Institutional dynamics and impact on capital formation: evidence from Namibia and Tanzania
Date
2013-03-15
Authors
Zaaruka, Benethelin P.
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Abstract
The purpose of this thesis is to examine the impact of institutions on fixed capital accumulation
over time in two developing countries, both former German colonies: Namibia and Tanzania.
This is motivated by two recent underpinning theories: the new institutional theory, which views
institutions as fundamental determinants of economic outcomes and income variations among
countries (the institutional hypothesis); and the theory of irreversible investment under
uncertainty, which emphasis the impact of uncertainty on investment and capital-stock
accumulation.
The first part of the thesis deals with the measurement and definitions of institutions. Empirical
measures of political and economic institutions have been previously produced; however, most
cover short periods of time. The short time span of the institutional indices makes them practical
in cross-countries and panel studies, rather than in country-specific studies. The importance of
country-specific studies is underscored by the notion that different historical paths led to
different ways of organising economic activities and political structures, yielding the differences
in economic development across countries. To overcome this challenge, this thesis presents a
database on institutional measures for Namibia and Tanzania for the period 1884 to 2009. These
indicators are used to assess the nature of political and economic institutional transformation
from the colonial legacy to the modern outcome, using Namibia and Tanzania as a natural
experiment.
Relying on archival information on formal laws in Namibia and Tanzania, the thesis constructs
institutional indicators that are de jure in nature representing political freedom, property rights
and judicial independence. These allow for the assessment of rules the game, rather than
outcome. The formal codification of rights and freedoms is of little significance if those rights
cannot be enforced. Therefore, the de facto element is also considered through the construction
of separate indicators on political instability and judicial independence. A clear theoretical
framework on each indicator provides the selection and combination of each sub-component. A
meaningful composite measure is based on the techniques of principal components and factor
analysis.
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The thesis argues that despite changes in colonial identity in these countries (i.e. German, then
British or South African), the broader framework of institutions remained partly the same,
particularly in the case Namibia. It is true that, with the attainment of independence in Namibia,
many institutions did change, particularly in the areas of political freedom, and judicial and
political instability. Measures such as property rights, on the other hand, are slow to change.
However, the overall long-lasting effect of these colonial institutions on economic outcomes
remains an empirical question. Similarly, the case of Tanzania reflects the notion of institutional
persistence as the country continued to undermine political freedom even after the attainment of
independence. Tanzania is among the few countries which adopted a constitution without a bill
of rights at independence.
Also, the new indicators for both countries, while covering a long time period (1884–2009),
correlate fairly well with some of the widely used institutional indices produced by Freedom
House and the Heritage Foundation.
The second part of thesis establishes the impact of institutional variables on capital accumulation
in Namibia and Tanzania, applying the Johansen Vector Error Correction Model (VECM)
technique. The data span for Namibia is from 1923 to 2009, and that for Tanzania is from 1946
to 2009. The findings highlight the importance of uncertainty (political instability) in explaining
capital accumulation over time in Namibia. The results also show that other institutional
variables are important in explaining uncertainty. Rising levels of property rights and political
rights lower political instability in Namibia.
The empirical evidence for Tanzania indicates the importance of property rights in explaining
capital accumulation over time. The most interesting result is the importance accorded to the
judicial independence, which showed a positive correlation to gross domestic product (GDP). It
is also shown that other institutional variables (property rights and political rights) have a
positive correlation to judicial independence. A further finding is that uncertainty (political
instability) has a negative effect on economic development over time in Tanzania.
Description
Keywords
Economic development, Namibia, Tanzania, Capital, Institutions, Measurement