The dynamics and quality of institutions for structural change and industrialization in Africa

Abstract

In the last three decades, the predominant role of institutions has re-emerged as a major determinant of economic growth and sustainable development. The increasing regional and national disparities have contributed to the emerging consensus that institutions matter greatly for economic performance. Yet, magnificent discrepancies are witnessed on how, when, where and to what extent institutions should play the intended role to achieve the desired development goals. The premise "Not all types of institutions are important for all types of sectors in all countries at the same time" is the basis of these ongoing debates. Particularly for developing countries, identifying the context-based institutional configurations to promote the right sectors at the right time could be the best development policy but not an easy task to do. In this regard, previous studies on the role of institutions for economic development persistently relied on Growth Domestic Product as a measurement of economic performance and skipped the investigation of the dynamics of structural change triggered by institutions and their long-term effect. However, since-2000s, some scholars have started to question the overriding emphasis on growth, particularly in African countries, as they had experienced a remarkable, average GDP growth rates but little advancement either in living standards or structural change. The structural change, which typically happens through a movement of resources from agriculture to the industry sector, then to the service sector, appears to skip the secondary sector, mainly the manufacturing sector in Africa. This is what has been called premature de-industrialization, characterized by increasing shares of employment in the service sector and informal activities and stagnating or decreasing trends in the manufacturing sector. The main explanations provided for Africa's unusual trend of industrialization relate to unsuitable policies, institutions, and the consequent Dutch disease effect arising from an extensive natural resource rent. In addition, the institutional arrangement and coordination failures that arise from various inter-sectoral and structural interdependencies determine the development of manufacturing in Africa, characterized by bottlenecks and constraints related to lack of development in the local production systems, economic diversifications, and value additions. This calls for the attention of both governments and academia to investigate how institutions affect the dynamics of structural change in Africa and what type of institutions could favor industrialization. Therefore, this thesis examines the dynamics and quality of institutions for structural change and industrialization in Africa. For this purpose, the study uses panel data on 40 African nations from 2000 to 2019 to analyze the role of the quality of institutions. Composite indexes built from The World Banks' World Governance Indicators are used to measure the multidimensional aspects of institutions in Africa, while the GDP and employment share of manufacturing and its merchandise share of export is used to measure the level of industrialization. In order to control for regional disparities, the study divides Africa into its five regions. Various controls (income level, urbanization, domestic credit, trade openness, export concentration, oil export, FDI, human capital, and infrastructures such as energy supply and transportation) are also included. The results show that institutions are significant for the development of the manufacturing sector; however, once the homogeneity within regions and the heterogeneity among them are taken into account, institutions have a moderate effect. This implies that the context and the dynamics of the internal environment and the economic structure of regions might determine to a large extent, the effect of institutions on the development of manufacturing. The result suggests the need to redesign and realign institutions towards regions' context and economic structures and emphasize the interdependencies among sectors that demand better institutional configuration and strategic coordination.