Institutions and Economic Growth in Africa: Evidence from Panel Estimation
There is growing emphasis on the role of institutions on explaining Africa's economic growth ahead of the traditional factors such as capital accumulation. However, it is not clear which of the institutions and governance indicators namely control of corruption, government effectiveness, political stability, regulatory quality, rule of law and voice and accountability matter most. This paper empirically examines the impact of institutions on economic growth in Africa. The paper uses a sample of 48 countries for the1996-2016 period. The overall number of observations is 912. The paper applied generalized methods of moment (GMM), fixed effects (FE) and random effects (RE) models. However, due to the fact that GMM is well suited to deal with potential endogeneity problems in the model, inferential statistics of this paper are drawn from GMM regression results. Results of the FE and RE regressions are presented in appendix. Empirical results show that institutions really matter for Africa's economic growth. Among the institutional quality indicators political stability appears to be the most significant factor in explaining real GDP per capita growth in Africa. However, it is worth noting that, the quality of institutions alone may not be sufficient. Along with institutions, the paper reveals that structural factors such as liberalization of trade, fixed capital formation, labour force and foreign direct investment have a significant effect on Africa's economic growth. The implication is that, a policy mix with the aim of improving the quality of institutions as well as reducing trade restrictions, enhancing both domestic and foreign investment and improving the quality of labour force would enhance economic growth in Africa.(original abstract)
- Acemoglu, D., Johnson, S., & Robinson, J.A. (2005). Institutions as the fundamental cause of long-run growth. In: Aghion, P., & Durlauf, S.N. (Eds.). Handbook of Economic Growth (pp. 385-472), Vol. 1, Part 1, Elsevier.
- Acemoglu, D., Johnson, S., & Robinson, J.A. (2005). The rise of Europe: Atlantic trade, institutional change and economic growth. American Economic Review, 95(3), 546-579. doi.10.1257/0002828054201305.
- Arellano, M & O. Bover. (1995). Another look at the instrumental variable estimation of error component models. Journal of Econometrics, 68(1), 29-51. doi.org/10.1016/0304-4076(94)01642-D
- Arellano, M. & S. Bond. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297, doi.org/10.2307/2297968.
- Barro, R. & Lee, J. (1993). Losers and winners in economic growth (NBER Working Paper, No. 4341).
- Barro, R. J. & Sala-i-Martin, X. (1997). Technological diffusion, convergence, and growth. Journal of Economic Growth, 2(1), 1-26. doi.org/10.1023/A:1009746629269.
- Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(2), 103-125. doi.org/10.1086/261726.
- Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. doi.org/10.1016/S0304-4076(98)00009-8.
- Bond, S. R., Hoeffler, A. & Temple, J. (2001). GMM estimation of empirical growth models. Working Paper, University of Oxford.
- Caselli, F., G. Esquivel, & Lefort, F. (1996). Reopening the convergence debate: A new look at cross-country growth empirics. Journal of Economic Growth, 1(3), 363-389. doi.org/10.1007/BF00141044.
- Cass, D. (1965). Optimum growth in an aggregate model of capital accumulation. The Review of Economic Studies, 32(3), 233-240. doi.org/10.2307/2295827.
- Giavazzi, F. & Guido Tabellini, G. (2005). Economic and political liberalizations. Journal of Monetary Economics, 52(7), 1297-1330. doi.org/10.1016/j.jmoneco.2005.05.002
- Grier, K. B. & Tullock, G. (1989). An empirical analysis of cross-national economic growth, 1951-80. Journal of Monetary Economics, 24(2), 259-276. doi.org/10.1016/0304-3932(89)90006-8.
- Hall, R. E. & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others?. Quarterly Journal of Economics, 114(1), 83-116. jstor.org/stable/2586948.
- Hoefller, A. E. (2002). The augmented Solow model and the African growth debate. Oxford Bulletin of Economics and Statistics, 64(2), 135-158. doi.10.1111/1468-0084.00016
- Holtz-Eakin, D., Newey, W., & Rosen, H. (1990). Estimating vector autoregressions with panel data. Econometrica, 56(6), 1371-1395. doi.org/10.2307/1913103.
- Koopmans, T. C. (1965). On the concept of optimal economic growth, in Study week on econometric approach to development planning, chap. 4, pp. 225-287. North-Holland Publishing Co., Amsterdam.
- Kormendi, R. & Meguire, P. (1985). Macroeconomic determinants of growth: cross-country evidence. Journal of Monetary Economics, 16(2), 141-163. doi.org/10.1016/0304-3932(85)90027-3.
- Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. doi.org/10.1016/0304-3932(88)90168-7
- Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110(3), 681-712. jstor.org/stable/2946696.
- McGuire, M. C. & Olson, Mancur, J. (1996). The economics of autocracy and majority rule: The invisible hand and the use of force. Journal of Economic Literature, 34(1), 72-96. jstor.org/stable/2729410.
- Nkurunziza, J. D., & Bates, R. H. (2003). Political institutions and economic growth in Africa (Center for International Development Working Paper, No. 98). Harvard University.
- North, D. C. & Thomas, R. P. (1973). The rise of the western world: A new economic history. Cambridge: Cambridge University Press.
- Persson, T. (2005). Forms of democracy, policy and economic development (NBER Working Paper, No. 11171).
- Rodrik D. (2000). Institutions for high-quality growth: What they are and how to acquire them. Studies in Comparative International Development, 35(3), 3-31. doi.org/10.1007/BF02699764.
- Roll, R. & Talbott, J. (2002). Policy research and analysis. The heritage Foundation.
- Romer P. M. (1990). Human capital and growth: Theory and evidence. Carnegie-Rochester Conference Series on Public Policy, 32, 251-286. doi.org/10.1016/0167-2231(90)90028-J
- Romer, P. M. (1986). Increasing returns and long-run growth. The Journal of Political Economy, 94(5), 1002-1037. doi.org/10.1086/261420
- Sachs, J. D. & Warner, A. M. (1997a). Sources of slow growth in African economies. Journal of African Economies 6(3), 335-376. doi.org/10.1093/oxfordjournals.jae.a020932
- Sokoloff, K. L. & Engerman, S. L. (2000). Institutions, factor endowments, and paths of development in the new world. Journal of Economic Perspectives, 14(3), 217-232. doi.10.1257/jep.14.3.217
- Solow, R. M. (1957).A contribution of the theory of economic growth. Quarterly Journal of Economics, 70(1), 65-94. doi.10.2307/1884513
- Tavares, J. & Wacziarg, R. (2001). How democracy affects growth. European Economic Review, 45(8), 1341-1378.doi.org/10.1016/S0014-2921(00)00093-3.
- Ulku, H. (2004). R & D, innovation, and economic growth: An empirical analysis (IMF Working Paper, WP/04/185).
- World Bank (2017). World Development Indicators.