulted to public debt borrowing which is mostly external which was further worsened by the 2008 global financial crisis which affected so many economies of the world (Kumar & Woo, 2015).  And as such fiscal sustainability is been difficult to achieve to some countries where social cohesion exist to maintain a giving level of growth and employment. (Greiner & Fincke, 2016).

The United Nations’ sustainable development goals (SDGs) specifically listed objectives that must be attained by 2030. One of which is to increase economic growth (United Nations, 2018). The shifting of the global economic structure towards the fourth industrial revolution has obliged governments to put in more funds in crucial sectors of the economy such as the tertiary sector. Investing in things like artificial intelligence, machine learning, technical advancement, and human capital (Al-Kasasbeh et al., 2022). Without these crucial investments, economic growth would stagnate and nations will lose competitiveness if investments are diverted towards conventional industrial processes (Bendarzsevszkij et al., 2021).

Investing in the above-mentioned crucial sectors takes a substantial quantity of capital. To fund these investment ventures, taxes are considered one of the vital sources of income (Ono & Uchida, 2018). However, because taxing has distorting effects on economic growth, policymakers are less fond of it. If a country lacks finances, public debt is the sole viable alternative for financing government spending and other economic initiatives. This argument adheres to the Ricardian invariance theorem, which states that taxes imposes a disproportionate burden on the public by increasing the cost of living and decreasing people’s buying power (Barro, 1979).

Efforts to mitigate economic downturns and promote community recovery necessitate embracing the concept of “inclusive growth,” although challenges persist in addressing vulnerability and social isolation (Samoliuk et al., 2023; Yurchyk et al., 2023). Inclusive growth stands apart from “pro-poor growth” by aiming to benefit all economic classes, not just those below the poverty line (Ranieri, 2013). In addition to poverty, sustainability addresses issues of inequality and unemployment, which significantly impact overall well-being.

In 2015, global leaders as members of the United Nations meet to establish Sustainable Development Goals (SDGs) to be achieved by 2030 (Rolle et al., 2020). Replacing the 2000 Millennium Development Goals (MDGs), this was aimed at addressing global poverty; the SDGs address the different social challenges that undermined growth and development throughout the world including economic injustice, gender inequality, and ability and accessibility barriers. For tackling the triple tackling the ‘triple bottom line’ approach to overall human wellbeing, economic development and environmental sustainability and social inclusion, SDGs provides a framework for countries to follow to realize it (Rolle et al., 2020).

Specifically, SDG 8 states its intention to promote sustained, inclusive and sustainable economic growth, full and productive employment, and decent work for all (United Nations, 2015). In addition goal 8.3 recommends development-oriented policies that promote and foster job creation, entrepreneurship and innovation with the motive to formalize systems that promote and support businesses of all sizes, most especially through access to financial services (United Nations, 2015). These specific goals provide a starting point through which many countries can address the needs of traditionally underserved populations.   

The increasing attention towards fostering inclusive economic development is closely linked to the challenges posed by the Sustainable Development Goals (SDGs), particularly in addressing poverty through inclusive, sustainable growth (SDG 8) (World Bank, 2021). Forecasts anticipate a rise in extreme poverty by 2030, especially in fragile and conflict-affected countries exacerbated by factors like the COVID-19 pandemic and geopolitical conflicts (Awojobi et al., 2023).

Economic growth generated by market signals, based on the paradigm of neoliberal capitalism, and has often attracted criticism as it may trigger high incidents of poverty and inequality. Cook, (2006) descriptively emphasized government policies that promote pro-poor growth. Providing public goods and social protection needed by the community and produce good quality institutions have also been recognized as pre-conditions for inclusive and equitable development and revealing the importance of governance and institutions in shaping the consensus of the new development model. Similarly, Ianchovichina & Lundstrom (2009) also observed a weak quality of government effectiveness led to market failure and hindered the achievement of inclusive economic growth. Inclusive growth had attributes reflecting poverty reduction, productive workforce, and elements of income redistribution. In addition, inclusive economic growth is also reflected in both the growth of workers and their productivity growth.

The world economy is currently in a very challenging position due to the numerous events, from the Russian war against Ukraine to the worldwide spread of the COVID-19 pandemic. The spillover effects of all these happenings can also be seen in the rise in inflation, income inequality, stagnation of economic growth, and spikes of public debt (World Bank 2022). Public debt levels tend to increase during periods of economic recession and stagnation, slowly recovering until the next shock hits the economy and the cycle continues (Salmon 2021).

The unprecedented increase in public debt in all the countries of the world, including the member states of the European Union, but especially those in the euro area, amid the recent international crisis has led to a considerable increase in the interest of researchers and policymakers in examining the economic impact of increasing public debt (Onofrei et al., 2022). With the continues increase in public debt, governance became very vital as a tool effective channel the borrowed funds to productive sectors (Fraj, S.H, et al 2018). For any debt to be considered reproductive or not and to further enhance growth in an economy there is therefore a need to consider the state of the organ or body of the government responsible in managing borrowed funds whether it is domestic or external debt. (Lopez & Nahon, 2017).

Due to the vitality of governance, in 1989, the World Bank used the term “good governance” which has since then been effectively utilized in different fields of study and is mainly attributed to the fact that a government which practices good governance would find it easy to achieve growth which is inclusive through practicing good governance. This view had long been supported by international organization such as the World Bank, International Monetary Fund, United Nations, the Organization for Economic Cooperation and Development and the Asia-Pacific Economic Cooperation Conference. (Fraj & Hamdaoui 2018), there is therefore a consensus that it becomes easy to efficiently and effectively manage debt and thereby achieving sound fiscal and monetary policies all through good governance.

To manage their fiscal deficit situations, many developing countries adopt different external and internal debts. For several reasons, developing countries often struggle to deal with public debt to stabilize the macroeconomic environment. Asteriou et al. (2021) argued that several developing countries suffer from unstable government budget balance and current account balance by adopting short- and long-term debts from different sources, resulting in twin deficits in the long run. Moreover, substantial debt service charges and installments trigger public taxation and affect capital formation and long-term economic growth (Pjanic et al., 2020). However, a frequent debt crisis raises public debate about the effectiveness of public debt. Given the contrasting literature, we were motivated to assess whether public debt is effective in promoting economic growth or not in the context of developing countries.

Many developing countries are struggling with an unstable democracy, authoritarian regimes, and other issues, which are prone to poor governance. Mauro (1995) asserted that poor governance motivated rent-seekers to embezzle public funds, whereas robust governance ensured the efficient use of funds. Kaufmann et al., (2011) affirmed that weak governance creates paths for government officials to benefit from public funds improperly by leveraging their political power. Governance is thus very vital in the management of the public fund, while public debt is a sensitive public fund that needs to be utilized efficiently to benefit the national economy.

Cameroon’s journey towards democratic governance has been marked by significant changes and continuities over the last three decades. 1990 was a pivotal moment in this journey, with the introduction of constitutional, legislative, political, and institutional reforms aimed at shifting the country from authoritarian rule to democratic governance. (Enonchong, 2020). The 1996 Constitution was a major milestone, introducing features of a modern constitutional system, including a semi presidential executive system, a Senate, and a constitutional jurisdiction to enhance constitutional justice. The Constitution also established a national electoral commission and a national human rights institution to promote democracy and protect human rights. However, despite these reforms, Cameroon’s democratic transition has been hindered by structural weaknesses, human rights abuses, poverty, and underdevelopment.

The country has struggled with authoritarianism, and the persistence of a Jacobin constitutional framework (it is seen as a constitutional system that was inspire by the French revolution that is the Jacobin ideology) has stalled constitutional advancement which has greatly affected the nature of inclusivity in its growth pattern. Notwithstanding there exist numerous challenges plaguing the democratic governance of the country such as failed democratic transition evident through the country’s transition to democracy which has been slow and fraught with challenges, Structural Weaknesses which have hindered effective governance and more to it Cameroon’s human rights record remains a concern. Moreover to relax such shortcomings, Cameroon needs to address the issue between the economic and social inequalities which persist in an alarming rate. So in all public debt and governance has a role to play in other for inclusive growth to be achieved within the context of the Cameroon economy and any other country.

The total public debt for Sub Saharan African (SSA) countries increased from an average of 27% of gross domestic product (GDP) in 2010 to over 56% in 2018. In particular, the total external debt stock in the public debt portfolio increased dramatically from $465 billion in 2015 to about $702 billion in 2020. (Olaoye, 2022) asserted that public debt is a significant driver of economic growth in SSA. Recently, the combined public debt stock in SSA rose by more than 90% (IMF, 2018).

Cameroon’s National development Strategy 2020-2030 (NDS30) for structural transformation and inclusive development has as one of its major objectives the promotion of employment and economic inclusion of its population, through the development of very small enterprises, small and medium size enterprises and youth entrepreneurship. According to them, several efforts have been made by the Cameroon government to address the problem of youth and women unemployment, including the creation of the National Employment Fund, the Rural and Urban Youth Support Program (PAGER-U), the special three-year youth plan, the agency for the promotion of women and the improvement of business climate. Despite these strategies, the economic inclusion of youths and women is still struggling to improve, which can be accounted by the low level of entrepreneurship development and poor debt management.

External debt for the Cameroon economy saw a great rise from $10.6 billion in 2000 to $15.4 billion in 2021 (World Bank, 2023). There was first a decrease in the amount of external debt up to 2005 due to the measures taken by the government to reduce the debt burden and improve the country’s economic situation. A further drop was registered in 2006, followed by a slight decline between 2006 and 2011 because of the commitments undertaken and support granted by international creditors under the enhanced HIPC (Highly Indebted Poor Countries). As from 2011 to 2021, the external debt significantly increased due to a rise in external borrowing to finance infrastructure projects or cover budget deficits. Even with this increase, the external debt/GDP ratio dropped from 99.9% in 2000 to 34.2% in 2021, with most of the decrease being registered up to 2011, when external debt recorded a minimum of 6.9% of GDP. Over the same period (2000–2021), external public and publicly ensured debt decreased from 82.8% to 27.5% of GDP (IMF, 2023). Moreover, following the same trend, the debt-to-exports ratio fell from 402.1% in 2000 to 206.9% in 2021, at about half its value in 2000 (World Bank, 2023).

The Bretton Woods institutions launched the Heavily Indebted Poor Countries (HIPC) initiative in 1996 to help reduce or remove the debt burden faced by developing countries. In 2005, the Cameroon economy was fully integrated into this initiative and its integration made the economy to benefit from a reduction in its debt. In 2020, the country was granted a moratorium on its debt because of the COVID-19 pandemic. The G20’s debt-suspension initiative allowed Cameroon to postpone the payment of $108 million in external debt in 2020 (Bradlow & Masamba, 2022). The advents of initiatives such as the HIPC and IMF interventions have helped developing countries cope with their economic difficulties and reduce their debt burdens. At present, although public debt is well below the 70% of GDP threshold set as a convergence criterion by CEMAC (Central African Economic and Monetary Community) member states, Cameroon is facing a high risk of debt distress. This underscores the high importance of prudent debt management and the appropriate choice of future sources of funding to avoid unfavorable debt developments while also allowing the government to reach a wide range of economic and social goals.

1.2 Statement of the Problem

Over the years the total public debt for Sub Saharan African (SSA) countries increased from an average of 27% of gross domestic product (GDP) in 2010 to over 56% in 2018. In particular, the total external debt stock in the public debt portfolio increased dramatically from $465 billion in 2015 to about $702 billion in 2020. (Olaoye, 2022) asserted that public debt is a significant driver of economic growth in SSA. The public debt situation in Cameroon worsened as the years went by as the economy saw an increase its debt from $10.6 billion in 2000 to $15.4 billion in 2021 (World Bank, 2023). The ratio of domestic debt to the total government borrowing increased from 23.7% in 2018 to 28.1% in 2021, which points out the rising interest in using domestic markets as an alternative to external creditors (IMF, 2023)

Cameroon’s public debt-to-GDP ratio has increased significantly, raising concerns about fiscal sustainability (World Bank, 2021). Issues such as corruption, lack of transparency, and weak institutional capacity hinder effective public debt management and inclusive growth (Transparency International, 2020). High public debt and poor governance can crowd out private investment, reduce public spending on essential services, and exacerbate income inequality (IMF, 2021). There is a need for policies that address both debt sustainability and governance issues to promote inclusive growth (African Development Bank, 2020). Good governance practices are crucial for achieving inclusive growth, as they ensure efficient use of resources and equitable distribution of benefits (Kaufmann et al., 2009).

Exploring the effects of public debt and governance on inclusive growth in Cameroon is vital for creating policies that foster economic stability and equitable growth. This research aims to identify the key factors influencing inclusive growth and propose actionable strategies for improving debt management and governance, thereby ensuring sustainable development. Therefore, this study is aimed at investigating the relationship between public debt, governance and inclusive growth in Cameroon, thereby shedding light on how better governance policies can promote economic development that benefits all segments of society. Also, this study aims at investigating ways through which good governance can be fostered in the country and by so doing facilitating the attainment of some of the SDGs like goal one of the which aims at ending poverty in all its form, and promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all which is SDG8.

1.3 Research Questions

1.3.1 Main Research Question

• What is the effect of Public debt and Governance on Inclusive growth in Cameroon?

1.3.2 Specific Research Questions

• What is the impact of public debt on inclusive growth in Cameroon?
• How would governance affect inclusive growth in Cameroon?
• What is the moderating effect of governance on the public debt – inclusive growth in Cameroon?

1.4 Research Objectives

1.4.1 Main Research Objective

• To investigate the effect of Public debt and Governance on Inclusive growth in Cameroon.

1.4.2 Specific Research Objectives

• To determine the impact of public debt on inclusive growth in Cameroon
• To analyze how governance can effect inclusive growth in Cameroon.
• Assessing the moderating effect of governance on the effect of public debt on inclusive growth in Cameroon