Studies on economic growth and income in Sub-Saharan Africa

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May, 2015
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For several years, sub-Saharan Africa (SSA) continues to struggle to achieve high growth rates and income necessary to pull its population from poverty and underdevelopment. This situation has resulted in high incidence of poverty and deteriorating standard of living among vast majority of the people. Despite persistent implementation of policies and structural reforms over the years, the region still lags behind when matched with other regions such as East Asia which it started on the same growth path with. It is against this background that this study was carried out to find out the key variables that drive the growth and income of sub-Saharan African countries. In an attempt to achieve this objective, the study addresses three broad questions: (i) What is the impact of trade openness and foreign aid on income in sub-Saharan Africa? (ii) Do democracy and corruption have impact on the levels of income among sub-Saharan African countries? (iii) What are the key determinants of economic growth in sub-Saharan Africa? Each of these questions has been addressed in a full length paper. The first paper analyses the impact of foreign aid and trade openness on income. Using the Pool Mean Group (PMG) estimator, the paper showed that aid has significant positive effect on income over the period under consideration which is consistent with other previous studies that conclude that aid promotes growth and income. Contrary to our expectation, trade openness rather has negative effect on income in SSA over the period considered in this paper. The paper also emphasized the important role played by foreign direct investment, capital stock and democracy in promoting income in sub-Saharan Africa. From a policy perspective, the study suggests that aid should be channelled to assist small and medium scale businesses which can help to reduce rural and urban poverty. Also, the export sector should be more competitive relative to the import sector through export diversification. Paper II examines the relationship between democracy and corruption and income differences in sub-Saharan African countries using dynamic panel data techniques. Using several indicators that could proxy for governance in eight alternative specifications, the study employed the within-mean group and the system GMM estimations. The paper finds that corruption has adversely affected income levels in SSA. The results also showed that whether or not democracy has income effects depends on a particular indicator used. This result is further confirmed by the indexes created from the principal component analysis. While property rights and political stability have had positive income effects rule of law and government effectiveness have shown negative impact on income. The paper therefore concludes that policy reforms should target programmes that seek to develop and build the capacities of state institutions. For research, the findings suggest that researchers should seriously take into account the selection of proxies when investigating the impact of democracy on economic performance. Paper III applies a nonparametric regression to identify the determinants of economic growth in sub-Saharan Africa. The findings suggest that there is a positive and nonlinear relationship between economic growth on one hand as well as investment in physical capital, population and democracy on the other hand. Again, while we find that human capital and inflation have no significant effect on economic growth over the study period, foreign aid was found to have negative effect on economic growth in SSA. All in all, the results obtained in this paper provide strong evidence that investment in physical capital, population, democracy, trade openness and foreign aid are important determinants of economic growth in SSA over the period under consideration. The findings obtained in the paper have important implications particularly for growth policy in SSA and growth empirics generally. Growth policies should thus consider population control, expanding and improving the quality of education and enrolment especially at the higher levels and strengthen democratic institutions. For research, the findings imply that researchers should be cautious in specifying the functional form of growth models when investigating the determinants of economic growth.
A thesis submitted to The School of Graduate Studies, Kwame Nkrumah University of Science & Technology, Kumasi in fulfilment of the requirements for the award of Doctor of Philosophy in Economics,