African
Develop
ment Ba
nk Grou
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Working
Pape
r Serie
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n° 26
4
May
2017
Institutional Reforms and Economic Outcomes in AfricaAbdulhakeem. A Kilishi
Working Paper No 264
Abstract
There is voluminous literature on the impact of
reforms, but little attention to the impact of
institutional reforms on economic outcomes.
Therefore, the focus of this paper is to examine the
effects of economic and political institutional
reforms on growth and investment in Africa.
Treatment analysis was employed using difference-
in-difference estimation techniques to gauge the
effect of reforms. The analysis revealed that
democracy does not necessarily translate into reform
of political institutions. Countries that embark on
small and gradual reforms in economic institutions
seem to grow faster. It is also observed that both
economic and political institutional reforms are
triggered by crises of low growth and low
investment. There is no evidence that one form of
reform induces another. The sequence of reforms
seems to matter for investment though it does not
matter for growth. Countries that start with reforms
in economic institutions invest more, while those
that start with political reform invest less. The
results also show that countries that embark only on
political reform grow slower and invest less. It is
therefore recommended that countries that have not
started any kind of reform should start with reform
of economic institutions. And those that started with
political reform should also give comparable
attention to economic institutions’ reform.
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Correct citation: Kilishi A.A. (2017), Institutional Reforms and Economic Outcomes in Africa, Working Paper Series N° 264, African
Development Bank, Abidjan, Côte d’Ivoire.
1
Institutional Reforms and Economic Outcomes in Africa1
Abdulhakeem A. Kilishi
Keywords: Institutional Reform, Difference-in-Difference Estimation, Africa
JEL Classification: O43, O55
1 Abdulhakeem Kilishi, Department of Economics, University of Ilorin, Ilorin, Nigeria.
e-mail: [email protected] / [email protected]
The author acknowledges the immense support from the African Economic Research Consortium and the African
Development Bank (AfDB) for the financial support and opportunity as a Visiting Research Fellow at the AfDB
that culminated with this study. The useful comments, discussions, and directions provided by Dr. Jacob Oduor
of ECMR are also gratefully acknowledged.
2
1. Introduction
In the past few years, there has been significant emphasis on institutional reforms. Reforms
have even become major criteria for financial and other forms of assistance from international
organisations like the World Bank, the International Monetary Fund (IMF), and other donor
agencies. The agitation for institutional reform is premised on close correlation observed
between income differences across countries and indicators of institutional quality in recent
growth literature (see for example, North, 1990, 1991; North and Weingast 1989; Mauro 1995;
Knack and Keefer 1995; Hall and Jones 1999; Acemoglu, Johnson and Robinson 2001, 2002,
2004; Rodrik, Subramanian and Trebbi 2004).
Due to this emphasis, issues of institutions and their effects on the economy gain significant
attention from researchers, policy makers and international organisations. However, a number
of questions remain unsettled;
How do economic and political institutional reforms affect economic outcomes?
Does political institutional reform induce reform in economic institutions, or is the
causality running the other way?
How do economic and political institutional reforms interact to impact on economic
outcomes?
Does it matter which of the reforms a country starts with?
Thus, this paper attempts to provide answers to these questions. The broad objective of the
paper is to examine the effects of two kinds of institutional reforms (economic and political
institutional reforms) on investment and economic growth in Africa. Specifically, this paper
attempts to: (i) identify major reformers in economic and political institutions across Africa;
(ii) examine the effects of economic and political institutional reforms on investment and
growth; (iii) investigate the feedback and interaction effects of the two types of reform; and
(iv) examine if the sequence of reforms matter.
This paper is related to two broad sets of literature, first is the literature on the impact of
institutions on economic outcomes, and second is literature on the impact of reforms on
economic performance. Within the first set of literature, two separate groups of studies can be
distinguished: those that focus on the impact of various measures of economic institutions (see
for example, Mauro 1995; Knack and Keefer 1995; Hall and Jones 1999; Acemoglu, Johnson
3
and Robinson 2001, 2002; Rodrik, Subramanian and Trebbi 2004; Glaeser 2004; Haggard
2004; Huang 2010 among others) and those that focus on the impact of measures of political
institutions (see Alesina and Perotti 1994 for a literature survey on the impact of political
institutions on growth). Meanwhile, some other studies examine the joint impact of the two
types of institutions. Similarly, the impact of economic and political reforms on economic
outcomes is also widely studied in the literature (see Sachs and Warner 1995; Barro 1996;
Przeworski and Limongi 2000; Wacziarg and Welch 2003; Roll and Talbott 2003; Reuveny
and Li 2003; Persson 2005; Giavazzi and Tabellini 2005; Jong-a-Pin and De Haan 2007 among
others).
Though, there is no generally acceptable definition of institutions, one of the most widely
accepted definitions was given by North (1990). According to him “institutions are the rules of
the game; more formally, are the humanly devised constraints that structure political, economic
and social interaction”. They consist of formal rules (for example, constitutions, laws, property
rights), and informal constraints (for example, sanctions, taboos, traditions, customs, norms of
behaviour, conventions, self-imposed codes of conduct) as well as their enforcement
characteristics. In other words, they consist of the structure that humans impose on their
dealings with each other. Institutions often establish the constraints and determine the costs
and benefits under which individuals take economic decisions. The extent of constraints and
the choices individuals make in different institutional settings depend on the effectiveness of
their enforcement. Institutions are constitutive rules and practices prescribing appropriate
behaviour for actors. They empower and constrain actors differently and make them more or
less capable of acting according to prescribed rules of appropriateness. The core perspective is
that institutions create elements of order and predictability.
In this paper, institutions are broadly divided into two: economic institutions and political
institutions. However, the interactions between these two sets of institutions are complex: on
one hand, political institutions shape the fate of economic institutions and, on the other,
economic institutions are critical to the fate of political institutions. Thus, it is difficult mapping
a distinction between political and economic institutions.
Economic institutions are laws, policies, and regulations that govern the interaction of agents
in market transactions, including buying, selling of goods and services, and use of property.
They define the level of restriction on agents to engage in mutually agreed-upon economic
4
transactions. They shape the incentives of key economic actors in society; in particular, they
influence investments in physical and human capital, technology, and the organisation of
production. The main function of economic institutions is to minimise transaction costs.
Property rights laws, the rule of law, regulatory quality, the nature of credit arrangements, and
policies that affect access to means of production as well as consumption are examples of
economic institutions. Hence, economic institutional reform in this paper is defined as
comprehensive and large changes that are targeted at reducing corruption, improving
regulatory quality, rendering monetary and fiscal institutions independent, strengthening
corporate governance, enhancing the independence of judiciary and protecting property rights;
these reforms create opportunities for the majority of people to participate in economic
activities. This definition falls in the context of what is sometimes called ‘second-generation
reforms’ which is different from definition of ‘first-generation reforms’ which rely heavily on
neo-liberalisation philosophy.
Political institutions are the rules on how to organise the polity, how authority and power is
constituted, exercised, legitimated, controlled, and redistributed. They affect how political
actors are enabled or constrained and the governing capabilities of political system. Thus,
premised on this preview and definition of institutions by North (1990), political institutions in
this paper are seen as the ‘political rules of the game’. They are laws and regulations that govern
political process and political decision making as well as the citizens’ ability to engage with
and criticise that process. Therefore, political reform consists of large and comprehensive
changes in the political environment that are associated with how political power is constituted
and exercised.
To answer the questions raised in this paper, data were collected on real GDP per capita,
investment, and variables to measure economic as well as political institutions for forty-five
countries over twenty-two years. The difference-in-difference regression technique, which
allows investigation of both time and cross-sectional variabilities was used in data analysis.
The results revealed that both economic and political institutional reforms are preceded by
economic crisis and the two reforms do not induce each other. The results suggest that countries
that start with economic institutions grow faster and invest more than the countries that start
with political reform. The results also suggest that the sequence of reform matters for
investment but does not matter for growth. One of the main contributions of this study is to
5
analyse the joint effect of both economic and political reforms on economic outcomes and to
examine whether or not the sequence of reforms matter for growth and investment.
The remainder of the paper is arranged as follows. Section 2 presents the model, estimation
techniques, and data issues. Section 3 presents reforms in Africa, while Section 4 presents
discussion of empirical results. Finally, Section 5 concludes the paper.
2. Methodology and Data
2.1 Model and Estimation Techniques
In this paper, reform is referred to as a treatment administered to some countries but not to
others. Therefore, countries that experienced reform are called “treated”, while those that do
not experienced reform are called “control”. Thus, the paper empirically examine the impacts
of different institutional reforms (treatment) as specified in equation 1 below:
𝑦𝑖𝑡 = 𝛼𝑖 + 𝛾𝑡 + 𝛽𝑟𝑒𝑓𝑜𝑟𝑚𝑖𝑡 + 𝛿𝑋𝑖𝑡 + 𝑣𝑖𝑡 1
Where 𝑦 is economic outcome of interest, 𝑟𝑒𝑓𝑜𝑟𝑚 is reform in economic and political
institutions, 𝑋 is a vector of control variables, 𝛼𝑖 is time invariant effect unique to individual 𝑖,
𝛾𝑡 is time effect common to all individuals in period 𝑡, 𝑣𝑖𝑡 is individual time varying error
distributed independently across individuals and independently of all 𝛼𝑖 and 𝛾𝑡. Though the
model is specified in a conventional fixed effect model, the framework of estimating 𝛽 requires
some special techniques particularly if 𝛼𝑖 and 𝛾𝑡 are related to the reform in some unknown
ways.
Assume equation 1 is specified without 𝑋𝑖𝑡, such as 𝑦𝑖𝑡 = 𝛼𝑖 + 𝛾𝑡 + 𝛽𝑟𝑒𝑓𝑜𝑟𝑚𝑖𝑡 + 𝑣𝑖𝑡 1*
One popular method of estimating equation 1* if 𝛼𝑖 and 𝛾𝑡 are dependent on 𝑟𝑒𝑓𝑜𝑟𝑚𝑖𝑡 is within
estimator that involves taking the first difference. Taking the first difference of equation 1* yields:
∆𝑡𝑦𝑖𝑡 = ∆𝑡𝛾𝑡 + 𝛽∆𝑡𝑟𝑒𝑓𝑜𝑟𝑚𝑖𝑡 + ∆𝑡휀𝑖𝑡 2
Where the operator ∆𝑡 is differences of individual observation across periods and ∆𝑡𝛾𝑡 is differences in
common time effects. However, the model consists of two time periods, 𝑡 = 1, 0, that is, the post-
reform era and pre-reform period for the treatment as well as the control group. Difference-in-difference
estimator is one of the special types of within estimators that takes the difference between the
differences between the two groups (taking difference of differences) such that:
𝛽 = {𝐸(𝑦𝑖1𝑡 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖1) − 𝐸(𝑦𝑖1
𝑡 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖0)} − {𝐸(𝑦𝑖0𝑐 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖1) − 𝐸(𝑦𝑖0
𝑐 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖0)} 3
6
Where superscript 𝑡 and 𝑐 stand for treated and control respectively, 𝐸(𝑦𝑖1𝑡 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖1) is the expected
outcome of countries that experienced reform (i.e. treated group) after the reform; 𝐸(𝑦𝑖1𝑡 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖0) is
outcome of treated group before the reform, 𝐸(𝑦𝑖0𝑐 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖1) is the outcome of control after the reform
in the treated group and 𝐸(𝑦𝑖0𝑐 |𝑟𝑒𝑓𝑜𝑟𝑚𝑖0) is the outcome of control before the reform. Thus, the
coefficient of reform 𝛽 gives the average outcome of treated countries after the reform against the
outcome before the reform, as well as the average outcome of the control group.
Blundell and McCurdy (2000) explained that there are two structural assumptions that must
hold for the difference-in-difference estimator to measure a behaviourally meaningful
parameter. Assumption 1: time effect must be common across the treated and control groups,
that is, 𝛾𝑡𝑡 = 𝛾𝑡
𝑐. Assumption 2: the composition of both treated and control groups must remain
stable before and after the reform. The first assumption is likely to be violated if relevant
variables that differ across treated and control groups are not included in the control variables.
If selection of members of each group is not random, the second assumption is likely to be
violated.
However, Giavazzi and Tabellini (2005) suggested a number of measures to minimise the
possibility of violating these assumptions. First, include in the control variables dummies to
capture the characteristics that make countries different. Therefore, both the individual and
time effects are controlled for in this study. The second suggestion is to include in the control
group both countries that have not experienced reform at all and countries that have
experienced reform before the beginning of the sample period. In the sample of this study,
countries that have weak institutions and never experienced significant changes as well as
countries that have always had strong institutions are all included in the control group. For
example, countries like Botswana that has been in democracy with positive value of Polity2
(see below) since independence as well as countries like Morocco that has never experienced
a democratic executive election are included in the control group of political reform.
The difference-in-difference estimation is one of the microeconometric techniques and it has a
number of advantages, particularly in measuring the effects of a reform or policy intervention
on any given outcome. One of the greatest appeals of difference-in-difference estimation is its
potential to circumvent many of the endogeneity problems that typically arise when making
comparison between heterogeneous individuals. In addition, the approach allows the
comparison of economic outcomes in treated countries before and after the reforms, with
economic outcomes of the control countries over the same time period. Thus, the estimation
7
method gives room to exploit both the within country variation as well as between country
comparison.
2.2 Nature and Sources of Data
Two variables are used to measure economic outcome, these are growth of real GDP per capita
(measure as first difference of log of real GDP per capita) and investment proxy with fixed
capital formation. These two variables are sourced from World Development Indicators (WDI).
The overall score of economic freedom of heritage foundation is used as economic institutions.
It is sourced from 2016 Heritage Foundation Index of Economic Freedom. The economic
freedom index of heritage foundation is computed from ten indexes: business freedom, trade
freedom, fiscal freedom, government spending, monetary freedom, investment freedom,
financial freedom, property rights, freedom from corruption and labour freedom. More freedom
in this sense would mean that the majority of people would have the opportunities and
incentives to participate in economic activities of their choice, particularly where they have
high potentials. Entrepreneurs would be encouraged to undertake investment because of the
presence of institutions that ensure: i) protection of property rights including intellectual
property; ii) easy access to finance; iii) security of business contract; iv) acquiring of business
license with fewer or no obstacles and without delay; v) indiscriminate provision of public
services; and vi) hence, reap the profits of investment.
The political institutional variable is sourced from POLITY IV dataset. Polity2 score is used
as measure of political institutions. The value of Polity2 scores range from -10 – worst
autocracy, and +10 – perfect democracy. Political institutional reform is assumed to have taken
place at a point where the Polity2 value becomes positive or at least greater than zero.
Theoretically, zero marks the end of autocracy, hence, positive value is considered as an era of
political reform that is likely to have impact on economic outcomes. This definition is similar
to the definition of political reform in previous studies such as Persson and Tabellini (2003),
Persson (2004), and Giavazzi and Tabellini (2005). Therefore, treatment commences at the
point where Polity2 value is positive. However, in a situation where a country’s value becomes
nonnegative but not greater than zero through the reform period, such a country is categorised
among the control group. Forward and backward moving averages of the economic institutional
variable were computed. Economic institutional reform is assumed to take place at the point
where the forward moving average is greater than the backward moving average by at least 2
points. Meanwhile, a distinction is made between two types of economic institutional reforms,
small and big reforms. Small reform takes place when forward moving average is greater by at
8
least 2 points while big reform takes place when it is greater by at least 4 points. All other
variables are as defined in Box 1 below.
Box 1: Definitions of variables
econreform2=1 from the year economic institutional reform takes place, 0 otherwise
polreform=1 from the year political institutional reform takes place, 0 otherwise
3preen=1 three year preceding reform, 0 otherwise
3postn=1 in the year reform starts and in the three following years
4ybyondpostn=1 in the fourth year of reform, and beyond
econreformonly=1 if country receives treatment only in economic institutional reform
polreformonly=1 if country receives treatment only in political institutional reform
econb4polreform=1 if country receives treatment first in econreform before polreform
polb4econreform=1 if country receives treatment first in polreform before econreform
3. Institutional Reforms Across Africa
Based on the definition of reform given above, all the countries in Africa except five (São
Tomé and Príncipe, Seychelles, Sudan, South Sudan and Somalia) are subjected to a reform
screening exercise so as to identify countries that experienced reform(s) in the continent. The
type and magnitude of reforms as well as the start date of reform are presented in Tables 1 to
3. Specifically, Table 1 presents the date that each country experienced economic institutional
reform (both small and big reform) and political institutional reform. It is observed that all
countries have experienced one form of reform or the other during the sample period, except
Namibia. However, the fact that Namibia did not experience reform during the sample period
of this study does not mean Namibia has weak economic and political institutions. Though,
there is no significant change in the quality of economic and political institutions during the
sample period in Namibia, that country is one of those with high quality institutions. It is
obvious that the country had experienced reforms earlier.
Except Namibia that experienced reform much earlier, all the countries in the sample
experienced economic institutional reform at different points during the sample period.
Meanwhile, twenty-one countries had only small institutional reform and did not graduate to
big reform. Sixteen countries experienced big reform, while fourteen had experienced both
2 Econreform is distinguished into two, ssmalleconreform, which is small reform, and bigeconreform, which is big reform in
economic institutions.
9
small and big reforms (usually starting with small, then big). Twenty-five countries
experienced political institutional reform during the sample period, while four countries had
political institutional reform long before the sample period and sixteen did not experienced
reform in political institutions. One interesting story from political institutional reform is that
the year the reform starts does not coincide with year of democratisation in almost all the cases.
In addition, democracy with periodic elections does not necessarily translate to political
institutional reform. Almost all the sixteen countries that did not experience political
institutional reform have democratic government. Central African Republic and Ethiopia have
had political institutional reform for a short period but returned to weak institutions. Burkina
Faso experienced diminutive reform in political institutions in year 2001 by transiting from
negative value of Polity2 score to zero and has persistently remained at that level since. There
is need for these countries and similar others, such as Algeria, to make concerted efforts to
improve the quality of political institutions beyond the current level.
Table 2 presents countries that experienced only one type of reform, either economic
institutional reform or political institutional reform. It is clear from the table that twenty-four
24 countries experienced only economic institutional reform without reform in political
institutions. However, there is no single country that experienced only political reform without
economic institutional reform. Twenty-five countries have experienced reform in both
economic and political institutions as presented in Table 3. Eighteen out of the twenty-five
countries started with political institutional reform while six started with economic institutional
reform and only one country (Côte d’Ivoire) commenced both reforms at the same time.
10
Table 1: Economic and Political Institutional Reforms Across Africa
Country
Small
economic
institutiona
l reform
Big
economic
Institutiona
l reform
Political
institutions
reform
Country
Small
economic
institutional
reform
Big
economic
Institutional
reform
Political
institution
s
reform
Algeria 1998 Nil 2004 Lesotho 2001 Nil 1994
Angola 2008 Nil Nil Liberia Nil 2012 2003
Benin 2007 Nil 1990 Libya 1998 2006 Nil
Botswana 1997 1998 Positive since
independence Madagascar 2000 2001 1992
Burkina
Faso 1998 2008
Became zero
in 2001 Malawi 1999 Nil 1995
Burundi 2009 2014 2002 Mali 1997 Nil 1992
Cameroon Nil 1998 Nil Mauritania Nil 2000 Nil
Cape
Verde 1998 1999
Reform
before
sample Mauritius Nil 2005
Reform
before
sample
Central
African
Republic
2011 Nil
Short lived
reform (1993
to 2002) Morocco Nil 2007 Nil
Chad 2001 2002 Nil Mozambique Nil 1998 1995
Comoros 2011 2012 2002 Namibia Nil Nil Nil
Congo
Brazzaville Nil 1999 Nil Niger 2001 2002 1999
Congo
Kinshasa Nil 2014 2003 Nigeria 2005 2006 1999
Côte
d’Ivoire Nil 2000 2000 Rwanda Nil 1999 Nil
Djibouti 2010 Nil 1999 Senegal 2014 Nil 2000
Egypt Nil 1997 Nil Sierra Leone 2005 Nil 1996
Equatorial
Guinea Nil 2001 Nil South Africa 1997
Nil
Reform
before
sample
Eritrea 2013 2014 Nil Swaziland 1998 Nil Nil
Ethiopia 1997 Nil
Short lived
reform (1993
to 2005) Tanzania 1997 Nil Nil
Gabon 1997 Nil 2009 Togo 2003 Nil Nil
Gambia Nil 2000 Nil Tunisia 2006 Nil 2011
Ghana 2008 Nil 1996 Uganda 2002 Nil Nil
Guinea 1998 Nil 2010 Zambia Nil 1997 1991
Guinea-
Bissau Nil 2001 2005 Zimbabwe Nil 2011 2009
Kenya 1997 Nil 2002
Source: compiled by author
11
Table 2: Countries that Experienced Only One Type of Reform
Experienced Only Economic
Institutional Reform
Experienced Only Economic
Institutional Reform
Country
Year of
econreform Country
Year of
econreform
Angola 2008 Gambia 2000
Botswana 1997 Libya 1998
Burkina Faso 1998 Mauritania 2000
Cameroon 1998 Mauritius 2005
Cape Verde 1998 Morocco 2007
Central African Republic 2011 Rwanda 1999
Chad 2001 South Africa 1997
Congo Brazzaville 1999 Swaziland 1998
Egypt 1997 Tanzania 1997
Equatorial Guinea 2001 Togo 2003
Eritrea 2013 Tunisia 2006
Ethiopia 1997 Uganda 2002
Source: compiled by author
12
Table 3: Countries that Experienced the Two Reforms
Experienced Both Institutional Reforms Political Institutional Reform First
Country Year of
econreform
Year of
polreform Country
Year of
econreform
Year of
polreform
Algeria 1998 2004 Benin 2007 1990
Benin 2007 1990 Burundi 2009 2002
Burundi 2009 2002 Comoros 2011 2002
Comoros 2011 2002 Congo
Kinshasa 2014 2003
Congo Kinshasa 2014 2003 Djibouti 2010 1999
Côte d’Ivoire 2000 2000 Ghana 2008 1996
Djibouti 2010 1999 Lesotho 2001 1994
Gabon 1997 2009 Liberia 2012 2003
Ghana 2008 1996 Madagascar 2000 1992
Guinea 1998 2010 Malawi 1999 1995
Guinea-Bissau 2001 2005 Mali 1997 1992
Kenya 1997 2002 Mozambique 1998 1995
Lesotho 2001 1994 Niger 2001 2000
Liberia 2012 2003 Nigeria 2005 2000
Madagascar 2000 1992 Senegal 2014 2000
Malawi 1999 1995 Sierra Leone 2004 2001
Mali 1997 1992 Zambia 1997 1991
Mozambique 1998 1995 Zimbabwe 2011 2009
Niger 2001 1999 Economic Institutional Reform First
Nigeria 2005 1999 Algeria 1998 2004
Senegal 2014 2000 Gabon 1997 2009
Sierra Leone 2005 1996 Guinea 1998 2010
Tunisia 2006 2011 Guinea-
Bissau 2001 2006
Zambia 1997 1991 Kenya 1997 2003
Zimbabwe 2011 2009 Tunisia 2003 2011
Source: compiled by author
4. Discussion of Empirical Results
The results of the regressions are presented in Tables 4 to 7. Table 4 presents the results of the
effect of economic institutional reform on growth and investment, while Table 5 presents the
effects of political institutional reform on growth and investment. Table 6 presents results of
the interactions between economic and political institutional reforms, that is, the effect of
economic institutional reform on political institutional reform and vice versa. Finally Table 7
reports the effect of sequence of reforms on growth and investment.
13
In Table 4, the econreform (as defined in Box 1) is a dummy variable that equals to 1 in the
post-reform years for the treated countries only. The control group includes countries that did
not experience reform in their economic institutions at all and countries that did reform much
earlier. The coefficients measure the average performance of the treated countries relative to
the control group. In the growth regressions reported in this table, both small and big economic
institutional reforms (smalleconreform and bigeconreform) are significant while the three years
pre- and post-reform are not statistically significant. The results in investment regression are
similar to the growth results except that pre-reform is negative with growth but positive with
investment. Thus, the results reveal that countries that experience reform in their economic
institutions attract more investment and on the average grow faster. However, countries that
pursue gradual/small reform grow faster than countries with big reform. On the other hand, big
reformers attract more investment. Equally, evidence in the results indicate that it takes more
than three years for economic institutional reform to have influence on investment and growth,
since the variables of the three years pre- and post-reform are not significantly different from
each other.
Political institutional reform is significant and negative in both growth and investment
regression reported in Table 5. When timing of the reform is considered, the three years
preceding reform (3prepolreform) dummy is negative in both growth and investment
regressions but not significant in growth regression. This implies that political reform is
triggered by crisis, that is, the reform starts when investment in a country is 9.781 points less
than the usual investment. The three years post-political reform dummy (3postpolreform) is
not significant in growth regression, while both the three years post-political reform and
beyond four years reform dummies (4ybeyondpolreform) are significant, and negative in
investment result. The significant negative coefficients in investment regression suggest that
the crisis is not overcome immediately after the reform. Even the political institutional reform
dummy (polreform) is negative and significant for both investment and growth. This is contrary
to the a priori expectation, which suggests that political reform is supposed to lead to more
investment and economic growth. This negative relationship may be due the fact that it takes
long period for political reform to have positive impact on the economy. It may also be
predicated by the fact that political reforms in Africa are relatively recent. The earliest reformer
among the treated group within this sample period starts in 1997, hence the post reform
dummies are for few years, and this could be a short period for political reform to have any
positive impact.
14
Table 6 presents results of the interaction effects between the two reforms. The results show
no evidence of any of the reforms leading to the other. In other words, there is no evidence that
economic institutional reform stimulates political institutional reform nor that political reform
induces economic institutional reform. The two reforms do not lead to each other. It could be
that the two are stimulated by similar factors as discussed earlier – that both reforms are
preceded by crisis. Thus, there is no feedback effect between economic and political
institutional reform in treated group.
Finally, Table 7 shows a few interesting results; first, the sequence of the reforms matters for
investment but is not significant for growth. The results show that countries that start with
political institutional reform before reform in economic institutions on average have lower
investment, while countries that start with reform in economic institutions before embarking
on political institutional reform have higher investment on average. Second, countries that
embark on only political institutional reform without corresponding reform in economic
institutions grow about 0.01 lower and invest about 6.1 points less. The variable that captures
reform in economic institutions only (econreformonly) is positive in both growth and
investment regressions but not significant.
Table 4: Effect of Economic Institutional Reform on Investment and Growth
Growth Investment
VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
smalleconreform 0.196*** 2.904**
(0.0369) (1.329)
bigeconreform 0.136*** 3.445***
(0.0275) (1.078)
preeconreform -0.0220 2.005
(0.0420) (2.500)
posteconreform 0.0232 2.080
(0.0332) (1.494)
Constant 0.770 -9.856** -16.55*** -74.78 -158.2 -428.5
(5.271) (4.781) (5.453) (174.8) (198.0) (260.7)
Observations 1,000 1,000 1,000 1,000 1,000 1,000
R-squared 0.050 0.036 0.018 0.028 0.031 0.026
*significant at 1%, **significant 5%, ***significant at 10%, Bootstrap Robust standard errors
in parentheses Source: computed by author
15
Table 5: Effect of Political Institutional Reform on Investment and Growth
Growth Investment
VARIABLES
polreform -0.134*** -1.979*
(0.0262) (1.139)
prepolreform -0.0670 -9.781***
(0.0685) (1.600)
postpolreform -0.0620 -3.071*
(0.0404) (1.780)
y4byondpolrefrom -0.140*** -2.273**
(0.0301) (1.044)
Constant -21.36*** -22.97*** -402.8** -294.8
(4.759) (6.180) (167.4) (231.8)
Observations 1,000 1,000 1,000 1,000
R-squared 0.040 0.040 0.026 0.040
*significant at 1%, **significant 5%, ***significant at 10%, Bootstrap Robust standard errors
in parentheses Source: computed by author
Table 6: Interaction between Economic and Political Institutional reforms
Variables Economic Reform Political Reform
polreform -0.0115
(0.0351)
3prepolreform -0.0235
(0.0818)
3postpolreform -0.0264
(0.0548)
4ybyondpolreform 0.0133
(0.0380)
smalleconreform -0.0141
(0.0432)
3preeconreform -0.0425
(0.0530)
3posteconreform -0.0389
(0.0465)
R-squared 0.2673 0.2820 0.0536 0.0549
No. Obs. 675 675 675 675
*significant at 1%, **significant 5%, ***significant at 10%, Robust standard errors in
parentheses Source: computed by author
16
Table 7: Effects of Economic and Political Institutional Reforms on Growth and
Investment
Growth Investment
econreformonly 0.0057 0.4448
(0.0045) (0.9980)
polreformonly -0.0106** -6.0970*
(0.0048) (0.8967)
polb4econreform 0.0050 -2.5936*
(0.0040) (0.9724)
econb4polreform -0.0052 4.1401**
(0.0053) (1.7752)
R-squared 0.0288 0.0702
No.Obs. 675 675
*significant at 1%, **significant 5%, ***significant at 10%, Robust standard errors in
parentheses Source: computed by author
5. Concluding Remarks
The paper addresses four issues surrounding institutional reforms in Africa. First, it identified
countries that experienced reform in economic and political institutions in the continent.
Almost all countries in Africa seem to undertake one or more reforms to strengthen either or
both of their economic and political institutions. While some countries focus on only one type
of institutional reform (either economic or political), some other countries pursue both types.
It was also found that the sequence of the reforms differ from country to country: while some
countries began with reform in politics others began with economic institutions.
The second issue addressed in the paper is the impact of these reforms on economic growth
and investment. Countries that embark on gradual reforms in economic institutions are on
average growing faster than the default period (that is, period before the reform in the country
in question and period of zero reform in some other countries). Political institutional reforms
seem to be preceded by crises such as lower growth and investment than their usual rate of
growth and investment. On the average, countries that embark on political reform could not
immediately overcome the crises that triggered the reform.
The feedback effects between economic and political institutional reforms are also examined
in the paper. The question addressed here is: does economic (political) institutional reform
17
stimulate reform in political (economic) institutions? There is no evidence from the empirical
results that either reform triggers the other.
Finally, the sequencing effect of the choice of reform is examined. Does it matter which of the
reforms a country starts with? The sequence seems not to matter for growth but it matters for
investment. Countries that start with economic institutional reform before embarking on
political reform seem to be doing better in terms of investment, while countries that go the
other way (that is, start with political reform) have less investment. Similarly, countries that
pursue only political reform without complementing it with reform in economic institutions
have lower growth and investment on average.
A number of conclusions can be drawn here: first, it takes long period for political reform to
have a positive impact on growth and investment. Second, reforms should be gradual and
systematic – gargantuan reform projects may not payoff. The results suggest that it is preferred
to start with reforms in economic institutions before embarking on political reform. Finally,
pursuing only political reform without corresponding reform in economic institutions may not
yield higher growth and investment.
18
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