INSTITUTIONAL QUALITY, GOVERNMENT EXPENDITURE, AND THE PERFORMANCE OF SUB-SAHARA AFRICAN COUNTRIES: A TRI-DIRECTIONAL ANALYSIS

ABSTRACT

The aim of this study was threefold. First, the study scrutinized the role of government spending on output growth for SSA countries. SSA countries’ economic growth has been low compared to other developing regions. Empirical evidence has shown that government expenditure is a significant driver of output growth. However, SSA economic performance has largely lagged despite the increase in government expenditure. The second objective assessed the role of institutions on economic growth, while the analysed the role of institutional quality on growth among Sub-Saharan countries. The issues of institutional quality have been considered to be fundamental in explaining income variation across countries. In line with the search for the real determinant of economic growth, this work sought to analyze the tri-variate relation existing among institutional quality, government expenditure and economic growth, using a panel data analysis for 48 SSA countries 2005 to 2020. The study found a positive and significant relationship between some institutions indicators, on economic growth whereas political institutions showed a negative and insignificant effect on economic growth. Also, the empirical findings reveal a very positive and significant impact of government expenditure on economic growth and finally, structural policy institution was found to impact positively on the government expenditure outcomes throughout the period of study. Based on the findings, the study recommends a concerted effort towards sanitizing the various institutions to improve on the policy making and execution of the various countries and by implication increase economic growth in countries. Also, governments should channel their public expenditure endeavors towards the productive sector (Education, Health etc) and on the provision of the requisite developmental infrastructures. Finally, institutions play a vital role in the achievement of sustainable growth and development to come before recommendations.

TABLE OF CONTENTS

Cover Page

Title Page

Declaration

Certification

Dedication

Acknowledgements

Table of Contents

List of Tables

List of Figures

Abbreviation And Ancronyms

Abstract

CHAPTER ONE

Introduction

1.1  Background of the Study

1.2 Statement of the Research Problem

1.3 Objectives of the Study

1.4 Statement of Hypotheses

1.5 Significance of the Study

1.6 Scope of the Study

1.7 Organization of the Study

CHAPTERTWO

Literature Review

2.1 Conceptual Issues

2.1.1 Government Expenditure and Economic Growth In Sub-Saharan Africa

2.2 Theoretical Review

2.2.1Wagner’sOrganicStateTheory

2.2.2KeynesianTheory

2.2.3 Crowding Out Theory

2.2.4 Neo-Classical Theory of Growth

2.2.5 Endogenous Growth Theory

2.2.6 Theoretical Model

2.3 The Efficiency of Public Spending In Sub-Saharan Africa

2.4  Institutional Quality And Economic Growth In Sub-Saharan Africa

2.4.1 Theoretical Model

2.5 Empirical Review

2.6 Summary Of Related Studies

CHAPTERTHREE

Research Methods

3.1 Research Design

3.2 Nature and Sources of Data

3.3 Definition and Measurement of Variables

3.4 Models Specification

3.5 Methods of Data Estimation

3.5.1 Panel Unit Root

3.5.2 Co-Integration Test

3.5.3 Granger Causality Test

3.6 Diagnostic Tests

3.6.1 The Hansen J-Statistic Test of Over-Identifying Restrictions

3.6.2 Arellano and Bond Test of Hypothesis

3.6.3 F-Test of Joint Significance

CHAPTERFOUR

Presentation and Analysis of Results

4.1 Descriptive Statistics

4.2 Pre-Diagnostic Test

4.2.1 Panel Unit Root Test

4.3 Econometrics Results

4.3.1 The Effect of Government Expenditure  on Economic Growth In SSA.

4.4 Discussion of Findings In Relation to Framed Hypotheses

4.4.1 Evaluation of Findings With Respect to Hypotheses 1

4.4.2 Evaluation of Findings With Respect to Hypotheses 2

4.4.3 Evaluation of Findings With Respect to Hypotheses 3

CHAPTERFIVE

Summary, Conclusion And Recommendations

5.1 Summary

5.2 Conclusion

5.3 Recommendations

5.4 Contribution to Knowledge

5.5 Implications for Future Research

References

Appendix 1:AverageGrowthRateForSsaCountries

LIST OF TABLES

Table 1.1 Presents GDP Growth Rate Across World Economic Regions from 1969 to 2020

Table 2.1:Growth-Categories of Countries In SSA (1990-2019)

Table2.2: Property Rights and Rule-Based Governance Indicator

Table 2.3: Summary of Literature Review

Table 3.1: List of Sub-Saharan African Countries

Table 3.2 Definition And Measurement of Variables

Table 4.1: Summary Statistics

Table 4.2: Correlation Matrix

Table 4.3: Unit Root Test (Augmented Dickey Fuller Test)

Table 4.4: Model Estimation Results (Model One)

Table 4.5: Model Estimation Results (Model Two)

Table 4.6: Model Estimation Results (Model Three)

LIST OF FIGURES

Figure 1: Trends of GDP Per Capital

Figure2.1: Government Expenditures In Developing Regions,1982-2020

Figure 2.2: Efficiency of Government Spending

ABBREVIATION AND ACRONYMS

ARDL Autoregressive Distributed Lag

CPIA Country Policy and Institutional Assessment

DEA Data Envelopment Analysis

EBA Extreme Bound Analysis

ECM Error Correction Method

EU European Union

FDH Free Disposal Hull

FE Fixed Effect

GDP Gross Domestic Product

GMM Generalized Method of Moments

GNI Gross National Income

IMF International Monetary Fund

OECD Organization for Economic Cooperation and Development

OLS Ordinary Least Square

PRs Property Rights

PSE Public Sector Efficiency

PSP Public Sector Performance

R&D Research and Development

RE Random Effect

SDGs Sustainable Development Goals

SSA Sub-Saharan African

SUR Seemingly Unrelated Regression

UCM Unobserved Components Methodology

WDI World Development Indicator

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The effect of government expenditure on cross country income variation has elicited considerable  interest in the past decades  (Adeleye, Gershon, Ogundipe, Owolabi, Ogunrinola and Adediran, 2020; African Development Bank, 2020).Government intervention in the economy is necessary because private markets do not produce efficient outcome. Therefore, market failure defined by externalities,   incomplete markets, information asymmetry and public goods necessitates government intervention through fiscal policy (African Union and OECD, 2021). Government involvement in the economy through public spending could either enhance or retard economic growth.

Literature that explored the effect of spending on output growth have largely remained ambiguous. One strand of literature posits that productive spending accelerates growth while unproductive spending is growth retarding (Landau, 1985; Ram, 1986;  Alekhina and Ganelli, 2020; Apiko, Woolfrey and Byiers, 2020).However, most of Sub-Saharan African (SSA) countries have experienced dwindling economic performance since independence despite increase in government expenditure (Ghura & Hadjimichael, 1996;Gyimah-Brempong&Traynor,1999; Argent and Begazo, 2015; Ayegba, 2015; Balistreri,  Maliszewska, Osorio-Rodarte, Tarr and Yonezawa, 2018).

Government expenditure policies that maintain sustainable economic growth remain key objective that governments pursue. Efficient resource allocation, distribution and stabilization are also important in the   realization of fiscal discipline that improves the economic growth of a particular country (Afonso et al., 2006). A sound fiscal policy significantly contributes to stable economic environment which creates expectation in the economy which foster long run income growth of a country(Afonso,SchuknechtandThone,2005; Cournède, Jean-Marc, and Peter, 2018).

SSA countries have experienced underdevelopment and low economic growth. This perception is supported  at  the   aggregate level by  low average income per person and low average growth rates of income over the last several decades (Garner, 2006; World Bank, 2018).

Table1.1 presents GDP growth rate across world economic regions from 1969 to 2020

Table1: GDP   growth across world regions

Source: World Development Indicators, GDP growth (annual percent), 2021.

Table 1.1 illustrates that over the period 1969-1979; SSA GDP growth rate averaged 4.77percent which is slightly higher than both the world annual growth rate and South Asia countries. However, between 1980 and 1999, SSA recorded an average GDP growth rate of1.711 percent. This implies that SSA was falling further behind the South Asian region and the OECD countries. However, the period from 2000 to2020, Sub-Saharan Africa recorded an improvement in GDP growth, but this was still below the South Asian countries’ growth rate.

In explaining slower economic growth in SSA, Graner (2006) postulates that lower capital  formation  and lower secondary school enrolment, and higher population growth rates explain poor economic performance in SSA. Artadi  et al. (2004) and Amusa &  Oyinlola, (2019).  assert that high fertility rate; low education level and low investment rates contribute to dwindling economic growth in SSA. Despite the   low investment rates in   Africa relative to other undeveloped regions,  low investment in itself cannot explain the slow output growth. This is because the productivity of investment in Africa is low (Devarajanetal.,2003).

Sachsetal .(1997) in contrast argued that SSA’ s slow economic growth is attributed to Dutch-

disease, limited access to oceans, misaligned trade policies, inadequate savings, lack of market-supporting institutions and demographic factors.  SSA can only experience good economic performance if the problem of Dutch-disease costs and prevalence of disease and lower life expectancy are addressed (Sachsetal., 1997).

Various studies have explained the poor economic growth in SSA. Macroeconomic policies that encourage human capital development and lower population growth can stimulate African economic growth (Ghura &  Hadjimichael, 1996). However, low human development, low investment   rates or high population   growth rate cannot entirely contribute to poor economic growth in SSA. Higher investment alone in Africa would not enhance faster GDP growth (Devarajan , Easterly, & Pack, 2003; Dreher, Fuchs, Parks, Strange, & Tierney, 2021). According to Devarajan (1996), a country’s economic performance depends on whether it adopts productive or unproductive public expenditure

What could be the possible causes of poor economic growth in SSA? Governance has been cited by many authors to be the root cause of Africa’s poor performance. For example, high degree of ethnic and linguistic diversity found in most African nations contributes to poor governance and low growth (Easterly & Levine, 1997). Allocation of public resources alone may not necessarily result to efficient outcome if institutions entrusted with the budgetary process are not optimal in resource allocation (Rajkumar  &  Swaroop, 2008).  This illustrates those poor institutions contribute   significantly   to   low income in SSA which discourage growth.

Despite poor economic performance of SSA countries, Botswana is an example of success story   in Africa. WDI (2000) showed that Botswana had income per capita of $5,796 in 1998, which was almost four times average African income per capita. For the   periods 1965 to1998, Botswana’s income per capita grew 7.7 percent annually (WDI 2000). According to Acemoglu,   Johnson and Robinson (2002), Botswana achieved robust economic growth because it embraced better institutions than other African countries. Good Institutions provide an environment for property rights (PRs) protection, enhance political stability and cushion   investors   against interference from political elites. In contrast, Democratic Republic of   the   Congo  (DRC)despite having large mineral deposits has remained  underdeveloped. Therefore, poor governance arising from corruption   that   distorts  economic  incentives, can   lead to low investment and the inefficient use of resources (Udah, & Ayara, 2015).

The problem then is seen not as one of the resource constraints in SSA but rather institutional   weakness and poor policies. Institutional quality includes civil and political liberties, extent of corruption, political stability, public sector efficiency, regulatory framework and economic   freedom. Governance should be seen as a function of the country’s institutions which implies that good institutions translate into good governance and policies, transparency and accountability. This paves way to allocation efficiency and visionary leadership.

According to Vitola, & Senfelde (2015) institutional checks and balances that renew policy makers through elections cushion the economy against corruption and misallocation of resources. Institutions that embrace democracy are believed to enhance economic prosperity by providing an environment that protects PRs and it also nurtures civil rights. This therefore provides economic players with incentives to undertake investment which consequently enhances economic growth. The  mixed economic activity outcome in SSA therefore suggests that economic growth is determined by the strength of institutional variables.

1.2 Statement of the Research Problem

Several research papers that involve output growth and government expenditure for SSA have been conducted. The findings have remained inconclusive on whether spending significantly retards or enhances output growth. The decline in output growth resulting from state spending is attributed to crowding out phenomenon. Provision of public goods through domestic borrowing could lead to a decrease in private sector. However, this understanding of crowding out does not consider the efficacy of public expenditure (Rajkumarand Swaroop,2008; Fasan, 2018; Iheonu, Ihedimma and Onwuanaku, 2018). In contrast, it is argued that resources alone are not egough but the institutional capacity i.e., nature of structure and policies and institutional quality are also important drivers for economic growth.

Existing empirical research which analyzed the function of institutional quality on outpu growth in SSA have produced conflicting results (Fuje, 2008; Olutwatyin and Folassade,2014; Kilishi et al., 2013). However, institutional quality, public expenditure and economic growth are interlinked. Understanding how public spending impact economic growth and exploring the role institutions play on growth is important for various reasons. The findingwilladdtoliteratureontheroleinstitutionalqualityplaysonoutputgrowthinSSA.Additionally, if institutional quality influences economic growth, then government decision making unit should shift their focus to policies that strengthen institutional variables and institutional reforms in SSA. Lastly, knowledge on the status of efficiency and sources of in efficiency of government spending is important for government in designing programs that realize optimal resource allocation.

1.3 Objectives of the study

The core objective of this study is to implicitly investigate the relationship between institutional quality, government expenditure and the performance of Sub-Sahara Africa countries. The specific objectives of this thesis are to:

i. examine the relationship between government expenditure and economic growth in SSA

ii. investigate the relationship between institutional quality and government expenditure in SSA

iii. ascertain the relationship between institutional quality and economic growth in SSA

1.4 Statement of Hypotheses

iv. There is no significant relationship between government expenditure and economic growth in SSA

v. There is no significant relationship between institutional quality and government expenditure in SSA

vi. There is no significant relationship between institutional quality and economic growth in SSA

1.5 Significance of the study

Researchers and policy makers around the globe are concerned with the poor output growth witnessed in SSA despite the increase in government expenditure. Various remedies have been proposed ranging from strengthening institutions, offering economic stimulus and productive spending that reduces wastages. However, SSA growth prospect has remained dimmed compared to other economic regions.

1.6 Scope of the Study

This study will be a panel analysis on the relationship between institutional quality, government expenditure and performance of countries within Sub-Saharan Africa. The data will span from 2005 to2020 and this is owing to the availability of data. The variables to be considered are government expenditure, public debt, institutional quality indicator, Gross Domestic Product, and institutional quality dataset. 

1.7 Organization of the Study

This study is divided into five chapters. Chapter one consists of the introduction to the study. Chapter two covers the literature review. Various research work related to the study will be examined with a remarkable conclusion drawn from them. Chapter three is the research methodology which presents different statistical and econometric tools used to test the hypothesis of the model. Chapter four discusses the data presentation and the analysis of result generated from the research. Chapter five takes the account of the summary and conclusion, main contributions of the Study, policy implications and recommendations, limitations of the study and suggestions for further research.