ABSTRACT

Responding to the continuing search for the true determinants of economic growth, this study analyses the impact of institutional quality and government expenditure on economic growth, using panel data for four selected West African countries (Nigeria, Ghana, Sierra Leone and Burkina Faso) over the period 2005 to 2013. The results show that economic institutions have a positive and significant relationship with economic growth, whereas political institutions have a negative and insignificant effect on growth in the four countries. The empirical findings also reveal that government expenditure has a strongly positive and significant impact on economic growth. In addition, structural policy institutions were found to improve the outcomes of government expenditure in these countries throughout the study period. On the basis of these findings, the study recommends concerted efforts to clean up the various institutions so as to improve policy formulation and implementation and, by implication, raise economic growth. It further recommends that governments channel their public expenditure toward productive sectors such as education and health, and toward the provision of the infrastructure that development requires. Finally, institutions play a vital role in achieving sustainable growth and development.

Keywords: Institutional quality, Government expenditure, Economic growth, Good governance

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The search for the true determinant of economic growth has produced contested results in economics, and the role of government expenditure in the growth process is part of this dispute. Some scholars argue that higher public spending, particularly on socio-economic and physical infrastructure, fosters growth. Others contend that larger government spending does not promote growth and development but instead lowers overall economic performance and may act as a dead weight on the economy. Barro (1990), for example, showed that public spending on productive services can raise growth, but that the taxation needed to finance it distorts private decisions and can offset the gains. Recent evidence from West Africa points in a similar direction: Olaoye et al. (2020), studying 15 ECOWAS countries between 2005 and 2017, found that government spending raises growth but that the prevailing institutional environment weakens this positive effect. To explain this puzzle, it becomes necessary 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 those who hold power, which gives them a free hand to redistribute assets and income among themselves and, in the process, to create economic turbulence (Acemoglu et al., 2005). This turbulence translates into unfavourable transaction costs and higher costs of transformation in the production process. Effective and efficient governance rests on the principle that the misuse of public funds raises the cost of governance, and that money spent on unnecessary goods harms development because resources are scarce and should be put to their best use.

The goal of every public sector undertaking is the successful translation of expenditure into outputs. This does not always happen, largely because of rent-seeking (Krueger, 1974; Murphy et al., 1993). Public expenditure may fail to deliver the expected services for several reasons. One is that spending may be directed at the wrong goods or the wrong people; Mauro (1998), for instance, showed that corruption tilts government spending away from education and health toward less productive uses. Even when governments spend on the right goods and the right people, the money may fail to reach frontline service providers. This underlines the need for sound, high-quality institutions. Research on the empirical determinants of economic growth has expanded rapidly, with hundreds of cross-national studies attempting to answer the persistent question of what causes growth and the prosperity of nations.

Economists have traditionally concentrated on the effects of physical and human capital accumulation, total factor productivity, technological innovation, the creation and diffusion of knowledge, and international economic integration (Helpman, 2004). Increasingly, however, experts recognise that politics and institutions are central to the growth process because they shape the incentives to accumulate, innovate and adapt to change (Acemoglu et al., 2005; Rodrik et al., 2004). Although the tradition that emphasises capital accumulation, economies of scale and similar factors remains vibrant and has yielded many insights into the mechanics of growth, it has long appeared unable to supply the fundamental explanation of growth (Acemoglu et al., 2005). North and Thomas (1973) argued that innovation, economies of scale, education and capital accumulation are not the causes of growth but are themselves growth, so that factor accumulation is only a proximate cause. In their view, the fundamental explanation for differences in growth across countries lies in differences in institutions.

Institutions have been defined along a wide spectrum. At one end is the notion of institutions as the "rules of the game" in a society, or, in North's (1990) widely cited definition, the humanly devised formal and informal constraints that shape political, economic and social interaction. From this perspective, "good" institutions establish an incentive structure that reduces uncertainty and promotes efficiency, thereby contributing to stronger economic performance. At the other end of the spectrum, the broad concept is given more specific shape in terms of organisational entities, procedural devices and regulatory frameworks (Williamson, 2000). Such institutions affect performance mainly by promoting better policy choices. Economic institutions determine not only the aggregate growth potential of an economy but also a range of economic outcomes, including the future distribution of resources (Acemoglu et al., 2005).

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 rests on the idea that the way people choose to organise their societies determines whether or not they prosper. Some ways of organising societies encourage people to innovate, take risks, save for the future, find better ways of doing things, educate themselves, solve collective-action problems and provide public goods, while others do not. Societies are therefore economically successful when they have "good" institutions, and it is these institutions that cause prosperity (Acemoglu et al., 2005). Evidence from West Africa is consistent with this view. Iheonu et al. (2017), using data on 12 West African countries for 1996 to 2015, found that indicators such as control of corruption, government effectiveness, regulatory quality and rule of law were positively and significantly related to economic performance under fixed- and random-effects estimation, although only government effectiveness remained significant once endogeneity was addressed. Ogbuabor et al. (2020), by contrast, found a predominantly negative relationship between institutional quality and growth in a panel of 13 West African countries, and identified corruption, government ineffectiveness, weak regulatory quality, political instability, absence of the rule of law and weak accountability as factors that hinder growth. Olaniyi and Oladeji (2021) similarly reported that institutional quality weakens the growth benefits of financial development in West Africa.

1.2 Statement of the Problem

At the start of the new millennium, Africa still faces enormous development problems. The roughly 600 million people living in the 50-odd countries of Sub-Saharan Africa are among the poorest in the world, and West African countries rank among the most impoverished globally (Ogbuabor et al., 2020). While the world economy grew at an annual rate of close to 2 percent between 1960 and 2002, Africa's growth performance was dismal: from 1974 to the mid-1990s growth was negative, falling to -1.5% between 1990 and 1994. Roughly half of the continent's inhabitants live below the poverty line. In Sub-Saharan Africa, per capita GDP has been in persistent decline and shows no sign of halting soon. In 1970, about one in ten of the world's poor lived in Africa; by 2000 the figure was close to one in two. This translates into 360 million poor Africans in 2000, compared with 140 million in 1975 (Artadi & Sala-i-Martin, 2003). This outcome can be attributed to the fall in the rate of investment in Africa, since most investments were skewed toward an ineffective public sector.

In Nigeria, government expenditure has risen because of large receipts from the production and sale of crude oil and growing demand for public goods such as roads and healthcare. Unfortunately, this rising expenditure has not translated into meaningful growth and development. Many people continue to live in poverty, and more than 50% of Nigerians live on less than US$2 per day. For instance, total capital and recurrent expenditure rose from N10,163.3m and N4,805.2m respectively in 1980 to N24,048.6m and N36,219.6m in 1990, and continued to climb steeply in 2000 and the following decade, eventually reaching the trillions of naira. Despite these huge expenditures, macroeconomic indicators show no sign of improvement.

In Ghana, the share of public expenditure has also risen continuously over time. 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 living standards or infrastructure, as about 28.5% of the population still lives below the poverty line. These expansionary fiscal policies have produced large macroeconomic imbalances, and recent spending policies have fuelled rising inflation and created ballooning and unsustainable fiscal and current-account deficits.

Sierra Leone is arguably one of the poorest countries in the world, with a per capita income of just US$170 in 1992. Income distribution is highly uneven: over two-thirds of the population lives in absolute poverty, and in 1990 about 54% of the population lived on US$2 or less per day. Government expenditure as a share of GDP hovered around 21%, 29% and 22% in 1999, 2001 and 2011 respectively. It is this wasteful public expenditure, often marked by a shift toward unnecessary spending activities and a pitiable decline in real per capita allocations to the social sectors (health, education and others), that has been the main factor behind the spread of poverty from the 1980s onward. The GDP growth rate has been disappointingly unstable, fluctuating between 1.8%, 0.04%, 0.9% and -0.4% across 1961, 1967 and 1972, and falling to an all-time low of -7% in 1988 and 2011. Despite various government efforts, the country's social indicators are among the worst in the world, with life expectancy of about 42 years, adult illiteracy estimated at 79%, and the highest infant mortality rate recorded in Africa.

Burkina Faso, like most West African countries, remains entangled in widespread poverty and a "snail-like" growth pattern, characterised by slow but steady growth and an absence of structural transformation. Since independence, GDP per capita has grown by 1.6% per annum, while the growth rate in 1961 was a disappointing -1.4%. Rent-seeking is arguably the biggest problem in the "country of honest men", as Burkina Faso is known. Elites have devised ways of manipulating aid from foreign donors and disbursing it according to their personal needs. This places a heavy burden on a country not richly endowed with natural resources, and poverty incidence worsens as a result. Over 51.6% of the population lived on less than 2 dollars per day in 1994 and 49% in 1998, while public expenditure expanded from 11% of GDP in 2002 to 15% in 2012 without delivering any meaningful economic breakthrough.

From the foregoing, it can be argued that what these countries have in common is high public investment, which translates into a high cost of governance and low economic growth. Much of this high cost of governance is largely due to the absence of institutional structures that redirect attention from predation (waste) to production. It is against this background that the study seeks to answer the following research questions:

1. What role does institutional quality play in economic growth?
2. What is the effect of public sector expenditure on the growth of these countries?
3. Does institutional quality affect the outcome of government expenditure endeavours in these countries?

1.3 Objective of the Study

The broad objective of the study is to investigate how growth responds to institutional quality and government expenditure in Nigeria, Ghana, Sierra Leone and Burkina Faso. The specific objectives are:

1. To ascertain whether institutional quality impacts on economic growth in Nigeria, Ghana, Sierra Leone and Burkina Faso.
2. To determine if the level of expenditure dampens or boosts economic growth in Nigeria, Ghana and Sierra Leone and Burkina Faso.
3. To ascertain whether institutional quality impacts on government expenditure outcomes in Nigeria, Ghana and Sierra Leone and Burkina Faso.

1.4 Statement of Hypotheses

Ho1: Institutional quality does not affect growth in Nigeria, Ghana, Sierra Leone and Burkina Faso.

Ho2: Public sector expenditure has no significant impact on economic growth in Nigeria, Ghana and Sierra Leone and Burkina Faso.

Ho3: Institutional quality has no impact on government expenditure outcomes in Nigeria, Ghana and Sierra Leone and Burkina Faso.

1.5 Relevance of the Study

The importance of this study cannot be overemphasised, as it seeks to draw attention to the endogenous and distributive nature of institutions and their critical role in determining the growth and development of nations (Acemoglu et al., 2005; Rodrik et al., 2004).

Policy makers will find this work beneficial because it departs from the traditional emphasis on the proximate causes of growth and development, and highlights the merits of an institutions and good-governance approach, thereby opening a more holistic pathway to economic prosperity.

Researchers and students will find the work relevant because, by offering insights into the channels through which institutions affect economic performance, it contributes to the consolidation of a theory-driven, empirically grounded and policy-relevant research programme on the institutional foundations of growth and development.

1.6 Scope of the Study

This study is a panel analysis of the impact of institutions on government expenditure outcomes in Nigeria, Ghana, Sierra Leone and Burkina Faso. The data span 2005 to 2013, a period determined by data availability. The variables considered are government expenditure, public debt, an institutional quality indicator, Gross Domestic Product and an economic management indicator. The index chosen to measure the quality of institutions is drawn from the World Bank's Country Policy and Institutional Assessment (CPIA). It comprises: (a) economic management; (b) structural policies; and (c) public sector management and institutions, covering property rights and rule-based governance, quality of budgetary and financial management, efficiency of revenue mobilisation, quality of public administration, transparency and accountability, and corruption in the public sector.

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