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Institutions, Governance and Economic Development in Africa: A Review

By

Augustin Kwasi FOSU

Deputy DirectorUN University-WIDER

Helsinki, Finland

Presentation at the European Development Institute

Workshop on ‘Transforming Structures: Security, Institutions, and Regional Integration Mechanisms’

Florence, Italy, 16-17 April 2009

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Outline• Introduction• SSA Economic Development Performance• Governance/Institutions =? • SSA Governance/Institutional Performance• The New Institutional Economics and Development• Political Institutions and Developmental Governance• Political Accountability, Disorder and Growth• Political Instability and Growth in SSA• Institutional Quality and the Resource Curse• Ethnicity, Gov./Institutions and Econ Performance• Gov./Institutions and Transforming Growth to Dev.• The Challenges and Conclusions

– The Policy Syndromes: SF vs. SB– Does governance/institution matter?– Is democracy the answer?– The political incentive challenge!

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Introduction

• Explaining the African Development Record – Colonial institutions (Acemoglu et al., 2001, AER) – Geography (Bloom and Sachs, 1998, BPEA)– Institutions rule! (Rodrik et al., 2004, JEG) – Slave trade (Nunn, 2008, QJE) – SSA sample– Malaria rules! (Bhattacharyya, 2009, JAE) – SSA sample

• The (AERC) Growth Project– Policy syndromes (PS) have been a major deterrent to growth (PS= state controls; adverse redistribution; sub-opt. inter-temp

allocation; and state breakdown; complement = syndrome-free)– PS may be endogenous to governance and institutions– Publications: Fosu & O’Connell (2006, ABCDE); Ndulu et al.,

(2008a,b, Cambridge)

Economic Development, SSA vs. World(Evolution of PC Income, US$)

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GDP per capita (constant 2000 US$), 1960-2007

SSA

World

0

1000

2000

3000

4000

5000

6000

7000

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

$

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Economic Development, SSA vs. World (2)(Evolution of PC Income, PPP)

GDP per capita, PPP (constant 2005 int´l dollars), 1980-2007

SSA

World

0100020003000400050006000700080009000

1000019

80

1983

1986

1989

1992

1995

1998

2001

2004

2007

$

Economic Development, SSA vs. World (3)(Evolution of PC Income Growth )

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GDP per capita growth, 1961-2007

SSA

World

-5

-3

-1

1

3

5

7

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

%

Economic Development SSA vs. World (4)(Evolution of Life Expectancy )

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Life Expectancy at Birth (yrs.), 1960-2006

SSA

World

010203040

50607080

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

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SSA Economic Development Level, Top 10

2007 2006 2006 GDP per capita, PPP Life expectancy Infant Mortality

Eq. Guinea (28923) Mauritius (73) Mauritius (13) Gabon (14325) Mauritania (64) Namibia (45)

Botswana (12664) Comoros (63) Eritrea (48) Mauritius (10647) Senegal (63) Comoros (51)

South Africa (9191) Ghana (60) South Africa (56) Angola (5161) Gambia (59) Senegal (60)

Namibia (4883) Madagascar (59) Gabon (60) Swaziland (4639) Togo (58) Sudan (61)

Congo, Rep. (3316) Sudan (58) Zimbabwe (68) Cameroon (2005) Eritrea (57) Togo (69)

SSA Mean 1865 50 94

SSA Median 1201 51 89

SSA Economic Development Level, Bottom 10

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2007 2006 2006 GDP per capita, PPP Life expectancy Infant Mortality

Ethiopia (736) Rwanda (46) Mali (119)Malawi (713) Liberia (45) Guinea-Bissau (119)

CAR (674) CAR (44) Burkina Faso (122)Sierra Leone (639) Lesotho (43) Eq. Guinea (124)

Niger (592) Zimbabwe (43) Chad (124)Eritrea (491) Mozambique (42) Congo, Dem. Rep. (129)

Guinea-Bissau (451) Angola (42) Niger (148)Liberia (338) Sierra Leone (42) Angola (154)

Burundi (322) Zambia (42) Liberia (157)Congo, Dem. Rep. (282) Swaziland (41) Sierra Leone (159)

SSA Mean 1865 50 94

SSA Median 1201 51 89

Institutions and Governance =?

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• Governance -The processes of decision-making and implementation (political and economic), e.g., democratic governance as measured by electoral competiveness

• Institutions – ‘The rules of the game…or humanly devised constraints that shape human interaction…’(North, 1990: 3-5) (market, non-market; economic, political, sociological, etc.), e.g., rule of law, constraint onthe executive.

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Governance/Institutional Evolution, SSA vs. World Index of Electoral Competitiveness (IEC)

IEC, 1975-2006

IEC_World

IEC_SSA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

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Governance/Institutional Evolution, SSA vs. WorldExecutive Constraint (XCONST)

XCONST, 1960 - 2007

XCONST_World

XCONST_SSA

XCONST_China

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Governance/Institutional Evolution, SSA vs. WorldRule of Law

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Rule of Law, 1996 - 2007

Rule of Law _SSA

Rule of Law _World

Rule of Law _China

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

19

96

19

98

20

00

20

02

20

03

20

04

20

05

20

06

20

07

SSA Governance/Institutional Indicators, Top 10 performers

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2007 2007 2006 XCONST Rule of Law IEC

Botswana (7) Swaziland (0.79) CAR (7) Comoros (7) Mauritius (0.76) Chad (7) Lesotho (7) Botswana (0.62) Comoros (7)

Mauritius (7) Ghana (0.40) Ghana (7) South Africa (7) Namibia (0.32) Guinea-Bissau (7)

Kenya (6) South Africa (0.26) Ivory Coast (7) Liberia (6) CAR (-0.28) Kenya (7) Malawi (6) Ethiopia (-0.28) Liberia (7)

Senegal (6) Benin (-0.30) Madagascar (7) Sierra Leone (6) Lesotho (-0.30) Malawi (7)

SSA Mean 4.05 -0.78 5.98

W’ld Mean 4.92 0.00 6.09

SSA Governance/Institutional Indicators, Bottom 10 performers

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2007 2007 2006 XCONST Rule of Law IEC Cameroon (2) Congo, Rep. (-1.38) Uganda (6)

Chad (2) Guinea-Bissau (-1.39) Burkina Faso (5)Congo, Rep. (2) Rwanda (-1.45) Burundi (5)

Eq. Guinea (2) Sudan (-1.46) Eq. Guinea (4.5)Eritrea (2) Cameroon (-1.50) Sudan (4)Gabon (2) Angola (-1.53) Swaziland (3)

Gambia (2) Ivory Coast (-1.68) Angola (3)Sudan (2) Congo, Dem. Rep. (-2.06) Eritrea (2)

Swaziland (2) Somalia (-2.10) Congo, Dem. Rep. (1.5)Togo (2) Liberia (-2.27) Mauritania (1.5)

SSA Mean 4.05 -0.78 5.98W’ld Mean 4.92 0.00 6.09

he New Institutional Economics and Economic Development

• The ‘New Institutional Economics’– Institutions, especially political ones, are key to economic

development– Institutions should provide incentives for developmental

governance leading to optimal development outcomes

• Corollary: Institutions represent a potential antidote to the post-independence personalized political authority of a patron-client relationship – ‘neo-patrimonial governance’.

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Political Institutions and Developmental Governance in SSA (Alence, 2004, JMAS)

• Democratic institutions greatly improve ‘developmental governance ’ (p. 176): economic policy coherence (free market), public-service effectiveness, & limited corruption

• Democratic contestation (i.e., unrestricted political contestation with meaningful executive restraints) considerably improves dev. governance quality, mainly through a reduction in corruption

• Executive restraints greatly improve dev. governance quality, mainly via economic policy coherence and public-service effectiveness

• Restricted political contestation has little direct impact on dev. governance

• Political contestation and executive restraints are reinforcing in positively influencing dev. governance quality

• Executive restraints improve dev. governance even if there is little political contestation

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Political Accountability, Political Disorder and Growth in SSA (Bates, 2006, JAE)

• Political contestability (PC) intended for political accountability and hence developmental governance

• PC need not be growth-enhancing, however, for:

• 1. Political accountability may lead to growth-adverse policies

• 2. PC likely to result in political disorder

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Political Instability and Growth in SSA

• Institutional arrangement rendered the military the only real check for executive authority, resulting in elite PI (EPI) (Fosu, 2008a, Camb.)

• EPI was rampant in SSA during post-independence (McGowan, 2003, JMAS), thanks to available rent opportunities (Kimenyi & Mbaku, 1993, Pub Choice; Fosu, 2003, JDS)

• EPI has been adverse to growth (Fosu, 1992, EDCC; 2002, JDS; 2001, AJES; Gyimah-Brempong &Traynor, 1999, JAE)

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Institutional Quality and the Resource Curse

• The ‘resource curse’ (RC) is primarily an institutional-quality problem (Mehlum et al, 2006, EJ)

• RC is alive and well in African economies primarily via fostering conflict and bad governance (Collier & Hoeffler, 2005, JCR), which can be adverse to growth (Collier & Hoeffler, 1999, OEP)

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Ethnicity, Governance/Institutions and Economic Performance

• Democracy (political rights) can reduce the negative growth effect of ethnic diversity (Collier, 2000, E&P)

• Higher institutional quality limits the adverse growth impact of ethnic diversity (Easterly, 2001, EDCC)

• Executive constraint (XC) mitigates the pernicious effects of ethnic diversity in SSA via its ability to reduce policy syndromes and raise TFP (Fosu, 2009, CSAE Conf.)

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Governance/Institutions and Transforming Growth to Development

• EPI reduces the rate at which growth is transformed to human development (HD) – HDI & non-income components of HDI - in SSA (Fosu, 2002, ODS; 2004, AJES)

• Democracy raises HD – L Exp & Literacy - even when PC GDP is accounted for (Vollmer & Ziegler, 2008, mimeo)

• Democracy increases the rate at which growth is transformed to HD – HDI & L Exp - in SSA (Fosu, 2005, mimeo)

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The Challenges and Conclusions SF vs. SB (note: unadjusted rel. frequencies)

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Evolutions of Syndrome-free and State Breakdown regimes, 1960-2000 (%)

SF

SB0

102030405060

1960

-65

1966

-70

1971

-75

1976

-80

1981

-85

1986

-90

1991

-95

1996

-00

SF

051015202530

SB

The Challenges and Conclusions (2)Raising SF while lowering SB

1.ncrease SF (0.27), i.e., free from :•tate Controls (0.33)•dverse Redistribution (0.21)•uboptimal Inter-temp Allocation (0.08) •State Breakdown (0.10)

. Decrease the likelihood of SBFosu / UNU-WIDER

Challenges and Conclusions (3)Might governance/institutions help?

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Evolutions of Syndrome-free (SF) and Executive Constraints (XC), 1960-2004

SFSF

XCXC

0102030405060

1960

-65

1966

-70

1971

-75

1976

-80

1981

-85

1986

-90

1991

-95

1996

-00

2001

-04

SF

(%

)

1.0

2.0

3.0

4.0

XC

The Challenges and Conclusions (4)How can governance/institutions help?

•olitical contestation raises accountability but need not increase growth & dev (G&D) (Bates, 2006, JAE)•emocracy (p rights) can increase G&D by reducing the negative effect of ethnicity (Collier, 2000, E&P)•C may raise G&D via increasing developmental governance: econ. policy coherence & public-service effectiveness (Alence, 2004, JMAS)•educing PI can increase the transformation rate of growth to HD (Fosu, 2002, ODS; 2004, AJES)•dvanced electoral contestation can raise G&D (Fosu, 2008, EL)

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The Challenges and Conclusions (5)Is democracy the answer?

• ‘Good governance’ (developmental governance) appears necessary for G&D

• But is democratization desirable for G&D?• That depends on the level of democracy and the

likelihood of transcending the threshold • Country-specific institutional factors should matter for the

optimal strategy• XC seems more critical than pol. contestation per se• Meanwhile, assistance needed for countries to transcend

the threshold, including incentives for political agents

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The Challenges and Conclusions (6)A political incentive challenge!

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THANK YOU !