INSTITUTIONAL QUALITY, GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH: PANEL EVIDENCE FROM FOUR SELECTED WEST AFRICAN COUNTRIES

INSTITUTIONAL QUALITY, GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH: PANEL EVIDENCE FROM FOUR SELECTED WEST AFRICAN COUNTRIES

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CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF STUDY

The search for the real determinant of economic growth has generated controversial outcomes in economics. The role of government expenditure in the economic growth process of various economies is not left out in this conflict, because while scholars have come to argue that increase in government expenditures, especially on socio-economic and physical infrastructure, fosters economic growth, other series of arguments have also emerged on the platform that increase in government spending does not actually promote growth and development but rather, it reduces overall performance Abayomi and Agbatogun, (2011) and sometimes acts as a dead weight on the economy.

In trying to explain this conundrum, it becomes pertinent to establish the role of institutions as the link between efficient government expenditure and economic growth. In institutionally weak societies, there are few constraints on the rulers (economic managers) and this gives them a free hand to redistribute assets and income amongst themselves, and in the process creating economic turbulence. This turbulence translates to unfavorable transaction cost and costs of transformation (in the production process). Effective and efficient governance underlines the notion that the misuse of public funds; contribute to the rising cost of governance and, the excess money spent on particular set of (unnecessary) goods affect development, since resources are scarce and should be optimally utilized.

The goal of every public sector engagement is the successful translation of expenditure into outputs. However this may not be the case at all times because of “rent-seeking”. As noted in the study paper of NISER (2003), public expenditures may fail to translate into desired and expected services for a variety of reasons. One of such reasons is the possibility that the expenditures may be directed at the wrong goods or the wrong people. But even when governments spend on the right goods or the right people, the


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money may fail to reach the frontline service providers. This underlines the need for good

and sound quality institutions.

Research on the empirical determinants of economic growth has exploded in the last decade, as hundreds of cross-national studies have been undertaken to approach the elusive and ever-important question of what causes growth and the prosperity of nations. Economists have traditionally focused on the effects of physical and human capital accumulation, total factor productivity, technological innovation, the process of knowledge creation and diffusion, and international economic integration (Helpman, 2004).

However, experts have increasingly recognized that politics and institutions are keys to the process of economic growth, by affecting the incentives to accumulate, innovate and accommodate change (Avellaneda, 2006).Though, the theoretical tradition of emphasis on capital accumulation, economics of scale etc, is still vibrant in economics and has provided many insights about the mechanics of economic growth, it has for long time seemed unable to provide the fundamental explanation for economic growth (Acemoglu, Johnson and Robinson, 2004). As North and Thomas (1973) put it, "innovation, economics of scale, education, capital accumulation etc, are not causes of growth, but that they are growth in themselves"; factor accumulation are only proximate causes of growth. In North and Thomas' view, the fundamental explanation for comparative growth is the differences in institutions.

Institutions have been defined along a wide spectrum. Toward one end is the notion of institutions as establishing the "rules of the game" for a society, or using North's (1990) widely cited definition, as the formal and information constraints on political, economic and social interactions (World Bank, 2005). From this perspective, 'good' institutions are viewed as establishing an incentive structure that reduces uncertainty but promotes efficiency, hence contributing to a stronger economic performance. Toward the other spectrum is giving more specific shape to this broad concept of institutions, which


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would be particular for organizational entities, procedural devices and regulatory frameworks (Williamson, 2000). Such institutions affect performance primarily by fostering better policy choices. Economic institutions do not only determine the aggregate economic growth potential of the economy, but also, involves an array of economic outcomes, including the distribution of resources in the future (Acemoglu et. al, 2004). What then determines the prosperity of nations? At its core; the hypothesis that differences in economic institutions are the fundamental cause of different patterns of growth, is based on the notion that it is the way that humans themselves decide to organize their societies that determines whether or not they prosper. This is because, while some ways of organizing societies, actually encourage people to innovate, to take risks, to save for the future, to find better ways of doing things, to learn and educate themselves, solve problems of collective action and provide public goods etc, others do not. This goes to show that societies are economically successful when they have "good" institutions and it is these institutions that are the cause of prosperity

1.2     STATEMENT OF PROBLEM

At the dawn of the new millennium, Africa still faces monumental development problems. The 600 million people inhabiting the 50 odd -countries in Sub-Saharan Africa are among the poorest in the world (lyoha and Oriakhi, 2002). While the rest of the world's economy grew at an annual rate of close to 2 percent from 1960 to 2002, growth performance in Africa has been dismal; from 1974 through the mid-1990s, growth was negative, reaching -1.5% in 1990 to 1994. It is noteworthy therefore, that one half of the African continent inhabitants lives below the poverty line (Oteng-abayie, 2011). In sub-Saharan Africa, per capita GDP has been on a continuous decline and does not look to be halting soon. In 1970, one in ten poor citizens of the world lived in Africa, and by the year 2000, the number was closer to one in two of such poor citizens. That trend translates into 360 million poor Africans in year 2000, compared to 140 million people in


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the year 1975 (Artadi and Sala-i-Martin, 2003). This problem can only be attributed to the fallen rate of investments in Africa, which is owing to the fact that most of the investments made were skewed in the direction of the ineffective public sector.

In Nigeria, government expenditures have been on the increase owing to huge receipts from production and sales of crude oil, as well as the increased demand for public (utility) goods like roads, healthcare etc (Sevitenyi, 2012). Unfortunately, this rising government expenditure has not translated to meaningful growth and development. Many people have continue to wallow in poverty and more than 50% of Nigerians live on less than US $2 per day (Nurudeen and Usman, 2010). For instance, total capital and recurrent expenditure increased from N10, 163.3m and N 4, 805.2m in 1980, to N 24, 048.6m and N36, 219.6m in 1990, and further increased to N 25, 9450.9m, N 46, 1600m in 2000. Between 2011 to 2009, they had increased from N 435, 696.5m, N 579, 300m to N l, 152,796.6b, N 2,131,906b respectively. Notwithstanding the huge expenditures, the various macroeconomic indicators does not show any sign of improvement, whatsoever.

In Ghana the percentage of the public expenditure has also been on continuous increase overtime. The trend shows that it increased from 26.2% of the total budget in 1999, to 33.3% in 2004, 33.8% in 2006 and 35.6% in 2009 without a commensurate improvement in the people's living standard/infrastructural growth, as about 28.5% of the population still live below the poverty line (Ghana economic performance, 2009). These expansionary fiscal policies have caused large macroeconomic imbalances and the recent government spending policies have fuelled rising inflation and have also created ballooning and non sustainable fiscal and current deficits (Bank of Ghana, 2009).

Sierra Leone is arguably, one of the poorest countries in the world and boasts of a per capita income of just US$170 in 1992. The distribution of income is very uneven that over two-thirds of the population lives in absolute poverty, and in 1990 about 54% of the total population live on US$2 or less, per day. The Government expenditure as a


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percentage of the GDP has been hovering around 21%, 29% and 22% percent in 1999, 2001 and 2011 respectively and. it is this wasteful public expenditure policies, often characterized by a remarkable shift toward unnecessary expenditure activities, coupled with the pitiable decline in real per capita allocations for the social sectors (Health, education etc), that has been the major factor behind the rise in the spate of poverty in the 1980’s and beyond. The GDP growth rate has been disappointingly unstable and has been fluctuating between 1.8%, 0.04%, 0.9% and -0.4% in 1961, 1967, 1972 and 1972 respectively, while succumbing to an all time low of -7% in 1988 and 2011 (world bank 2013). Despite all the various government endeavors, statistics show that the social indicators in this country is among the worst in the whole world with a life expectancy of about 42 years and adult illiteracy estimated at 79%, while the infant mortality rate is the highest recorded in Africa.

Burkina Faso, like most West African countries has remained entangled in the web of gross poverty incidence and a “snail like” growth pattern. The growth pattern is characterized by a very slow, albeit steady growth and absence of structural transformation (Gustave, marc, Augustin and Estelle, 2013). Since independence the growth record of Burkina Faso is an increase in the GDP per capita by 1.6% per annum and the GDP growth rate shows a disappointing trend of -1.4% in 1961. Rent seeking is actually the biggest problem in the country of honest men (as burking Faso is known). The elites have since devised means of manipulating the various aids from foreign donors, in order to use them in obtaining their real objectives and disbursing them according to their personal needs. This places huge burden on a country that is not so blessed with natural resources and as such the poverty incidence worsens. Thus, over 51.6% of the population lives on less than 2 dollars per day in 1994 and 49% in 1998


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whereas the public expenditure has expanded from 11% in 2002 to 15% of the GDP in

2012 yet been unable to translate into any meaningful breakthrough, economically.

From the foregoing, it can be argued that what these countries have in common is the existence of high public investment which translates to high cost of governance and low economic growth. Much of the high cost of governance, are largely due to the absence of institutional structures that direct attention away from predation (waste), to production.

It is therefore, against this background that this study seeks to answer the research question below:

1)


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