THE IMPACT OF REFORM ON THE
ECONOMIC GROWTH TRAJECTORY OF
SUB-SAHARAN AFRICA
Islam Abdelbary*
Assistant Professor of Economics at the Arab Academy for Science and
Technology, Alexandria 5310002, Egypt
I.abdelbary@aast.edu
Reception: 27/11/2022 Acceptance: 22/01/2023 Publication: 15/02/2023
Suggested citation:
A., Islam (2023). The Impact of Reform on the Economic Growth Trajectory
of Sub-Saharan Africa. 3C Empresa. Investigación y pensamiento crítico,
12(1), 226-241. https://doi.org/10.17993/3cemp.2023.120151.226-241
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ABSTRACT
The research examines why sub-Saharan African (SSA) nations have seen
unsatisfactory economic development by assessing the reform programmes
implemented during the last three decades. Based on an enhanced neoclassical
growth model framework generated from a dynamic panel for 12 African nations from
1995 to 2019 using data from the LSDCV dynamic panel. The findings revealed that
insufficient changes, particularly in governance and the institutional environment, had
been implemented. Stability in the macroeconomic environment, structural reform,
and physical infrastructure are all necessary for an efficient reform process and
development of the developing world's growth prospects. Reform implies that it is
political, social, and economical simultaneously. Political and economic reform should
be carried out in tandem.
KEYWORDS
Development, Sub-Saharan Africa, institutions, reform policy, panel data, Economic
growth
PAPER INDEX
ABSTRACT
KEYWORDS
1. BACKGROUND
2. LITERATURE REVIEW
3. METHODOLOGY
4. EMPIRICAL RESULTS
5. CONCLUSIONS
6. POLICY IMPLICATIONS
7. STUDY LIMITATION
REFERENCES
APPENDICES
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1. BACKGROUND
Sub-Saharan Africa (SSA) has lagged in growth performance and, consequently,
income per capita compared to other world regions or even other developing regions
[1]. There are also marked differences in income per capita across space and time in
SSA. For instance, over the period 1970-2013, the average income per capita of the
wealthiest state in the region, Seychelles, of US$ 7,100 was more than a factor of 54
of the poorest country, Ethiopia, whose average income per capita was only US$160.
Moreover, Africa's share in the global economy has dropped significantly during the
past 50 years regarding the gross domestic product (GDP), exports, and foreign direct
investment (FDI). For instance, its global GDP share declined from around 3.5% in
1950 to 2.5% in 2000 [2]. The decrease in Africa's share of world export and FDI is
even more drastic. Export as a percentage of world export fell from about 7% to 2% (a
70% fall), while FDI declined from 5.5% to 1% in the same period. The deterioration of
the continent's importance in the world economy appears in its global GDP share in
purchasing power parity (PPP) terms, which dropped by more than 40% between
1950 and 2000 [1].
These poor economic indicators led to a series of socioeconomic and political
reform programs in the 1980s. The domestic context for introducing policy reform was
the deepening economic crisis. These development procedures have been
implemented to improve the economic environment. These reforms included
exchange rate liberalization, tariff reduction, and suspension of 'subsidies' [3]. The
effects of these reforms were negligible. Paradoxically, the more African states
attempted to impose controls, the more their ability to influence and direct the
economy shrank as the informal economy expanded. The most important signal of
this loss of state capacity was the tax base's weakening [4].
Therefore, despite various reforms implemented in Sub-Saharan Africa, the region
has not experienced significant economic growth compared to other regions in the
world. The paper seeks to examine the impact of these reforms on economic growth
in the region and to determine the factors that contribute to the growth trajectory. This
research seeks to understand better the challenges faced by Sub-Saharan Africa in
achieving sustainable economic growth and help policymakers design more effective
growth-enhancing policies.
The paper is organized as follows; Section 2 presents the literature review; Section
3 describes the empirical model and estimation approach. Section three explains the
estimated results of the growth model, including different composite factors, followed
by conclusions and policy implications.
2. LITERATURE REVIEW
The post-independence growth experience of the SSA has been episodic. The
period from 1960 to the mid-1970s experienced high growth performance. However,
after 1975 there was a sharp deterioration in the SSA economies, with a fall in the
average annual per capita GDP growth rate of 1% during 1980-85. The decline
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continued reaching approximately 0.1%. Thus the 1980s could be considered as
"Africa's lost decade" [5]. The falling trend in real per capita incomes coincided with
widening domestic and external imbalances, climbing external debt burdens and debt
servicing difficulties, worsening the plight of economically and socially vulnerable
groups, sharp drops in world commodity prices and substantial losses in terms of
trade of SSA countries. Regarding trade, virtually all African countries' export earnings
were hugely concentrated on a few commodities, while for some countries,
government revenues relied heavily on export taxes.
These poor economic indicators led to a series of socioeconomic and political
reform programs in the 1980s. The domestic context for introducing policy reform was
the deepening economic crisis [6]. These development procedures have been
implemented to improve the economic environment. These reforms included
exchange rate liberalization, tariff reduction, and suspension of 'subsidies' [3]. The
effects of these reforms were negligible. Paradoxically, the more African states
attempted to impose controls, the more their ability to influence and direct the
economy shrank as the informal economy expanded. The most important signal of
this loss of state capacity was the tax base's weakening [4].
The reform record was weak and limped along. Several arguments have been
provided to explain this failure. Firstly, all SSA countries faced deep-rooted
developmental constraints, rapid population growth, low human capital development,
inadequate economic and social infrastructure, and structural rigidities. These factors
also impede the private sector's development [7-9].
For instance, Nga Ndjobo and Certo Simões [10] re-examined the relationship
between African institutions and the migration phenomena, specifically, the business
start-up regulations and the brain drain from (SSA) countries towards those in OECD.
They found that regulations controlling enterprise creation in SSA countries positively
and significantly contribute to brain drain towards OECD countries. Thus, setting up
regulations for effective enterprise creation may retain qualified individuals in Africa,
mainly entrepreneurs who have in sight the creation of their own businesses. In
addition, regulations, governance and the potential contribution of these
entrepreneurs should be taken into account in setting up integrated national
innovation systems in African countries. Abdelbary and Benhin [11] consistently
examined the factors affecting economic growth, focusing on the role of governance
based on a neoclassical growth framework for 97 countries. Results showed a
positive impact of human capital and investment on growth but a negative impact on
regulatory quality. Governance was found to have a significant positive effect on
growth in advanced economies but a negative effect in developing countries. The
study emphasized the importance of human capital and governance in improving
growth prospects and reducing political and economic instability.
Secondly, this economic reform regime's conditional nature, controlled by leading
donor countries, significantly inhibited attempts to remedy critical structural
deficiencies in these economies. The reform programs with the World Bank and IMF
institutions, especially the structural adjustment programs (SAPs) and poverty
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reduction strategy papers (PRSP), seem to have contributed to Africa's poor
economic performance [12].
Moreover, factors such as ethnic conflicts, political instability, unfavorable security
conditions, and protracted civil wars contributed to the region's dismal economic
performance before the mid-1990s. The ineffective national government management
of the mandated macroeconomic reforms was at the root of their failure. In nearly
every SSA country, these development strategies were associated with a particular
authoritarian regime type, referred to as "the development dictatorship". African
development dictatorships promised high economic performance and rising living
standards. In return, they gave themselves the right to maintain a centralized and
authoritarian governance system [13].
Leadership problems plague many SSA countries. Besides being authoritarian,
African leaders are noted for their high-level corruption and are in no position to
promote development [14]. By changing the state's constitution or rigging elections,
most African leaders continue to perpetuate themselves in office. For instance,
according to Luiz and Charalambous [14], only 7% of African leaders between 1960
and 1999 had left office via free election compared to 60% overthrown in a coup
d’état, war or by assassination with an average time in the office of 7.2 years
compared to 3.2 years in Europe. Corrupt elongation of office tenure has negatively
affected sufficient power, which is essential to building stable and efficient institutions
for good governance.
Bräutigam and Knack [15] argue that institutions in many SSA countries are weak
due to colonialism, which failed to develop domestic institutions to meet modern
states' demands. Acemoglu, Johnson [16] also suggest that Africa is more inferior
compared to the rest of the world due to European powers building "extractive
colonies". This means the colonialists launched institutions devoid of rules to enforce
accountability and transparency, a trend that has persisted even after political
independence. Currently, the state in many SSA countries is significantly influenced
by neo-patrimonial tendencies and poor policy choices, severely hindering state
capacity [17]. These repressive regimes were associated with a lack of efficient
political checks and balances systems. In addition, the absence of real electoral
democracies had significantly retarded the region's economic performance and was a
primary cause of the ineffective reform [18-20]
Furthermore, out of 26 African conflicts between 1963 to 1998, affecting 61% of the
continent's total population, seven were classified as inter-state, while 19 happened
within countries [14]. This political violence damages the state's capacity and destroys
any efforts for serious reform. Also, it disrupts physical and human capital, reduces
savings, diverts FDI from national economies, disrupts economic activities and leads
to adverse structural change in government expenditures from the provision of civic
services to military spending [21].
However, in recent years, especially starting from the mid-2000s, SSA economies
have experienced a persistent increase in economic growth. The notable performance
has been attributed to reduced conflict, slightly improved political stability, meaningful
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domestic economic reforms and a favourable foreign environment with more
integration into the global economy [22-24]. Besides, better commodity prices have
also been essential in driving growth.
3. METHODOLOGY
Based on the theoretical background of the Solow-Swan growth model and the
empirical approach following "Barro-type regression" [25], the new aggregated reform
indicators were generated using principal components analysis (PCA) to allow the
computation and categorisation of macroeconomic variables into four separate
groups.
These original indicators are: the Macroeconomic Stability (M) [26], the Business
Environment (B) [27], Infrastructure (F) [28], and Political Institutions (I) [29]. Besides
integrating the annual population growth rate (POPi,t), and the percentage of oil rent to
GDP (oili,t) to control variations in human and natural resource endowments across
countries.
Real GDP per capita growth is empirically stated as follows:
where, represents the economic growth rate in the country i at time t; ln
() is an N x 1 vector of logs of initial GDP; is the intercept, to , are
parameters for convergence and the principal components, and εi,t is the error term.
The study covered from 1995 to 2019 a host of economic, institutional and social
indicators for 12 Sub-Saharan African countries (SSA) based on the data availability
[30]. The sources of data include the World Development Indicators (WDI), the
Economist Intelligence Unit (EIU) CountryData, UNCTAD, World Statistical Database,
and the Worldwide Governance Indicators (WGI).
The analysis used the bias-corrected Least Square Dummy Variable (LSDVC)
technique to undertake 100 repetitions to bootstrap the estimated standard errors to
deal with endogeneity bias. This is applied because the generalised method of
moments (GMM) estimators is not the most suitable procedure and will be highly
unstable as the analysis period is relatively large compared to the number of
observations. The Least Square Dummy Variable (LSDV) estimator has a relatively
low variance and hence can lead to an estimator with a lower root mean square error
after the bias is removed [34, 35].
4. EMPIRICAL RESULTS
Before estimating the research model as in Eq.(1), Levin, Lin, and Chu (LLC) and
Im, Pesaran, and Shin (IPS) tests have been employed to determine each panel's
integration characteristics. The results as reported in Appendix 1, indicate that none of
the series has a panel unit root at the level, except for the Business Environment (B)
(Yi,t)=α0+φ1ln(GDPi,t−1)+θ1(Mi,t)+θ2(Bi,t)+θ3(Fi,t) +θ4(Ii,t)+θ5(oi li,t)+θ6(POPi,t)+εi,t(1)
Yi,t
α0
θ1
θ6
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series, which is stationary in the first difference, I (1). In addition, the Hausman test
was used to determine the significance of unobservable individual effects, indicating
that a fixed-effect simulation was appropriate instead of pooled OLS and random
effects, as in Appendix 2.
Regarding estimating a conditional convergence equation for economic growth in
SSA, Table 1, shows that Macroeconomic stability is highly significant and positively
related to economic growth. In particular, the components of inflation and deficit.
Empirical work such as Lin and Chu [36], Catao and Terrones [37] notes that fiscal
deficits are likely to be inflationary only in lower-income countries where the
restrictions on government borrowing are the most sharp. Especially in SSA, where
the role of supply-side shocks is very critical because of the massive weight of
agriculture in the GDP and the consumption basket, so variations of real GDP are
expected to be strongly affected by environmental conditions that determine the
quality of the harvest [38]. Inflation also shows a government's inability to balance its
budget; therefore, the uncertainty of inflation affects the investment decision of foreign
businesses [10, 39].
Concerning the Business Environment (B) indicator components, FDI plays a vital
role in SSA to encourage growth, as shown in col. (3) Table 1. In many respects,
Africa represents a frontier to global capital, seeking out new, growing and emerging
markets. While Africa is considered a tiny player in the international market, it will
attract foreign enterprises by addressing FDI-friendly policies.
African countries have seen an actual increase in FDI flows since 2000, which saw
FDI flows to the region more than double from an average of US$ 14.9 billion (2001–
2005) to US$ 30.3 billion (2006–2010). Also, SSA countries are an untapped market
of 850 million people, and the returns on investment are already substantially higher
here than anywhere else [40].
Table 1. Estimated panel data models for sub-Saharan African countries
(1)
FE
Basic
Model
(2)
Model
with M
(3)
Model
– with B
(4)
Model
– with P
(5)
LSDVC Model
with G
(6)
LSDVC
Model
– with G
Macroeconomic stability (M)
-0.701***
-0.76***
-0.64***
-0.489**
-0.547**
(0.216)
(0.179)
(0.178)
(0.224)
(0.221)
Exchange rate
-0.071
0.045
Deficit
-0.18**
(0.076)
Public debt
0.155
0.21
Inflation
-0.167**
(0.084)
Unemployment
-0.041
0.466
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Business Environment (B)
0.121
0.116
0.101
-0.009
-0.011
0.183
0.185
0.172
0.226
0.227
FDI
0.105*
(0.063)
Credit to the private sector
-0.086
0.149
Concentration index
0.014
0.219
Infrastructure (F)
0.247
0.243
0.051
0.161
0.428**
0.17
0.204
0.094
0.224
(0.257)
Improved water source
2.633***
(0.988)
Electricity for the population
-0.507
(0.299)
Improved sanitation facilities
-1.608
(0.913)
Governance (G)
0.204
0.284
Voice and accountability
0.799*
0.470
Political stability
-0.149
(0.319)
Government effectiveness
-0.975*
(0.525)
Regulatory quality
1.192***
(0.447)
Rule of law
1.384**
(0.661)
Control of corruption
-0.441
0.566
Initial GDP
-0.733
0.428
0.065
0.518***
-2.238***
-2.072***
0.971
0.601
0.154
(0.191)
(0.603)
(0.625)
population growth rate
1.146***
1.038**
0.616**
1.262***
0.464
0.56
(0.378)
(0.422)
(0.310)
(0.328)
0.514
0.522
Oil rent to GDP
0.04
0.036
0.018
0.065
0.016
0.017
0.054
0.054
0.046
0.044
0.061
0.064
lag GDP per capita growth real
0.223***
0.229***
(0.04)
(0.039)
F statistic
4.31
3.65
4.96
4.94
Adjusted R2
0.3
0.31
0.3
0.3
#observations
288
288
288
288
288
288
#Countries
12
12
12
12
12
12
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***, **, and * indicate that the coefficient is significantly different from zero at 1%,
5%, and 10%, respectively
For the Political Institutions indicators, it is worth noting that more governance
components are significant. The argument is that institutions are vital for the sustained
increase in growth in SSF. Col. (6) shows the effect of the rule of law index, capturing
a dimension of governance involving citizens' respect and the state for institutions that
govern both social and economic interactions. Its coefficient is positive and statistically
significant, with a one-standard-deviation change increasing income by 1.384. The
result is firmly in line with Dollar and Kraay [41] and Rodrik, Subramanian [42]. They
observed that the same index is positively associated with faster growth and higher
per capita income. Therefore, it is acknowledged that enforcement of basic
fundamental rights, such as human and property rights, can provide a conducive
economic environment for factor accumulation in SSA.
The second dimension of Political Institutions involving the government's capacity
to manage its resources and implement sound policies effectively is captured using
the regulatory quality index. Its coefficient is positively signed and statistically
significant, with a 1.192-factor improvement in income following a one standard
deviation change. In other words, adopting less distortionary and market-friendly
policies in trade and business is a stimulant for healthy competition and innovation,
which are crucial for meaningful and sustainable development.
Excellent institutional quality plays an essential role in the process of economic
development. A mixture of a firm rule of law, quality regulatory framework, and political
stability are essential ingredients that governments should emphasise and prioritise at
all stages of the development process, especially in SSA.
The more surprising finding in Table 1 is that neither the Infrastructure indicator nor
its components, except the improved water source, are statistically significant. This
outcome suggests that current levels and access to infrastructure in SSA countries
have no relationship with economic growth. However, after introducing the
governance indicators in col. (6), the infrastructure aggregate variable becomes highly
significant. The result is in line with previous literature that found that the institutions
and their quality boost economic growth determinants (e.g., Acemoglu, Johnson [43]).
Consequently, the results of an insignificant effect of infrastructure access on growth
might potentially be associated with Africa's relatively low institutional quality, which
might have made infrastructure-less effective as a growth catalyst.
Finally, infrastructure and institution coefficients explain why the SSA region's
growth performance has been unsatisfying. Mo [44] accentuates this relationship by
associating low growth with corruption. He demonstrated that corruption raises
investment costs and creates uncertainty about applying regulations for private
investors. Corruption increases public enterprises' capital and operation expenditures
of public enterprises, thus limiting private investment through insufficient and low-
quality infrastructure [45]. The same outcomes have been drawn about the role of
bureaucracy in businesses [46]. Furthermore, the above finding is consistent with
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Oyelere (2010) study, as he explained that Sub-Saharan Africa did not experience
significant development because of a combination of inferior technology, bad
governments, extractive institutions, ineffective policy choices, health crises and poor
education.
5. CONCLUSIONS
The current study has confirmed that sub-Saharan African economic performance
is improving, and it has highlighted numerous explanatory variables that have notably
and favourably affected the post-2000 growth level. However, these rates are still
insufficient to allow sub-Saharan African countries to catch up with other emerging
economies. This paper seeks to address the possible explanation of why the region's
growth performance has been unsatisfactory.
The findings of this study provide important insights into the drivers of economic
growth in Sub-Saharan Africa (SSA). The results suggest that several key
macroeconomic, business environment, infrastructure, and political institution
indicators are significant determinants of economic growth in the region.
The analysis showed that Sub-Saharan African economies must significantly raise
their real GDP per capita growth rate on a sustainable basis to be at least par with
other developing countries. The regression results indicate that macroeconomic
stability should play a vital role in the economic recovery of several Sub-Saharan
African economies. It will also be essential to attract an increased inflow of FDI to
sustain and broaden sub-Saharan economic growth performance. This can be
accomplished by creating a favourable environment for private investment using
appropriate macroeconomic policies, ensuring the availability of infrastructure needed
and skilled workers and establishing and maintaining an efficient regulatory and
justice system that adequately protects property rights.
Macroeconomic stability is one of the critical ingredients of economic growth. The
theoretical framework discussed earlier has shown that the macroeconomic
environment significantly accelerates economic growth and development. Therefore,
sub-Saharan African governments must implement sound monetary and fiscal policies
to sustain the growth acceleration episode, which started in the mid-1990s. Reducing
the inflation rate and overall deficit may have influenced the recent economic growth
acceleration favourably. Therefore, policies and measures that reduce inflation and
overall deficit must be sustained to maintain the current economic growth
acceleration. Government borrowing from the domestic economy must be limited to
provide greater scope for the private sector's bank financing.
The results reveal that the Political Institutions indicators play a crucial role in
economic growth in SSA. The rule of law index, which captures citizens' respect for
institutions that govern both social and economic interactions, is positively and
significantly associated with income. The regulatory quality index, which measures the
government's capacity to manage its resources and implement sound policies
effectively, is also positively and significantly associated with income. These findings
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align with previous literature and highlight the importance of governance quality in
promoting economic growth.
The results also show that the infrastructure aggregate variable is insignificant until
the governance indicators are introduced. This suggests that current infrastructure <