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ECONOMIC DEVELOPMENT UNDER CRISES—AN ECONOMETRIC ANALYSIS

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Contents

Introduction.....................................................................................................1Some Stylized Facts..............................................................................................4Overview of Eco-Political Environment of Sub-Saharan Africa......................................................29Political Instability and Economic Development – Econometric Analysis......................................36Political Instability and Economic Development — Estimations and Results...................................58Differential Effects of Political Instability Across Sectors — Estimation and Results......................71Summary..........................................................................................................114

Chapter One

AFrica, from all accounts, has been a difficult region to analyze. Many observers tend to make proclamations and prognostications on the continent as if it were a relatively small country that a simple macroeconomic model or political ideology can define. As an analyst, one must resist the temptation of making any prediction about the future of the continent, whether apocalyptic or full of optimism. The record since independence for most extrapolates to project the coming of apocalypse. Considering the degree of political instability in the region, an assertion of political transformation and economic resurgence at a sustainable level would be a poor calculation.

The current socioeconomic situation in Africa as a continent is precarious. The continent faces multiple crises, including those of religion, politics, and economics. Each crisis is significant in its own right, and together they are mutually reinforcing. One begins to wonder if the leaders have the will and/or the means to put the continent on a growth trajectory and once and for all address the wide spectrum of inextricably linked development issues. While the significance of politics on religion or vice versa is recognized, what is more crucial is the impact of politics on economy and vice versa. This relationship between politics and economy deserves a little mention.

The economy and the polity interact in many ways with respect to resource allocation, income distribution, and stabilization policies. For these obvious reasons, neither the economy nor the polity can be looked at in isolation. Many of the decision-makers do not have the political will to embark on the kind of macroeconomic policies that may bring about development, simply because these policies are not politically popular domestically. Equally important, these countries do not have domestic resources to pursue required macroeconomic policies capable of generating growth. Hence, they rely on international financial institutions to provide funds, which often come with conditionalities. For those leaders with political will, external funds can jumpstart their distressed economies and put them on a sustainable growth path.

Bruno Frey (1983) identified the interdependence of economy and polity: The economy and polity formed a closed system with the two parts linked by feedback. Accordingly, ... the upper link shows political intervention working on the economy; and the lower link shows the influence of economic conditions on the political sector (Ibid., 9).

There are lots of bits and pieces of evidence to support the fact that politics in general does affect economic development. At least everyone—governments and international lending institutions included—believes that policies affect growth, and in turn, scholars tend to think that politics affect policies (Przeworski and Limongi, 1993, 65). Also, Reynolds (1983), having reviewed the historical experience of several countries, concluded that spurts of growth are often associated with major political transformation. A reversed argument can be made in the sense that the political instability that plagues the region has been responsible for the deleterious growth pattern experienced in the last forty years by many of the countries. Even in cases where there were stable dictatorships, the deleterious effect of long-term dictatorship is just as inimical to growth as those of several military interventions. Certainly the issue of direction of causality cannot be ignored, whether economic development drives regime change or whether it is the stability of political regime that drives economic development. Again Przeworski and Limongi, (p. 62), asserted that the reason social scientists have little robust statistical knowledge about the impact of regimes on growth (or growth on regime, for that matter) is that the research design required to generate knowledge is complex (Ibid.).

Since independence, many of the countries in the region have formulated numerous initiatives and implemented several reforms aiming to put them on a development path. Yet, in general, the outcome is abysmal because the leaders lack the political fortitude to carry the reforms to their natural conclusion. It is recognized, however, that the aggregate data on economic performances will vary from one country to another because reform measures, resource inflows, and political climates will also vary. In most cases, rather than citing leadership incompetency as the fundamental reason for failure to fully implement reforms, it is convenient to blame the abysmal performance on lack of resources. Usually, the domestic resources component of the funds necessary for implementation falls short of projections, due to a host of reasons that are also traced to inept management.

Assuming it is not a lip service, the concerted efforts being made by African leaders through proclamations at various summits regarding precarious socioeconomic conditions show that the region is ready to pursue measures that can put the continent on the growth path and subsequently, toward a sustainable economic development. Again history has taught us not to be too optimistic about any positive transformation, as the analysis of the region cannot be constructed by simple economic and or political models.

Chapter Two

2.1 ON INSTITUTIONAL STRUCTURE

Mankind has made great material progress in modern times, and much of this progress has been affected by the choice of the institutional framework designed to bring it about. The Western industrial economies and many other former colonies chose an institutional framework that permitted wide latitude for individual initiative, choice, and responsibility. In general, these countries are capitalist and democratic and are committed to the rule of law.

It is a generally observed phenomenon that the rising nationalism and independence movement after World War II gave many new nations the opportunity to choose an institutional framework by which they could progress. In some cases, what became a fashionable idea was state control and economic planning, with a concomitant de-emphasis, if not denigration, of individual initiative. Many nations selected this route for economic development. As Scully (1988) pointed out, there are two contrasting paradigms that point to the path by which men progress economically: individualism and statism. Both paradigms are old and still debated. That the state direction leads to material progress is the older vision. The wisdom of the state in creating...