The Threshold Effects in the Relationship Between External Debt and Human Development: the Case of Kenya

Abstract

This study aimed at establishing the relationship between external debt and human development in Kenya by identifying the optimum threshold of external debt. This was done by carrying out a regression of the human development index and external debt using the quadratic method. Annual time series data for the period 1970 to 2018 was used. The macroeconomic variables selected included external debt, gross capital formation, foreign direct investment, and population growth rate. The governance indicators used included control of corruption and the absence of violence. The results show that the threshold level of external debt that optimizes human development is 45%. External debt beyond this level crowds-out social sector spending. The study recommends that the treasury should cap external debt at 45% of GNI. The borrowed funds should be invested in the most productive sectors. Other recommended measures include population control and measures to foster peace and social stability.