African

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Working

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n° 26

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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: meetkilishi@yahoo.com / kilishi-a@unilorin.edu.ng

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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