International Journal of Economic Perspectives, 2016, Volume 10, Issue 4, 685-694. The Size of Government and External Debt: A Panel Analysis of Five SSA Countries Shittu W. OLAWALE School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia. E- mail: walesh.economist@gmail.com Sallahuddin HASSAN* School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia. E- mail: din636@uum.edu.my ABSTRACT The large size government has largely affected the growth of economies and scaled up their indebtedness. This study examines the impact of government size on external debt in five sub-Saharan African countries, using data spanning for 26 years (1990-2015), and employing the pooled mean group estimation technique. The findings show that external debt is negatively influenced by the government size; and that trade openness negatively affects the external debt. Further research is hereby recommended on other countries or regions. JEL classification: E42; G18; G28; G38. Keywords: Government; External Debt; Trade Openness; Pooled Mean Group; Sub-Saharan Africa. *Corresponding author. 1. INTRODUCTION The aspiration of every economy is to translate the periodical growth to development, since the growth of an economy is a sine-qua-non for economic development. In the quest for this development through stable growth in economic activities, a country usually supplements domestic resources with external finances. This may be in the form of loans, grants, and remittance; among others. Thus, external finance remains a necessary means of raising funds in order to increase domestic productivity and growth. This is obtained through the financing of public investments in infrastructure and human capital, which fosters the economic growth and development. As such, increase in public capital raises the productivity of labour and private capital, while also inducing the accumulation of these productive factors and, therefore, economic growth (Agénor, 2012). In recent times, the size of government in both the developed and the developing countries has exhibited an upward trend; even as the size of the public debt has been on the increase. Debt has largely become a cause for concern among countries, and serious debate is beginning to emerge over the proper size of the government. The impact of government size on economic growth has been the central point of research for years (Barro, 1990; Karras, 1997). Over the past decade, and especially following the recent European sovereign debt crisis, the level of government spending has been at the centre of many political debates. Increases in government size, therefore, has the likelihood to have consequences on the public debt and domestic economic performance. As it is possible that a negative relationship between debt and economic growth likely results in a negative relationship between the size of government and economic growth (Asimakopoulos & Karavias, 2016; DiPeitro & Anoruo, 2012; Soldatos 2016; Katircioglu, 2010), so, also a rise in the size of government has a tendency to raise a country’s public debt (both domestic and external). As of 2013, as reported by the World Bank, 27 African countries were among the 36 countries classified as low-income; most of these countries have been heavily burdened by debts and their financial systems have been largely defective, thereby created problems in the course of servicing the debts obligations. Similarly, the systems of economic and social welfare have largely declined, and the system of government has fallen drastically (Megersa, 2015; Richards, Nwanna & Nwankwo, 2003). In sub-Saharan Africa, the level of aggregate external debt stood at USD 416.3 billion in 2015, which was 4.05% increase from the 2014 balance; with interest payment rising from USD 3.8 billion to USD 9.3 billion between 2010 and 2015 (World Bank, 2017). International Journal of Economic Perspectives ISSN 1307-1637 © International Economic Society http://www.econ-society.org 685