Credible Commitment and Economic Growth in Africa - DORAS

Credible Commitment and Economic Growth in Africa Michael Seifu
Thesis submitted for the award of PhD in Political Science and
International Relations Supervisors: Prof. Robert Elgie & Dr. Iain McMenamin
School of Law & Government
Dublin City University
August 2009
DECLARATION
I hereby certify that this material, which I now submit for assessment on
the programme of study leading to the award of PhD in Political Science and
International Relations is entirely my own work, that I have exercised
reasonable care to ensure that the work is original, and does not to the
best of my knowledge breach any law of copyright, and has not been taken
from the work of others save and to the extent that such work has been
cited and acknowledged within the text of my work.
Signed: _____________________ Student ID No. 54141451
Date: 02 July 2009
ACKNOWLEDGEMENTS
I was privileged to have received the support of several people in
completing this research project. First and foremost, I would like to
express my heartfelt gratitude to my supervisors, Professor Robert Elgie
and Dr. Iain McMenamin. It is with pleasure and pride that I acknowledge
their invaluable assistance in introducing me to the rigours of academic
research. I would also like to thank the School of Law and Government for
providing me with the financial and logistical wherewithal which made this
research possible. Similarly, thanks are also due to the Central Remedial
Clinic for awarding me the 2006 Dr. Ciaran Barry Scholarship. My dear
friend and fellow SALIS PhD candidate, Kieran O'Driscoll, deserves a
special mention for thoroughly editing my thesis. A note of gratitude goes
to Mr. Alan O'Brien, Mr. Michael Ryan and the staff at the Disability
Office of Dublin City University.
While my gratitude also goes to all the members of my family in
Ethiopia, I reserve a special thanks to my wife, Netsanet Abitew. Whenever
I reach one or another milestone in my life, I fondly remember my late
mother, Yemariam Work Asfaw, to whom I owe all the energy and perseverance
I possess. This time is no different. Finally, I dedicate this work to all
the people of Ireland, whose generosity and kindness have left an indelible
mark on my heart. Go raibh maith agaibh goléir! Abstract 11 Chapter 1. Introduction 13 1.1) The argument of the dissertation 17
1.1.1) Theory 17
1.1.2) Research method 19
1.1.3) Findings 20 1.2) Value-added of the thesis 22 1.3) Structure of the thesis 23 Chapter 2. A Review Essay on the Political Economy of Growth 26 2.1) Statement of the research problem 29 2.2) Institutions and institutionalism 33
2.2.1) Sociological institutionalism 36
2.2.2) Historical institutionalism 39
2.2.3) Rational choice institutionalism 41 2.3) The credible commitment paradigm 46
2.3.1) Theoretical underpinnings 46
2.3.1.1) A time-inconsistency policy paradigm 47
2.3.1.2) A political instability paradigm 50 2.4) A typology of political institutions of credible commitment 52
2.4.1) Institutions of delegation 52
2.4.1.1) Central Bank Independence 55
2.4.1.2) Judicial Independence 58
2.4.2) Rule of law and credible commitment 61
2.4.3) veto players and credible commitment 64 2.5) Empirical studies on nexus between institutions and economic growth
67
2.5.1) Does democracy cause economic growth? 68
2.5.2) Property rights and economic growth 70 2.6) Discussion and summary 75 Chapter 3. Empirical models for economic growth accounting 79 3.1) Major approaches in economic growth studies 81
3.1.1) Growth diagnostics 81
3.1.2) Growth accounting 83 3.2) Rationale for cross-country economic growth analysis 84 3.3) The Basics 87
3.3.1) The Solow model 87
3.3.2) Augmented variants of the Solow model 91
3.3.3) A note on current state of growth modelling 96
3.3.3.1) Cross-sectional models 97
3.3.3.2) Panel data models 100 3.4) Discussion and summary 107 Chapter 4. The Setting 109 4.1) Competing theories on African economic performance 109
4.1.1)A growth-inhibiting geography thesis 109
4.1.2) Socio-cultural and historical factors 111
4.1.3) Institutions rule: a political economy paradigm 112
4.1.4) Political variables in African economic growth studies 114 4.2) Rationale for growth analysis in an African context 116 4.3) Africa as a diverse set of performance and institutions 121 4.4)The Botswana-Mauritius story(ies) 125 4.5) Discussion and summary 129 Chapter 5. Model specification and testing 131 5.1) The cross-sectional model 133 5.2) The panel model 135
5.2.1) The dependent variable 136
5.2.2) Economic covariates 142
5.2.2.1)The convergence hypothesis 143
5.2.2.2)Investment 148
5.2.2.3)Human capital 151
5.2.2.4) Other economic variables 154 5.3) Data and analysis 157
5.3.1) Descriptive analysis 158
5.3.2) Quantitative analysis 164
5.3.2.1) Basic Solow Model 164
5.3.2.2) Basic Solow augmented by economic policy variables 171 5.3) Discussion and summary 182 Chapter 6. Delegation, credible commitment and economic growth in Africa
183 6.1) Central Bank independence 185
6.1.1) A background note on Central Banking in Africa 186
6.1.1.1) Pre-independence Africa and Central Banking 186
6.1.1.2) Post-independence Africa and Central Banking 189
6.1.2) Operationalisation of the CBI variable 191
6.1.3) Data and analysis 198
6.1.3.1) CBI and its evolution 198
6.1.3.2) A new set of CBI indicators for Africa 202
6.1.3.3) Tenure of Central Bank governors in Africa 204
6.1.3.4) Descriptive analysis 206
6.1.3.5) Quantitative analysis 211 6.2) Judicial independence 219
6.2.1) Operationalisation of judicial independence 222
6.2.2) Data and analysis 229 6.3) Discussion and summary 242 Chapter 7. Rule of law-cum-credible commitment and economic growth in
Africa 243 7.1. Property rights, commitment and economic growth 244
7.1.1) Rule of law 245
7.1.1.1) Operationalisation of rule of law 247
7.1.1.2) Rule of law indicators 253
7.1.1.3) Data and analysis 255
7.1.2. Corruption 265
7.1.2.1) Operationalisation of corruption 266
7.1.2.2) Analysis 268 7.2. A composite rule of law variable 277
7.2.1. Data 278
7.2.2. Operationalisation 279
7.2.3. Analysis 282 7.3. Discussion and summary 284 Chapter 8. Veto players, credible commitment and economic growth in Africa
286 8.1) Do veto players matter for economic growth? 287
8.1.1) The Problem 287
8.1.2. The Concept 291 8.2 Operationalisation of the veto players variable 295
8.2.1. Checks (DPI) 295
8.2.2) Polcon (Henisz) 297 8.3. Data and analysis 303
8.3.1.) Descriptive analysis 306
8.3.2) Quantitative analysis 311
8.3.2.1) Basic model with political variables 312
8.3.2.2) Basic model with policy interactive terms 316 8.4) Discussion and summary 324 Chapter 9. Conclusion 325 9.1) A brief recapitulation 325 9.2) Limitations of the study 327 9.3. Looking ahead 328 Appendix A. Basic Solow variables for an African panel data 331 Appendix B. Basic Solow model with country effects 341 Appendix C African cross-sectional economic growth model variables 343 Appendix D. Country notes on Central Banks Governors in Africa 346 Appendix E Country notes on Central Banks legislations in Africa 350 Appendix F. CBI Variables for Africa 351 Appendix G. Data sources for economic and political variables 353 Appendix H. African Central Banks on the Web 354 Appendix I. Basic Solow robustness test on Botswana and Mauritius 355 Appendix J. Basic Solow robustness tests (different specifications) 356 Appendix K. Basic Solow augmented for policy variables (robustness tests
using different specifications) 357 Appendix L. CBI estimates robustness tests (different specifications)
359 Appendix M. CBI estimates robustness tests (different controls) 361 Appendix N. JI estimates robustness tests (different specifications)
362 Appendix O. JI estimates robustness tests (different controls) 363 Appendix P. Basic Solow with controls for colonial history 364 Appendix Q. A brief description of the African governance indicators
365 Appendix R. A correlation matrix between fixed factors and quality of
institutions in Africa 366 Appendix S. A note on the joint effects of institutions of credible
commitment on economic growth in Africa 367 Bibliography 370
List of Figures Figure 1 Democracy and economic growth in Africa 119
Figure 2 A range spike for African economies 138
Figure 3 Africa and the convergence hypothesis 146
Figure 4 A Kernel density plot on economic growth in Africa 161
Figure 5 Evolution of CBI in Africa 200
Figure 6 Links between CBI variables 209
Figure 7 Rule of Law and economic growth in Africa 251
Figure 8 Corruption and economic growth in Africa 267
Figure 9 Eigenvalues of the factors 281
Figure 10 Economic policy volatility in Africa 290
Figure 11 Veto players in Africa: A mixed record 302
List of Tables Table 1 Descriptive statistics of economic variables 159
Table 2 A correlation matrix between economic growth and selected economic
variables 163
Table 3 Basic Solow fixed-effects model (Dependent variable is the natural
log of change in real GDP per capita) 166
Table 4 Basic Solow GMM estimation (Dependent variable is the natural log
of change in