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PROJECT TOPIC – Role of Institutions and Governance on Economic Performance in Selected sub-Saharan African Countries

 Role of Institutions and Governance on Economic Performance in Selected sub-Saharan African Countries

 

Abstract

A major discourse in recent literature centers on whether or not the quality of institutions matter for economic performance in sub-Saharan Africa (SSA). But institutions only makes meaning to the common man to the extent that it delivers good governance, creates opportunities and improves the quality of living. The main objective of this study is to examine the extent to which institutional quality, particularly the constraints on the executive, exerts influence on the economic performance in SSA. The study is only significant considering the fact that government effectiveness have been found to exert some measure of influence in explaining the economic performance in SSA. The study employs the System Generalized Method of Moments (SGMM) dynamic panel modelling technique for the period 2002 to 2013 on cross-country samples of forty-four selected SSA countries. The main findings of the study reveal that voice and accountability, political stability, regulatory quality and the rule of law has an insignificant positive influence on economic performance in the selected SSA countries. This implies that generally, institutions are associated with faster economic performance in the region, although their coefficients are statistically insignificant during the period under study.

However, while the control over corruption is negatively related with economic performance, weak executive constraints has a significant negative influence on economic performance of the region. Therefore, the policy direction drawn from the study is that the governments in SSA countries should be committed and focus more attention on institutional development for good governance. Efforts should target such institutions as those that allow government bureaucracy to run effectively so as to provide the needed public goods and services in the form of basic social infrastructures. This is the only way that improvements in the quality of institutions can significantly add up both in the short-run and long-run periods. Further, the region should also, as a matter of priority, develop such institutions that promote political rights and civil liberty, private sector development, building political stability and an independent and credible judicial system for enforcement of contracts and property rights protection. In doing this, the region can gain more, both in the short and long-run in its response to improvement in institutional development, with its likely pay-off and potentials benefits.Keywords: Institutions/Governance, Economic Performance, sub-Saharan Africa, System Generalized Method of Moments

CHAPTER ONE

: INTRODUCTION

1.1 Background to the Study

The overriding importance of institutions and governance has witnessed a surge in the growth and development literature in recent years. It has therefore been stressed as significant long-run determinants of economic performance in the economic literature. As a result, there exists a widespread consensus that has emerged among scholars in considering institutions as a key factor explaining different economic performance across diverse economies (Nelson & Sampat, 2001; North, 1990; World Bank, 2003). In this regard, there has been rising interest in this topic stemming from the view point of its role in the economic performance of countries around the world and Africa in particular. There are growing economic and political opinions on the centrality of the role of institutions and governance in the development process. Until the early 1990s, the rise in the study of institutions in the development literature became a phenomenon globally and Africa in particular. This emerging interest brought about discernible change as economic reforms that sought to focus on policies but neglected institutions met with failure (Chang, 2007). Consequently, institutions play a key role in bridging the differences in per capita income across countries (Eicher & Leukert, 2009). As a result, Rodrik, Subramanian and Trebbi (2004) noted that the quality of institutions overrides geography and integration (i.e., international trade) in explaining cross-country income levels.

Notably, countries with better institutions and a more secure property rights, with less distortionary policies will invest more in capital accumulation (physical and human). This in turn will be used efficiently to achieve a greater level of per capita GDP (Acemoglu, Johnson, & Robinson, 2001). Therefore, what matters are “institutions”, which according to North (1990) are the rules of the game in the society and their conduciveness to desirable political, economic or social behaviour. North (1990) further maintained that institutions establishes an incentive structure of a society that reduces uncertainty and enhances efficiency. Arguably, if institutions are effective, they can constrain our actions in order to induce productive behaviour. For instance, some sort of trust could be seen as a bridge banning unpredictable and opportunistic that the region lags greatly behind the rest of the developing regions and other regions of the world. This is in spite of implementing series of economic reform programmes in which their direct impacts were to stimulate development in the region. It is noticeable for example that between 2010 and 2012, SSA region has consistently recorded the lowest in terms of its Human Development Index value as compared to other regions of the world. It recorded 0.468 in 2010, 0.472 in 2011 and 0.475 in 2012 (United Nations Development Programme, 2013).
Similarly, the SSA economic performance has been markedly worse than those of other developing regions of the world. The region’s per capita GDP (at PPP, constant 2011 international $) was the lowest in 2000 and 2011 when compared to other regions; recording $3,131 in 2011 (see Appendix Table A.1). Likewise, in terms of the effectiveness of the educational system and the average number of years that a new-born infant is expected to live, SSA region trailed behind other regions in 2000 and 2011; with 59.8 per cent and 55.9 per cent recorded in 2011 respectively (see Appendix Table A.1). These facts are a reflection of the protracted economic misfortunes of the region that has defile several adjustment policies. Accordingly, Ndulu and O’Connell (1999) agreed that an extensive political economy literature locates the slow African growth to failure in governance. This has persisted with grievous implications on the growth and development paths of the region over the years.

Overtime in SSA, particularly since the mid-1990s, the political landscape has experienced significant changes in terms of countries of the region embracing democratic governance. Yet, there is little or no significant improvement in the economic performance of the region as compared to other regions of the world. Funke and Nsouli (2003) contended that even when governance and the quality of institutions are vital for economic performance, African countries (particularly SSA) have still not reached the levels attained by other regions despite advocating for democracy. Conversely, this has been attributed largely to weak, missing or dysfunctional institutions (particularly political) and governance which bear much of the blame for the region’s disappointing economic performance (Alence, 2004). The lack of institutional development in the region have not only helped explained the many negative aspects of the SSA states, but has also hindered the successful pursuit of any development strategy – whether oriented towards capitalism or socialism, self-reliance or global integration (Mkandawire & Soludo, 1999; Ndulu & O’Connell 1999 However, one of the many drawbacks of the region in promoting growth and development arises from such issues as building states and their capacities. This forms one of the important parts of a sound institutional environment that is essential for many other reform areas (Goldsmith, 1998). The lack of state capacity building has left the region worse-off, simply because of the inability of the states to provide the requisite institutional framework to support good governance.

Thus, rendering the governmental institutions in many SSA countries weak (Akpan & Effiong, 2012; Luiz, 2009). In the words of Kofi Annan, he reasoned that “good governance is perhaps the single most important factor in eradicating poverty and promoting development” (United Nations Development Programme, 2002). Essentially, governance is poor in SSA countries because colonialism did little to develop strong indigenously rooted institutions that could tackle the development demands of modern states (Brautigam & Knack, 2004). Evidence from Acemoglu et al. (2001) shows that Africa is not poorer than the rest of the world because of geographic and cultural factors, but because of weak institutions and accompanying policies. They asserted that the institutions introduced by the colonialists were devoid of checks and balances to enforce accountability. North (1990) contended that third world countries are poor because the institutional constraints define a set of pay-offs to political/economic activities that do not encourage productive activity.

These trends have persisted decades after many countries of the region gained political independence and as such, growth and development still remains elusive to the region. More to these is the continuous neglect in investing and building strong institutions in SSA countries. As shown in Table A.2 (see Appendix A), most SSA countries suffer from weak institutional development and poor governance records, maintaining one of the lowest governance ranks worldwide. Indeed, with a few exceptions, the region is below the world average in terms of voice and accountability and regulatory quality. Moreover, most countries in the region rank poorly in terms of corruption index and this has consistently pulled countries of the region below the world median. The result of which is seen in the weak state structures in the region that is incapable of implementing large scale reforms meant to promote economic development (Luiz, 2009). Not surprising therefore, is the fact that the weak state structures in the SSA region has produced weak institutions of governance. The weak institutions and governance structures, in turn, have contributed to the poor economic performance of countries in the region, and thus, providing the basis for the region’s lagging behind other developing regions in the world.

In terms of political governance, poor leadership has been identified as a continual problem of governance and development in many of the SSA countries. It has been stressed that a major problem affecting governance and development in Africa (particularly, SSA) is that of sit-tight leaders in office (Eregha, 2007). As pointed out by African Development Bank (2001), Africa is famous for leaders with long tenure in office. Accordingly, Akpan and Effiong (2012); Eregha (2007) opined that these leaders are known for amending states’ constitution to enable them rule for life. Also, by rigging elections, majority of them perpetually keep themselves in power for as long as they wish. Akpan and Effiong (2012) further argued that this has adversely affected effective leadership in the region, which is critical to building strong and efficient institutions for good governance. Ndulu and O’Connell (1999) viewed this from the stands of the unconstrained elites who are in power merely to serve the interests of a group that comprises a fraction of the population. The implication here is the likely divergence of interest between leaders of the region and their population. As a consequence, Beck, Clarke, Groff, Keefer, and Walsh (2001) pointed out that a key hindrance to development is the tendency of many political leaders to make opportunistic decisions that will entail long-run costs to the society, which invariably outweigh short-run benefits.

 Role of Institutions and Governance on Economic Performance in Selected sub-Saharan African Countries

 

1.2 Statement of the Problem

Since the mid-1990s when institutions and governance played prominent role in Africa’s development agenda, SSA countries have not fared better. The region is faced with the challenge of reversing her economic failure due to the lack of significant role in institutions and governance characteristics needed to fast track its development paths. Indeed, it can be argued that the failure of institutions and governance system has been as much, a factor in the SSA’s inability to contend with much of the region’s backwardness in terms of growth and development. As such, many SSA countries are severely characterised by poor policy choices, including weak and dysfunctional state-building capacity. Thus, accounting for the poor and ugly state of affairs in the region Goldsmith (1998) observed that if institutions are weak, policies are also most likely to be weak.
While the debate on whether institutions drives economic development or vis-versa, rages on, there is additional disturbing issue as it concerns leaders of the region, who are known to be famous in prolonging or extending their stay in office beyond their stipulated limit. What is more? Usually, these leaders are most likely to exhibit repressive tendencies and sit-tight attitude. Quite often, they manipulate states’ constitutions including electoral processes by using the powers of a state in a discretionary manner, in particular situations without being subject to rules, just to enable them remain in power. Letiche (2010) asserted that these set of leaders fear the consequences of alternative occupations and as such will do whatever they can to remain in power. Report by African Development Bank (2001) attested to the fact that between 1960 and 1999, only 7 per cent of the leaders in Africa left office by election with a mean tenure of 7.2 years for all former African leaders compared to 3.2 years in Europe. Furthermore, the report revealed that as at the year 2000, only 14 present national heads of states in Africa had been in office for between 10 and 20 years and 9 had served more than 20 years in office.

Fundamentally, the sit-tight attitude of these leaders have created a sustained destabilizing behavior in the region and quite often, has rendered the military as the ‘only real check’ for executive authority. This constitute one of the major sources of political instability in the region. They fact that institutions in the region cannot effectively constrained leaders and political elites in such a way as to control and limit their discretionary use of power and a range of distortionary policies that they can pursue, Acemoglu, Johnson, and Robinson (2005) argued that institutions of private property are more likely to endure. The likely implications of these is that it will constantly undermined the institutions and governance capacity that is meant to be crucial for economic performance of the region, and as such, the role of institutions would no doubt be constrained. Ultimately, the need to control for such discretionary use of power on the part of the state has also motivated the stance of the researcher on why the region has not fared better. Therefore, given the seemingly inelastic degree of responsiveness of economic performance of SSA countries, the problem that agitates the mind of the researcher is basically drawn to the attitude of sit-tight leaders in office. This has overly affected effective leadership as a result of the lack of or non-existence

 Role of Institutions and Governance on Economic Performance in Selected sub-Saharan African Countries

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