Quick thought: Is Africa doing better than we think?

Whether one is in New York or Johannesburg, Hong Kong or Paris, there are a few distinct views on Africa that continue to prevail today. Most of these views are simply ill-informed. There are those, many from Africa themselves, that simply believe that it is the doomed continent with no hope. Others are confident that it is the world’s charity, to whom we donate money, or where we go to volunteer in order cure us of the guilt we have for living privileged lives.

In the past few years, however, there has been a mindset change by many of those that closely follow the developments on the continent. This third view is that Africa is the future, and will grow in the same way the Asian Tigers have over the last decades. Why have some become so optimistic?

I have always said that if African leadership is not on board to achieve development, there is nothing that can be done to achieve this (sorry Professor Sachs, not even $20 billion dollars can achieve this). However, if the leadership is committed to its people, they will become unstoppable. It is exactly this which has already started but will continue to unfold over the continent over the next decades.

In fact, the improvement in the quality of institutions (think protection of private property, constraint on the executive, improved transparency of government spending) in Africa over the last two decades has been so extreme that it has completely distorted the development literature.

Last semester, I conducted research on whether or not the quality of a country’s institutions has a causal impact on whether a country achieves economic growth. Previous papers such as Acemoglu et al. (2001 & 2003) proved that this was the case, as would make intuitive sense. However, looking at data for the last 20 years, it was no longer provable that this relationship holds. The question could not be answered under the econometric techniques traditionally used in answering similar questions because of the institutional improvement that has taken place in Africa since 1995. Although the paper becomes complicated at some points, the main takeaway is as follows:

It is commonly assumed that there is a positive and causal relationship between institutional quality and growth of GDP per capita. My findings do not prove a stance, but rather that the improvement of institutional quality in Africa makes it impossible to rigorously prove this relationship exists.

Below is the abstract to the paper, and I will also attach the paper in its entirety.

Macroeconomics and Institutions in the 21st Century: Same Same or New Game?Abstract: 

The last 25 years have seen economic trends dissimilar from those witnessed in the second half of the 20th century. Between 1945 and 1995, countries that pursued distortionary macroeconomic policies, appeared to have suffered more macroeconomic volatility and also grown more slowly. However, since 1995, it appears that even the correlation between distortionary macroeconomic policies (high inflation, irresponsible fiscal spending and large government debt) and poor macroeconomic outcomes (slow growth, high volatility and large crises) has severely weakened.

 Furthermore, the period prior to 1995 documents a statistically significant, robust and negative relationship between institutions and volatility and crises and a positive one with growth. This paper finds that in the period post 1995, the negative relationship between institutions and volatility and crises remains statistically significant, however the relationship between institutions and GDP per capita growth disappears and at times inverts although mostly not significant.

 There are two possible explanations for this finding: firstly, institutions may have become less important or irrelevant for achieving growth as some nations with weak institutions have seen some of the highest growth rates in the world. A second, and more technical, explanation is that institutional improvement seen globally in the last two decades has created a huge hurdle for development literature. The historically determined component of institutions, settler mortality rates in the ex-colonies, is no longer a valid instrument due to a substantially weakened first stage relationship. Without the validity of the settler mortality instrument, it is no longer possible to reliably estimate the causal effect of institutions on economic growth.

The disappearance of the relationship between growth and institutions occurs in the mid 1990s. This paper explores other notable trends during the same time period in an attempt to understand and explain this relationship, or rather lack thereof. Chinese influence and trade, the declining incidence of HIV and globalization are all explored as possible explanations for the seemingly unexplainable patterns of economic growth. None of these seem to explain the anomaly. 

With several distinctly different African nations on the rise, there may no longer be a common rule to economic growth, that is, if there ever was one. The 21st century is an era of unprecedented macroeconomic complexity.

However, what can be concluded from this paper is not that institutions do not matter, but instead that the significant, positive and robust relationship between institutions and growth that many take for granted, can no longer be rigorously proven to exist.

Full Paper: 21st century macroeconomics and institutions

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