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Africa’s Development Path The Role of Institutions

In the last two decades, Africa’s economic performance has garnered perhaps more scepticism than optimism. Since decolonization, economic growth dynamics have varied quite significantly across African countries. In the 60s and 70s, many African countries experienced sustained growth, however, growth rates were still low relative to other parts of the world. But by the late 70s, following the global oil crisis, economic climates across the continent began to deteriorate.

In a paper published in 2002, Bertocchi and Canova estimate that, for the period 1960-1973, the average economic growth rate in Africa was 2 per cent, whereas the world average was 3 per cent, and the average for the OECD was 4.2 per cent. A 1991 paper also finds evidence that Sub-Saharan Africa (SSA) nations experienced lower growth rates relative to other parts of the world between 1960 and 1985.

In the mid 90s, however, economic tides appeared to change. According to Arbache and Page, the average GDP per capita for the SSA region grew from -0.07 per cent during 1975-94 to just below 2 per cent in 1995-2005. Much of the improvement was ascribed to there being fewer episodes of (severe) economic downturns and faster growth in mineral-rich countries. Non-resource rich countries, however, also experienced more episodes of growth between 1995 and 2005, and this positive growth trend persisted. Between 2001 and 2010, The Economist reports, 6 of the 10 fastest growing economies were in Sub-Saharan Africa. According to The Economist, the economies of countries such as Nigeria, Ethiopia and Mozambique grew at more than 7 per cent annually between 2001 and 2015. Although the pace of growth across the continent slowed down in 2016 due to domestic and external shocks, the continent’s recovery has been quite robust, with overall growth expected to accelerate. This generally positive growth outlook over much of the last two decades might suggest that Sub-Saharan Africa’s economic fortunes may be on an upward trajectory, with economic development to follow closely.

The Stark Realities of African Growth

Despite what appears to be an upward trajectory in economic growth across Sub-Saharan Africa, there are questions as to whether this growth is sustainable. Arbache and Page, for instance, find little evidence that the fast growth that occurred between 1995 and 2005 was associated with the typical factors that correlate with long run growth such as investments, macroeconomic management, and policy and institutional reforms. In addition, the authors find that governance indicators for Sub-Saharan Africa have been declining since 1996, particularly in resource-rich countries. This suggests that growth in these countries may not be sufficient to improve governance outcomes. Other stark realities are also worth considering. The GDP per capita of many African countries is still quite low compared with other parts of the world. Also, although poverty in Africa has declined from 56 per cent in 1990 to 43 per cent in 2012 according to the World Bank, population growth meant there was a concurrent increase of 100 million people in extreme poverty. In addition, the World Bank projects that, by 2030, the world’s extreme poor will be concentrated in Africa.

Resource-rich economies such as Nigeria, Angola and Sierra-Leone, are also susceptible to the “resource curse”, a term used to describe the poor economic performance of this group of countries relative to non-resource-rich countries. Although Economists have suggested that the resource curse is a thing of the past, a 2006 paper by Mehlum and colleagues attests to its persistence. In 2007, Okonjo-Iweala and Osafo-Kwaako argued that Nigeria has been marked by widespread corruption, economic stagnation and rising poverty, which are common features of low development. Despite being one of Africa’s largest economies, poverty is rising in Nigeria, which earlier this year, overtook India as the country with the largest concentration of extreme poverty in the world.

Institutional Explanations for Growth

Loayza and colleagues, among other researchers, have examined another issue facing many developing countries, that of macroeconomic volatility. Economists typically associate wild swings in a country’s GDP per capita growth with lower per capita growth on average. In their paper, the authors suggest that these swings are worse in poor countries; in countries that lack complex financial institutions; and in countries where fiscal policy adjusts with—as opposed to against—business cycles. In such cases, fiscal policy is “pro-cyclical”; and while fiscal policy is generally countercyclical in developed countries, meaning government spending decreases in good times and increases in bad times, it tends to operate on the reverse in developing countries. Pro-cyclical fiscal policies are typically not optimal because they enhance booms and deepen recessions. Given these issues, a few pertinent questions can be raised: Why have many African countries been unable to achieve higher incomes per capita? What generates a resource curse? And finally, why would a country pursue undesirable policies which would generate adverse economic outcomes such as macroeconomic volatility?

Strong evidence suggests that the answer to all three questions is bad institutions. Institutions can be described as man-made constraints on human interaction. Based on this definition, two important features of institutions emerge as detailed by Acemoglu and Robinson in a 2004 paper. Institutions are man-made, and they take effect through incentives. Furthermore, Acemoglu and Robinson contend that differences in economic institutions are the main determinant of income differences across countries. Economic institutions include the structure of property rights and functioning markets, and the incentives institutions create influence economic outcomes such as growth and development. When economic agents have no incentive to invest in human and physical capital, low growth ensues. The structure of property rights and functioning markets, in particular, also depend on two other institutional characteristics: political institutions, i.e. the type of government and the degree of constraints on politicians; and the distribution of political power. As a result, these three characteristics also indirectly determine economic outcomes. Ultimately, institutions, through their effect on the incentives of economic players, matter for economic development, poverty and inequality.

Historical dynamics can explain the nature and complexity of institutions in Africa. Specifically, the poor state of institutions across many African countries is not a recent development but one that emerged over centuries, possibly preceding but reinforced by colonization. In a 2010 paper, Acemoglu and Robinson claim that Africa lagged behind other parts of the world in creating centralized states, and when centralization did occur across the continent, it was marked by absolutist or patrimonial rule. The authors argue, in certain societies, the institutional contexts that existed prior to colonization were ratified by the colonial encounter. Furthermore, that in regions where the disease environment was not conducive to European settlement, such as in Africa, the Caribbean and Latin America, Europeans set up “extractive institutions” that were devised to extract resources. In this way, colonization led to economic reorganization and worsened post-independence prospects for economic growth.

That colonization had a negative impact on economic development in Africa is a view many Economists, including Bertocchi and Canova, share. The authors find that former “colonies”, in contrast to countries that did not face explicit colonial rule, suffered adverse fates in their post-colonial development experiences (this view is, for instance, supported by Okonjo-Iweala and Osafo-Kwaako, who, with reference to Nigeria, highlight the negative effect of many years of neo-patrimonial rule on economic and human development indicators). Bertocchi and Canova also find evidence of indirect effects of colonization, which are only present in Africa. They find that colonization negatively affected growth potential through its negative impacts on human capital accumulation, and that it also created political distortions.

There is, quite certainly, a link between bad institutions and adverse economic outcomes, but the question remains how institutions matter for macroeconomic policies and the macroeconomic environment. Macroeconomic policies such as overvalued exchange rates, high inflation and fiscal policy procyclicality are often blamed for negative economic outcomes. This seems logical given that economic theory dictates that such policies are seemingly detrimental to economic performance. However, Acemoglu and colleagues in a 2003 paper show that macroeconomic volatility is only indirectly linked to macroeconomic policies, such that these polices are actually a reflection of weak institutions. In the same vein, Mehlum and colleagues find evidence that the resource curse is conditional, in the sense that it only manifests itself when the quality of institutions is low. Botswana, for example, has been able to utilize its diamond wealth to bring about economic development. Other resource-rich developing countries like Chile, Malaysia, and Thailand have had a similar experience. These countries have been able to escape the resource curse due to their high-quality institutions, which lead to growth-promoting policies.

The Potential for Economic Reform

So why don’t countries with bad economic institutions turn them into good ones? Acemoglu and Robinson highlight that economic reform is unlikely to be successful in a bad political equilibrium. This explains why many reforms in Latin America and Africa have failed.  Cases of reform failures indicate that directly reforming economic institutions may not work if the underlying political characteristics of the economy are unchanged. More specifically, the balance of power in the society must change in order to transition to a better equilibrium. Institutional reforms can, however, be successful given the right political forces. The divergent experience of Botswana compared to other African countries has been used to underscore the importance of political factors in securing successful economic reform. Conducive political institutions in Botswana meant that the country has been able to generate consistent economic growth since gaining independence. The persistence of these institutions, which predate colonization, moreover, may also indicate the marginal effect colonization had on Botswana’s institutional landscape.

Doubts regarding the sustainability of growth in many African countries may suggest need for economic reforms. The case of Botswana indicates that successful reform can happen in Africa when political forces can sustain them. However, directly reforming institutions when the political landscape does not support growth requirements like secure property rights could lead to remarkably unsuccessful outcomes. In this case, change needs to happen within the sphere of political power for there to be a chance of better economic performance. Beyond economic growth and higher incomes, good institutions promote economic stability and higher welfare for citizens. Resource-rich countries with perverse political institutions have even more of an imperative to develop good institutions as such institutions bring with them the possibility of escaping and eluding (the negative effects of) the resource curse