The impact of institutions on economic performance: an empirical case of African economies

Abstract

Explaining cross-country variations in economic performances not only requires a deeper understanding of the links between growth and public policies, but it also requires an understanding of the channels through which institutions affect the growth rates of countries. This study examines the impact of institutions on economic performance using balanced panel data covering 39 African countries from 2002 to 2018. A standard growth regression is estimated with linear interaction between economic growth, institutional quality and structural determinants of economic performance. The study applied Pooled Ordinary Least Squares (POLS), fixed effects (FE), and random effects (RE) models. Empirical findings show that institutions do matter for Africa’s economic growth; the institutional quality measure significantly explains growth. Furthermore, trade openness, government spending, gross capital formation, and population growth have a strong positive impact on African growth, whereas human capital is found to weakly influence growth and is either significant in some models and insignificant in other models. The findings imply that African countries should improve government administration and develop more efficient legal institutions while increasing investments in human capital accumulation. Growth policies should also focus on liberalizing the countries to open for international trade, to benefit from spill overs of ideas and new technologies while advancing fixed capital formation