MSc. Political Science
Political Economy
To What Extent do International
Institutions Lead to the
Disenfranchisement of African
States?
Víctor López Hernández
Student Number: 10846506
June 2019
Supervisor: Dr. Michael Eze
Statement of Originality
This document is written by Víctor López Hernández, who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this thesis are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Political Science is responsible solely for the supervision of completion of the work, not for the contents.
To What Extent do International Institutions Lead to the Disenfranchisement of
African States?
Abstract
Africa’s dismal economic and socio-political performance has continued to plague the continent and its people since the wave of independence in the 1960s, constituting a severe impediment to the realization of the African Renaissance. In an attempt to remedy these outcomes, international institutions have been deployed. Yet, their success has been mixed and their reception in the literature limited. This investigation therefore explores this topic by examining data on 47 African countries in the period 1996-2017. In particular, it assesses the impact of international institutions across three variables – economic performance, institutional quality and he power of elites – to determine whether African states have become disenfranchised or whether these can be utilized as a tool to achieve the continent’s revival. The regression results, which controlled for the heterogeneity of African states and addressed endogeneity issues through the use of entity and time fixed effects and IVs, find a largely positive impact on Africa’s economic, social and political outcomes. In particular, a 1 percent increase in FDI flows, which proxy MNEs, increase economic output by 0.22 percent, while a state’s corruption score is improved by 0.0426. Similarly, a 1 percent increase in aid flows generates an increase in a state’s GDP by 0.268 percent, increases the institutional quality score by 0.137 and reduces corruption by 0.125. Conversely, despite improving economic performance, IFIs reduce institutional quality and increase corruption. As such, the findings generally support the view that international institutions can contribute to the enfranchisement of African states. However, concerns are also voiced on the suitability and adequacy of international institutions in the African context. These may be diluted by Africa’s weak institutional infrastructure, while the moral illegitimacy of external forces can render the impact of international institutions sterile at best. Therefore, a number of structural issues inherent in these reform programs ought to be addressed in order to constitute efficient development tools.
Key Words: African Renaissance, international institutions, African disenfranchisement, development
Víctor López Hernández MSc. Political Science Thesis
University of Amsterdam 10846506
Contents
I. Introduction……….………..…4
II. Literature Review………....7
III. Theoretical Framework and Hypotheses……….….15
IV. Data………..21
V. Methodology……….24
i. Model Specification………24
ii. Estimation Strategy………..………..30
VI. Results……….………….….……...34
VII. Discussion………...40
VIII. Conclusion……….44
Works Cited………...46
I. Introduction
Africa has consistently been underperforming in key economic and sociopolitical indicators since the wave of African independence in the 1960s. This is particularly shocking when Africa’s story is compared to that of the Asian Tigers, who at the same point in time and with similar resources, were able to grow, industrialize and develop into some of the most prosperous and modern societies in the world. In contrast, Africa’s economic performance has shied from its true potential, with estimates revealing its output ranges at 23 percent below its production possibilities frontier (Bloom et al., 2006, p. 23). This amounts to having the highest poverty rate in the world at 47.5 percent of its population living on less than 1.25 dollars a day (World Bank, 2013). Similarly, a significant portion of the literature has depicted Africa as a continent in which formal institutions do not perform as intended, with official rules labeled as weak, fragile and vulnerable to executive manipulation by powerful and corrupt personal networks and ethnic politics (Cheeseman, 2018, p. 4). More worrying is the fact that one third of African countries have been labeled as fragile and susceptible to instability as a consequence of the prevalence of despotic and authoritarian rule that some states exercise over their peoples (Casper, 2017, p. 965). Critically, these dismal economic and political outcomes are evidenced by acute deprivation, social turmoil and continued political restraint.
These bleak outcomes have constituted a staunch structural impediment for the continent to truly emancipate and achieve the African Renaissance. The fact that the current context sees states not organized and governed by a fundamental set of laws that ensure predictability and a great degree of legitimacy continue to represent barriers to sustainable development, political renewal and social harmony. Moreover, the lack of a set of specific and integral solutions that address these problems has the potential to exacerbate the lagging of Africa in the world stage (Napier, 1997, p.93; Olowu, 1998, p. 215).
Africa’s poor institutions are said to be the primary cause of many of these challenges, with a number of studies across the literature examining their salience in specific country contexts. For instance, Alexiou et al. (2014) find that Sudan’s lack of sound economic and political institutions increased its vulnerability to shocks and crises, which in turn lead to economic and political instability. Similarly, Acemoglu et al. (2010) attribute Zimbabwe’s economic collapse to a deficient institutional framework that allowed dismal social policies in the early 2000s. More generally, Jeffries (1993) concludes that African governments have been characterized by corruption, wastefulness and short-sighted economic policy, which has ultimately weakened governmental capacity and hindered attempts at economic revival. Similarly, Napier (1997) outlines that Africa’s lack of institution building since colonialism has diluted the infrastructure conducive to good governance, which has exacerbated corruption and despotism (p. 95). Hence, an important precondition for development is the
establishment of more efficient state machines, which Jeffries (1993) sees as independent government institutions committed to a national public interest (p. 20).
Therefore, in an attempt to find a solution to many of the continent’s misfortunes, numerous efforts have been made concentrating on the structural reform of institutions. Here, a popular choice has been the deployment of international institutions, particularly given the praise these have received in the economics literature. These international institutions have typically consisted of multinational enterprises (MNEs), aid organizations and non-governmental organizations (aid), and international financial institutions (IFIs). According to scholars such as Eichengreen (1996), these international institutions can have a positive impact as they help create the ‘right’ incentives in society to solve commitment and coordination problems. In turn, this encourages the protection of property rights and ‘good’ governance. Ultimately, these stimulate private domestic and foreign investment, which can have a multiplier effect and increase economic growth and development.
However, the success of these programs and their reception across the literature has been mixed. In the context of MNEs, a large literature has debated on its possible impacts, mostly by assessing foreign direct investment (FDI) inflows. Here, one perspective argues that FDI flows can result in increased economic output through increased demand, have positive knowledge spillovers and encourage the protection of property rights (Sylwester, 2006). Others see MNEs as a force that can contribute to increased income inequality and generate more corruption (Bornscheir et al., 1978).
Similarly, there is a lack of consensus on how aid flows and IFIs affect African countries. On the one hand, aid dependency theory, which can be extended to include IFI flows, suggests that substantial increases in aid flows over a sustained period of time can have a harmful effect on institutional development in Africa, in turn leading to economic and political disturbances (Brautigam & Knack, 2004, p. 255). For instance, Moss et al. (2006) show how countries that can raise a substantial proportion of their revenue from the international donors are less likely to be accountable to their citizens and under less pressure to maintain popular legitimacy. This can result in governments being less likely to have the incentives to invest in effective public institutions. Moreover, aid flows and financial flows from IFIs can cause the government to become overwhelmed by their projects to the point that the government’s priority becomes concentrated on satisfying donors as opposed to investing in citizens. On the other hand, scholars like Collier (1999) reject the view of the aid dependency school and instead argue that the disincentive effects at the aggregate level are only marginal. Burnside & Dollar (2000) also give credence to the beneficial effects IFIs may have by promoting sound economic policies and good governance practices.
Yet, many of these investigations suffer from acute methodological flaws that cloud the true impact of international institutions. First, the majority of the literature addresses these impacts from a theoretical and qualitative perspective. Hence, the need for an empirical investigation is paramount. Second, the limited number of empirical studies are plagued by estimation and econometric limitations,
which typically take the form of endogeneity issues. Moreover, the scope of these studies has been extremely limited, usually focusing on a single development indicator or impact channel. For instance, Brautigam & Knack (2004) look at the impact of aid on institutional quality, neglecting how economic performance or other indicators fare. Therefore, this limited scope ignores the holistic impact of international institutions on states’ economic, political and social outcomes, which is essential to investigate in order to explore how they affect the prospects of the African Renaissance.
Hence, the important methodological flaws, the limited scope and the lacking consensus of studies across the literature beg a holistic investigation into how international institutions impact African countries. In addition, the lack of connection made between international institutions and the African Renaissance reveal it is paramount to in order to assess whether international institutions can work towards the continent’s ability to achieve economic, political, cultural and scientific renewal. Do all international institutions impact African states uniformly? What international institutions can be utilized as a tool for development? Are international institutions constitute a solution to Africa’s continued economic, social and political problems? What are the impediments external forces may encounter in the African context? Ultimately, this begs the question: to what extent do international institutions lead to the disenfranchisement of African states?
Therefore, this investigation explores this topic by defining a state’s disenfranchisement as the revocation of its power or control to embark on its own path to development. Thus, countries that are disenfranchised remain economically marginalized, politically oppressed and socially degraded, which persists over time as a consequence of the structural impediments to reform a state may experience. Hence, states that are disenfranchised are unable to truly emancipate and fulfill the African Renaissance. Following this definition, disenfranchisement is assessed by three key variables, namely, economic performance; institutional quality; and the power of elites. These are evaluated by empirically analyzing data on 47 African countries for the period 1996-2017. Here, a series of models are developed that capture the impact of international institutions on a state’s economic output, institutional quality, income inequality and corruption. To control for heterogeneity of African states, the analysis employs entity and time fixed effects. In addition, an instrumental variables technique is utilized to circumvent potential endogeneity issues.
The investigation finds that international institutions have a largely positive impact on Africa’s economic, social and political outcomes. In particular, a 1 percent increase in FDI flows, which proxy MNEs, increase economic output by 0.22 percent, while a state’s corruption score is improved by 0.0426. Similarly, a 1 percent increase in aid flows generates an increase in a state’s GDP by 0.268 percent, increases the institutional quality score by 0.137 and reduces corruption by 0.125. Conversely, despite improving economic performance, IFIs reduce institutional quality and increase corruption. As such, the findings generally support the view that international institutions can contribute to the enfranchisement of African states, therefore rejecting much of the current narrative.
However, concerns over the suitability and adequacy of international institutions in the African context are also raise. First, it is argued that Africa’s inherently weak institutional infrastructure constitutes a serious impediment to the materialization of these mechanisms. Second, the moral legitimacy of these external forces is questioned. Following Ekeh’s (1975) analysis, in so far as international institutions are seen by the African public as extensions of colonialism, they will lack the morality and hence appeal to change incentives, norms and behavior necessary to induce economic, political and social development. As such, their impact will at best be sterile. These are concerns are explored in more detail in Section VII.
The remainder of this thesis is organized as follows. Section II reviews the literature on the determinants of cross-country differences in income levels, the impact of structural reform and the effects of international institutions on African countries. Section III highlights the investigation’s theoretical framework and hypotheses, focusing on how international institutions can impact African states from a theoretical perspective and the expected outcomes of this. Section IV describes the data utilized. Section V details the investigation’s methodology and estimation strategy. Section VI presents the results, while Section VII discusses them before concluding in Section VIII.
II. Literature Review
How and why institutions constitute the fundamental determinants of cross-country differences in income levels and affect the development prospects of states has been the topic of a contested debate in the economics and social sciences literature. This debate has looked at establishing the root causes of differences in economic development and subsequently launch interventions to improve economic growth and living standards. Yet, the interest in institutions can be seen as a response to theories brought forward by geographical determinism and neoclassical economics, which have dominated much of the discourse relating to economic growth and its incidence across countries.
In fact, the latter theoretical approach forms the basis of orthodox economics and claims that a countries’ levels of income per capita are determined by their saving and population growth rates in the short run, and its existing technology and rate of technical innovation in the long run (Knight et al., 1993). Since these rates differ across countries, those with higher rates of saving and technical progress, all else being equal, will have a higher level of income, while higher population growth rates can lead to lower income levels (Nelson & Winter, 1974). Ghura & Hadjimichael (1996) test this for Sub-Saharan Africa and find that countries that encourage a slowing down of the population growth rate are able to stimulate growth. In general, they reveal that private sector development has been impeded by high population growth rates, low levels of human capital and inexistent infrastructure, which has also
Yet, neoclassical arguments have run into difficulties against empirical investigations and when its theoretical underpinnings have been evaluated. On the one hand, critics allege that the standard model fails to accurately predict cross-country differences in observed per capita incomes. On the other, the model’s key assumptions have come under fire for being unrealistic and overly simplistic. Quite early, Coase (1960) pointed out neoclassical models only holds under the unrealistic and extremely binding assumption of zero transactions costs in the exchange process, which are rarely low enough in the real-world. In addition, the assumed exogenous nature of changes in the variables that affect economic growth has instead been demonstrated as endogenous. These endogenous growth theories have also been tested to a greater effect than the neoclassical ones (Savvides, 1995). As a result, empirical investigations using these assumptions have often been labeled as dubious (Nelson & Winter, 1974). Moreover, the need to determine the fundamental causes of these differing levels of saving, technology and capital between states has spurred scholars to seek alternative explanations.
In this regard, the geographical – or environmental – determinists have established a more concrete theory, which emphasizes the primacy of geographical factors such as climate and resource endowments to explain the differences in economic performance and development levels between states. Here, Jared Diamond (1998) most famously describes how state formation prior to 1500 AD was dependent on its geographical location, which determined the availability of resources and factors of production, accumulation of capital and hence economic development. According to this perspective, these differences have endured over time to dictate current income levels. In the context of Africa, Bloom et al. (1998) reveal how these geographic and environmental factors, which are said to be tremendously disadvantageous for the continent, have a direct effect in shaping its societies and interactions with abroad. In fact, they argue that due to factors such as climate and topography, Africa has been plagued with an inefficient and stagnant agricultural sector. This has resulted in low levels of food production, which has also been subject to commodity price slumps. More generally, the authors reveal that tropical countries enjoying high development levels is a rare fact, with temperate regions significantly surpassing them.
Nevertheless, the value of geographical determinism has been questioned not just due its difficulty in illuminating current economic and social reality, but also due to the troubling ethical grounds it has been founded upon. In fact, during the late 19th and early 20th centuries, geographical and environmental determinism encompassed a number of discourses – which now may be labeled as racist ideas – and that inspired imperialist actions by European and North American colonizers (Bratton, 2007). Frenkel (1992) indeed documents how the intuition behind environmental determinism normalized American’s calls for imperialism. Bassin (1992) adds to this by revealing how environmentalism actually represented a “thoroughly opportunistic attempt to explain and justify scientifically the abominations of late 19th century European imperial domination” (p.4). Hence,
environmental determinism normalized racial discrimination and the ranking of races according to theoretical and scientific perspectives (Bassin, 1992, p. 5).
Putting these ethical considerations aside, a number of scholars have disproven the predictions of the geography hypothesis by documenting how being rich in natural resources does not guarantee prosperity. For instance, Tan et al. (2010) show how, other things being equal, countries that experienced significant high growth in the period 1960-2003 and escalated income rankings had lower or more deficient endowments of natural resources than economies that experienced flatter growth rates during the same period. Naude & Krugell (2007) also demonstrate that geographic factors like sea access do not influence economic outcomes (p. 1228).
More crucially, Acemoglu et al. (2002) show that geographic factors lose salience once the characteristics and shocks to institutions are factored in. Here, the authors document how European colonization in 1500 AD caused important shocks to institutions in resource-rich countries that saw institutional quality diminished. This caused a “reversal of fortune”, whereby the economic development path of these societies was significantly altered (p. 1241). Hence, this result would instead be consistent with the institutions hypothesis, which predicts changes in the course of economic progress stemming from major changes in the organization of societies.
Therefore, the relative failure of both neoclassical economics and geographic determinism has motivated a new school of thought that sees institutions as the primary determinants of income levels and cross-country differences in economic development. These investigations have typically explored the relationship between economic performance and institutions from a theoretical perspective (Keohane, 1988; Bratton, 2007). Here, North (1989) likely provides the most comprehensive theoretical framework, emphasizing that institutions provide incentives and behavioral constraints that minimize transaction costs, ultimately expanding the gains from trade. This indicates that states that have been successful at establishing formal and reliable institutions have been able to enjoy higher productivity gains from trade, which could increase rates of growth and hence development (p. 1325).
Similarly, other scholars have contributed to this theoretical discussion. Alonso & Garcimartin (2009) for instance show that institutions provide a solution to problems of social interaction that rise in an uncertain world, by constituting a mechanism to reduce the discretionary behavior of individuals and limit opportunism, fostering social interaction and collective action. Iqbal & Daly (2014) further reveal that feeble institutions cause already limited resources to be diverted from productive sectors to unproductive sectors and exacerbate the proliferation of rent seeking and inefficient activities. Instead, strong institutions reduce the chances of misallocation, contribute to the productivity of growth inducing factors and hence accelerate the economic growth process (p. 18). These claims have been seconded by a number of scholars, who agree that a country’s institutional infrastructure sets out the incentives and constraints that govern social interactions in a way that they become intertwined to achieve economic development (Rodrik, 2003; North & Thomas, 1973; Stein, 1994).
As a result, a number of empirical investigations have emerged to test these theories and shed light on the true extent by which institutions affect development, although these are not free of serious methodological flaws arising from endogeneity and reverse causality (Pistor, 1995). This occurs because a country’s institutional quality is endogenous and potentially shaped by its geography, income levels and its previous institutions quality (Rodrik, 2003, p. 7). However, a typical method to circumvent these issues is to deploy instrumental variables techniques to isolate exogenous differences in institutional quality. Here, Acemoglu et al (2001) present the most noteworthy study by utilizing European settler mortality rates in colonized countries as an instrument for institutional quality. This follows from the fact that in countries where Europeans would experience high mortality rates, colonizers would set up extractive institutions that endured to erode present day institutional quality (p. 1378). Hence, this strategy leads to the estimation of positive effects of good institutional quality, proxied by lower settler mortality rates, on income per capita.
Other studies that have developed careful econometric methodologies when exploring the relationship between institutions and economic performance have corroborated these positive results. For instance, Rodrik et al. (2004) also utilize European settler mortality rates as an instrument for institutions and conclude that the quality of institutions trumps all other variables when accounting for economic development. Hall & Jones (1999) instead develop a series of instruments for what they term “social infrastructure” and evaluate them in terms of their contribution to a country’s level of output. Here, an increase of 0.1 in the measure of their instruments for social infrastructure yield a 4.998 percent increase in output per worker (p. 99). Similarly, Acemoglu et al. (2003) show variables that have been traditionally been labeled as crucial by orthodox economics like inflation and government spending are insignificant in relation to development levels once institutions are accounted for in the analysis. This result is corroborated by Easterly et al. (2004). Ultimately, this evidence has led to a strong consensus pointing towards the primacy of institutions to explain development levels.
Thus, given that institutions have been convincingly demonstrated as the fundamental cause of countries’ political and economic development, a large body of literature has also concentrated on the African continent to explore the institutional problems hitting many of its countries as a source of its continued challenges. These studies typically suggest that African states tend to be institutionally weak, which leads to an inability to deal with shocks to the economic and political establishment that culminate in violent state failures. For instance, Young (1994) finds that the origin of Africa’s weak institutions stems from the enduring effects of colonialism, which disregarded developing Africa’s domestic institutions and instead sought to extract resources. In addition, Alexiou et al. (2014) empirically examine the impact of institutional quality on economic expansion in Sudan and find that the characteristics of the institutional environment constitutes a key determinant of economic prosperity. Furthermore, they conclude that Sudan’s feeble economic and political norms makes it defenseless to shocks that exacerbate economic and political outcomes. Similarly, Asiedu’s (2005) analysis on 22 Sub-Saharan African countries indicates that their dismal institutions – which are
illustrated by investment constraints, corruption and political instability – negatively affect private and foreign investment, and hence adversely condition economic growth and macro stability. Moreover, Acemoglu et al. (2010) attribute Zimbabwe’s economic collapse to the weak institutional structure that allowed for redistributing and expropriating agricultural rights in the early 2000s.
Furthermore, Rodrik (1999) argues that countries with weak institutions are unable to deal with major economic shocks. This suggests that the being unable to confront global economic shocks because of feeble institutions is at the root of the dismal economic performance of African countries in the later decades of the 1900s. Demirguc-Kunt & Detragiache (1998) also find that problems and crises in the banking sector are more prevalent in laxer institutional environments, which is significant for the African countries in their sample. Moreover, Johnson et al. (2000) show that of the African countries with no restrictions to capital flows, countries with governmental and financial institutions saw more destructive crises, again confirming the link relating global shocks and institutions. Besides, Kourtellos et al. (2010) find that whether natural resources have a positive impact on economic wealth is contingent on its institutional quality. This would provide an answer to the resource paradox that affects African countries, as their research indicates that weak institutions exacerbate economic and social problems. (p. 1711)
Therefore, the demonstrated salience of institutions as the primary determinant of economic and political development has inspired scholars and policy makers to design reforms and interventions that improve them. Here, deploying international institutions has been a popular choice, with the majority of these consisting of financial institutions, aid and non-governmental organizations and, albeit to a lesser extent, firms and industrial organization (Herbst, 1990). However, a hot debate on its consequences and desirability has developed, with the literature reporting mixed results and a consensus lacking. On the one hand, scholars claim that these international reforms can be beneficial as they constitute a direct reform of domestic institutions to create the right incentives in society. Keohane (1998) outlines how these international institutions can establish rules and norms through which domestic actors are expected to perform. In this fashion, these international-led reforms can curtail uncertainty arising from the enforcement of exchange contracts. Cortell & Davis (1998) corroborate this theoretical prediction although their analysis indicates that the success of international institutions depends on the domestic salience of the international institution.
On the other hand, some scholars have been rather skeptical of international institutions as a tool for improved development outcomes. Stein (1994) provides an interesting investigation that theoretically analyzes how international institutions can and are used as a tool for economic reform in Africa. Here, the examination of property rights, financial institutions, and industrial organization, leads Stein to warrant against foreign-led structural reform. This stems from the fact that because structural adjustment policies are founded on the teachings and predictions of neoclassicists, these are essentially “ainstitutional” and thus not suited to be the basis of reform in Africa (p.1838). Instead, African
contends that the formal adoption of structural adjustment programs led by World Bank and International Monetary Fund are likely to bring about diluted benefits in the absence of a strong domestic institutional infrastructure. In addition, this reveals that it is unrealistic to engineer institutional structures in the African context based on Western experiences (p. 1). Ekeh’s (1975) analysis may also be extrapolated to add that international institutions are seen as lacking the moral legitimacy to appeal to the African public. Cortell & Davis (1998) also argue that many of these problems arise because local agents can essentially bend an international rule of norm in order to prioritize their goals in the domestic scene. More generally, Acemoglu et al. (2010) highlight that reforming institutions directly is dangerous given we do not fully understand the local contexts, players and actors that have led to their creation and endurance.
Empirical investigations into the consequences of external institutional reform have typically concentrated on only specific international institutions, the vast majority of which have looked at aid donors, debt and financial institutions. However, the potential impact that aid may have upon public institutions in African countries has typically been ignored, which is particularly surprising given the saliency of donor flows in the continent (Fosu, 1996 p. 93). Nevertheless, these studies typically analyze these issues from a theoretical and qualitative perspective. Here, Goldsmith (2001) argues that institutions can weaken because aid flows create a moral hazard whereby incumbent authorities are freed from bearing the full consequences of their actions. This entices those in government to become even less willing to reform, hence legitimizing their corrupt and inefficient actions (p. 123). Empirically, Brautigam & Knack (2004) find strong statistical evidence relating high levels of aid and governance deterioration in Africa, which reveals large amounts of aid do not contribute to good governance practices.
More generally, some studies analyzing the impact of aid point to its benefits and highlight that these flows may ease governments from binding revenue constraints, improving investment decisions (Tan-Mullins et al, 2010). Further, aid personnel tend to be highly skilled, which facilitates the transferring of technical know-how and hence enhance governance efficiency (Brautigam & Knack, 2004 p.266). Moss et al. (2006) also detail that aid can result in positive outcomes for African states as it acts as a leverage increasing commitment on the part of African governments to improving domestic institutions for growth and poverty reduction. In their meta study on aid effectiveness, Doucouliagos & Paldam (2008) document that it is common for aid to be seen as treatment given to poor countries to generate development, although positive results tend to be small and insignificant.
Yet, a loud majority of studies, which may be grouped as the aid dependency perspective (Collier, 1999 p. 528), warn against this and instead contend that large amounts of aid and the way it is delivered can result in economic issues, usually in conjunction with poor management practices. For instance, Burnside & Dollar (2005) identify that while aid may constitute an economic stimulus provided countries exhibit strong economic policies, donor flows may also be sterile when economic policies are dismal. Rajan & Subramanian (2005) also show that it is hard to find a robust effect of aid
on the long-term growth of poor countries, even when these have good policy in place. In fact, this systematic adverse effect of aid stems from how it negatively impacts a country’s competitiveness, which is reflected in a decline in the share of labor intensive and tradeable industries from the manufacturing sector. Similarly, Heller (2005) warns large aid increases may have a Dutch Disease effect on small developing economies, whereby increased aid revenues cause a decline in a previously productive sector. White & Edstrand (1998) corroborate these findings for the case of Zambia, arguing that its erratic path to reform has conditioned the observed negative outcomes resulting from increased aid flows.
How international financial institutions impact developing countries has also been explored by the literature, although these have usually looked at debt levels issued by the likes of the IMF. In this regard, there is a wide consensus on the negative impact that foreign debt has on African countries to the extent that it has been labeled as one of the most important factors constraining recovery and development (Danso, 1991 p. 6). Much of this is due to the agreement that Africa’s debt crisis absorbs resources and energies that should be used to tackle urgent social and economic problems (Elbadawi et al., 1997 p. 55). In addition, Frankel et al. (2003) cast doubt on whether International Monetary Fund programs are able to promote better national institutions given their inefficient dealings with crony activities and state parastatals (p. 28). Casper (2017) adds that IMF programs can increase the risk of a coup d’état as the changes to the political setting increase disapproval amongst the ruling elites (p. 965). The empirical evidence on this matter has been mixed, however, typically as a result of employing varying debt measures. In addition, this literature has focused on a small sample of African countries, which is rather shocking given the dismal performance of Sub Saharan economies and their paralleled wolfing of external debt. Furthermore, much of the evidence in this context relates to studies examining the indirect effect of debt, which concentrates on the impact on the level of saving and investment (Lancaster, 1991 p. 50). This is particularly troubling because external debt may affect the productivity of investment and hence influence economic growth even if the rate of investment is unaffected. Instead, Fosu (1994) looks at the direct impact of external debt on economic growth in Sub-Saharan Africa and finds that if a country is classified as high debt, annual economic growth is lowered by 1.1 percentage points. These results support the hypothesis that the burden of debt, whether measured as debt service or debt outstanding, has on average a detrimental effect on the growth of Sub Saharan countries. However, the few empirical investigations exist on the debt hypothesis, specifically the impact of debt or international financial institutions on the development indicators for African countries, reveal the need to conduct a thorough examination on the subject.
The impact of multinational enterprises has gathered relatively more attention than other international institutions in the literature, with most investigations concentrating on measures of foreign direct investment as proxy (Naude & Krugell, 2007 p. 1224). The general consensus amongst the economics literature is that FDI supports positive economic outcomes particularly from increased
find that employment outcomes may improve, although these are conditional on worker skill levels (p. 1071). Similarly, Sylwester (2006) stresses the importance of FDI induced spillovers, which may arise from technology transfers and improve allocative efficiency, technical know-how and managerial skills.
These findings are corroborated in the African context by Adams (2009), who shows that FDI contributes to economic development through accumulation of domestic capital and improved efficiency arising from technical transfers (p. 178). However, the literature generally ignores the effects of FDI on domestic institutional quality. Instead, domestic institutional quality is usually treated by studies as a condition that attracts flows of foreign investment (Naude & Krugell, 2007 p. 1225). Therefore, this demands an investigation into the relationship as well as highlighting potential endogeneity issues that influence consistent estimation.
Hence, the important methodological flaws and the limited scope of studies in the existing literature warrant a more complete and holistic investigation into how international institutions impact African states. In particular, the need to address endogeneity issues is paramount in order to eliminate the bias inherent in many empirical investigations into the subject. Furthermore, it is essential to incorporate a multi-indicator and multivariate analysis that directly focusses on disenfranchisement by analyzing economic performance, institutional quality and elite power, which has not been captured by the literature. In addition, the lack of connection made by the literature between international institutions and the African Renaissance additionally necessitates an investigation that assess the impact on the development path of African countries. As such, this discussion may also contribute to the general debate on the understanding of the impact of institutions, which remains limited and inherently biased.
III. Theoretical Framework & Hypotheses
According to Douglas North (1989), institutions are “the rules of the game in a society, or more formally, the humanly devised constraints that shape human interaction” (p. 1319). Hence, this definition captures that institutions may make reference to a general pattern of activity or a particular and specific human constructed arrangement, whether it may be explicitly or implicitly devised, that prescribe behavioral roles. Acemoglu et al. (2010) highlight three important features of this definition. First, they are humanly devised, which reveals that they are within human control and can be established, amended or unaltered through individuals’ actions. Second, they are a set of conventions or principles governing behavior through constraints in a particular sphere or context. Third, their major effect will be through incentives. This third aspect is perhaps the most important to emphasize given that in so far as institutions determine incentives, they will have a major effect on economic outcomes, development, growth, inequality, poverty and governance. A fourth aspect underlined by Keohane (1988) worth incorporating is that these sets of rules and norms shape expectations. Therefore, institutions between countries or societies can vary due to their formal governance mechanisms –
dictatorships versus democracies – or in their methods of economic organization – for instance, tax systems – or due to the way informal institutions function – patron-client relationships – and affect social, political and economic organization.
Hence, this definition may be extended to include international institutions, which can be thought of as institutions that originate externally and are operated by outside forces. More formally, these are exogenous standards of behavior or specific prescriptions for action defined in terms of rights and obligations. Yet despite their foreign nature, these international institutions’ rules and norms can become “naturalized”, whereby the exogenous rule or norm is accepted, admitted and institutionalized at the domestic level. Cortell & Davis (1998) enumerate two main ways by which this naturalization may happen. First, this may occur if these rules can transpire into the beliefs and values of domestic actors in the state. Second, the international institution’s principles may become involved in the domestic economic and political process through the operating procedures of bureaucratic agencies. This is particularly relevant when international norms and rules are incorporated in domestic laws. Furthermore, the impact that these international institutions will have on these two fronts depends on the domestic salience of the rule or norm in question (p. 468). Here, it is assumed that the higher the prominence and status, the higher the impact and hence adoption of the international norm in the domestic context. Therefore, this relationship reveals it is imperative to quantify the extent of the prevalence of each international institution, which is the function of the subsequent sections.
The three international institutions that the investigation focuses on are multinational enterprises (MNEs), aid and non-governmental organizations (NGOs), and international financial institutions (IFIs). Here, MNEs refers to organizations that own or control production of goods and services in a foreign country. In particular, their main objectives revolve around having access to a foreign market, securing sources of supply, and enjoying the benefits of lower production costs or lower taxes. The main characteristic distinguishing multinational enterprises from other international institutions is that of private foreign ownership or control. Prime examples of MNEs that operate and are salient in the African continent include Royal Dutch Shell and Unilever. Aid and NGOs comprise institutions that provide official development assistance, typically in the form of aid flows from official donors to countries and territories. The key characteristic defining them is their goal of providing solutions for developing countries and the fact that they are a global venture. In addition, this definition focuses on developmental aid as opposed to geopolitical aid. For instance, aid flows from the Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD), and the United Nations Development Program are captured by this definition. Finally, IFIs include institutions that define and oversee the basic macroeconomic policies of African states. Their distinguishing feature it that they have been established and are controlled by more than one country. Usually their owners or shareholders are national governments or other international institutions, with common examples including the World Bank and the International Monetary Fund.
The final key term worth outlining is disenfranchisement. This investigation defines disenfranchisement as the revocation of power or control, in this case of a state, to the natural amenity it is abound in. This implies that countries that are disenfranchised are effectively voided of the right to embark on their own path to development, resulting in an inability to truly emancipate. This is evidenced by economic marginalization, political oppression and social erosion, which persists over time as a consequence of the structural barriers to reform a state may experience. Most crucially, the disenfranchisement of African states constitutes an impediment to the materialization of the African Renaissance. As a consequence, without the unbinding of Africa, the continent will continue to see corruption, violence, elitism and poverty, and be unable to replace these with a more just and equitable structure.
Therefore, the primary condition for disenfranchisement is economic precariousness. This typically results in miserable social services, rampant poverty and bleak life outcomes, which are factors severely preventing African states from emancipating. In addition, a state may be thought of as disenfranchised when its regulatory quality, rule of law and government effectiveness are discredited. Thus, the poor institutional context of a state constitutes one of the key conditions that see its confinement. Essentially, this is illustrated in weak domestic institutional quality. Moreover, the concentration of power on a limited number of elites qualifies as a ground for disenfranchisement. Here, it is assumed that elites accumulate positions and resources to break, bend or subvert governing institutions, undermining possibilities for democratic and equitable rule. This can be evidenced by greater income inequality and corruption, which illustrate how elites operate. Thus, their predominance and clout reveal a great deal about the character of African democracies and indicates whether they remain constrained. With this in mind, the investigation assesses disenfranchisement according to three key pillars, namely, economic performance, domestic institutional quality and the power of elites. How these three variables, as well as international institutions, are measured and accounted for is explained in detail in the following section.
Nevertheless, the theories and evidence presented in the literature facilitate inferring how the three types of international institutions evaluated impact these three key pillars. In this context, neoclassical economics typically assumes that multinational enterprises can directly promote nationwide economic growth by augmenting domestic capital accumulation, domestic investment and promoting exports. In addition, foreign plants are said to encourage better management and organizational techniques, which can improve the efficiency of production processes (Sylwester, 2006 p. 290). Similarly, MNEs can transmit a growth stimulus back to neighboring countries, spurring their economic output. These spillovers can result in improved allocative efficiency, where domestic firms benefit from pro-competitive effects; increased technical efficiency that accrues from the demonstration of superior practices; and technology transfer from access to leading technology (Buckley et al., 2007 p. 1071). Thus, MNEs can build and maintain the infrastructure to transfer productivity enhancing
characteristics and accumulate human capital, which then sparks further investment and growth. This would result in a positive impact upon a country’s economic performance.
However, and in line with dependency theory, it is expected that international institutions can have a detrimental effect on economic performance (Bornschier et al., 1978 p. 669). While aid revenues can constitute a direct transfer to governments who are then legitimized to engage in their development activities, Burnside & Dollar (2000) claim these financial flows can erode government incentives to feed the private sector (p. 255). Tied to this is a soft budget constraint effect, whereby high levels of aid essentially validate a government’s spending patterns. This causes governments to lose the incentive and subsequent ability to maintain expenditure within sustainable levels, which ultimately causes a decrease in policy trust and hence an inability to deal with crises (Pradhan, 1996). Furthermore, powerful classes and groups may benefit from aid and capture these flows. This introduces a source of inefficiency that substantially waters down the benefit from increased aid revenues. Moreover, aid flows may also result in a direct reduction of tax receipts, as it is commonplace for imports related to aid projects and staff to be exempt from staff import duties and taxes. These untaxed elements can further contribute to the exacerbation of African countries’ problems of low revenues and fiscal deficits (Brautigam & Knack, 2004 p. 278). Hence, the aid process and the surrounding methods of delivery it entails erode constraints, incentives and norms, ultimately discouraging from innovation, competition, accountability and hence economic robustness. Ultimately, these can negatively affect economic performance.
Similarly, the impact that international financial institutions may have on economic performance can be discouraging. In fact, a very large stock of debt can discourage voluntary capital inflows and encourage capital flight. Here, foreign and domestic entrepreneurs may be reluctant to invest in a heavily indebted country for fear of future restrictions on their abilities to finance their projects, or due to other economic restrictions on their ability to repatriate profits (Pastor, 1987 p. 250). In addition, while international financial institutions can represent a guiding force that correct and supervise macroeconomic policy, their guidance may also be interpreted as a temporary fix to a long-term problem. In turn, this may be seen signal a dismal future investment climate, which can further reduce the development of the private sector, encourage financial downturns and ultimately hamper growth. The stabilization policies typically recommended by the IMF can have negative consequences for growth since they involve opening up the economy. This can destroy a country’s basis for autonomous development and hence dampen growth potential. Therefore, to the extent that the effects of aid and NGOs and IFIs outweigh those of multinational enterprises, we may expect the following hypothesis.
Hypothesis 1: International institutions will have a negative effect on a state’s economic performance.
The second pillar international institutions may impact is domestic institutional quality. Here, economic theory assumes that multinational enterprises can encourage good governance practices as policy makers and the private sector are incentivized to attract more foreign investment. In the same vein as with technical spillovers, MNEs can generate institutional spillovers whereby superior practices in the realm of contract types, property rights and transaction efficiency, are demonstrated (Wiggins & Davis, 2006 p.6). Firm efficiency may also generate a stronger business environment, which could translate into more stable institutions that promote a sound investment climate. Nevertheless, little evidence or theoretical predictions exist confirming these analytical forecasts, with some studies pointing to no relationship occurring between multinational enterprises and specific institutional indicators (Gorodnichencko et al., 2007 p. 956).
However, dependency theory again suggests bleak outcomes for domestic institutional quality arising from aid and international financial institutions. Indeed, Brautigam & Knack (2004) outline how this may result as large amounts of aid can weaken institutions, as well as create incentives that make it hard to overcome the collective action problems required to build strong institutions. First, a large number of donor projects can increase transaction costs when a small country has low absorptive capacity as each project requires government oversight and reporting. For countries with little capabilities, this renders government efforts to manage its aid resources ineffective (p. 278). Hence, central capacity for policy formation can become fragmented, particularly as the numerous aid projects’ cumulative effects are collectively unsustainable or mutually inconsistent. Ultimately, these channels can diminish the authority and importance of domestic institutions as governments are sidelined and discounted (Pradhan, 1996 p. 6).
The way that aid dependence may affect the incentives of state actors can be even more powerful. On the one hand, aid may make solving collective action problems more difficult. Here, governments from feeble states can remain institutionally weak because they cannot combat the pressures from powerful constituencies or individual interests to redistribute these resources (Geddes, 1994, p. 25). Also, high levels of aid into countries that are not fully dedicated to reform are likely to reduce their incentives to cooperate and engage in governmental rehabilitation. This emanates in part from political elites being unwilling to change the patronage and fringe benefits that plague institutions, and which aid can negatively multiply. Related to this, moral hazard can operate in a way that may discourage domestic institutional reform (Brautigam & Knack, 2004 p. 256). Indeed, countries may be incentivized to continue governance malpractices and dismal performance in order to maintain the arrival of much needed resources.
Similarly, IFIs can fall short from encouraging successful institutional reform due to the incentive structure they promote, which further weakens domestic institutional quality. For instance, should large amounts of financial flows only enter a country when it experiences times of trouble,
governments will have little incentive to truly reform policy (Frankel et al., 2003). Tied to this, a successful institutional reform according to IFI programs can weaken a government’s ability to redistribute wealth in the future. Casper (2017) predicts this may incentivize other powerful constituencies to rise and confront the incumbent government, which results in a weakening of domestic institutional quality. In addition, the IMF and other IFIs cannot dictate countries’ domestic policies, nor determine when social and political conditions will be right for a new sweeping reform movement. This can difficult the improvements of domestic institutions. Therefore, given these predicted negative outcomes on institutional quality, the following hypothesis may be expected.
Hypothesis 2: International institutions will have a negative impact on a country’s regulatory quality, rule of law and government effectiveness, thus diminishing domestic institutional quality.
Finally, the impact of international institutions on a country’s elites can occur through the channels of income inequality and corruption. Theoretical predictions relating to these channels have been scarce, with much of the relationship described examining the opposite direction. However, in the case of income inequality, and as per traditional labor economics models, should MNEs raise the demand for skilled workers, their presence and activities can result in increased income disparity (Sylwester, 2006 p. 291). Moreover, should multinational enterprises only allow for a select few individuals to capture spillovers from external investment, income inequality could increase and reinforce the power of elites (Bratton, 2007 p. 100). In addition, MNEs can engage in corrupt practices as a consequence of the pressures corporations face when investing in the host country. For instance, MNEs may encounter substantial host country pressure to engage in bribery as a way to “grease the wheels” of business activities and circumvent bureaucratic delays. This would legitimize corrupt practices by multinationals and make the issue more prevalent (Ades & di Tella, 1999 p. 985). Hence, this would imply that MNEs contribute to the reinforcement of elites across African countries.
Aid institutions can also exacerbate the power and presence of elites. Countries that are dependent on aid can be incentivized to not fully utilize their sources of revenue in fear of losing key budgetary support. This can be exemplified in lower tax efforts, which would reinforce and exacerbate income inequality by diminishing transfers to lower income echelons (Lambsdorff, 1999 p. 6). Similarly, binding political constraints in both recipient and donor countries can limit the options of donor countries when it comes to poverty alleviation (Svensson, 2006 p. 115). This can dampen the effects of transfers to lower income classes and hence income distribution may remain unchanged. In addition, the inherent design of aid programs can contribute indirectly to increased corruption. Here, the difference in constituencies between donors and recipients can block normal performance feedback processes (Luiz & Stewart, 2014 p. 387). The result is that no entity is held accountable for misdeeds,
which removes sanctions and punishments associated with corruption.. This is especially the case if the reforms needed to tackle these elites can result in decreased budgetary support. These mechanisms would indicate that aid can contribute to strengthened elite power.
Likewise, international financial institutions may have a strong impact on income inequality and ultimately reinforce the power of elites. On the one hand, the higher debt levels that result from IFI programs can increase income inequality. Those nationals with capital may try to move that capital abroad in a reaction to future economic uncertainties associated with a heavy burden of debt. On the other, the promotion of an open economy by IFIs can serve the interests of capitalists and reduce labor’s share of income (Bornschier et al., 1978 p. 669). This allows the relatively stronger more efficient capitals of the core to dominate those of the periphery, which can contribute to higher urban-rural income inequality (Pastor, 1987). Another aspect worth stressing is that the reform packages of IFIs typically work against the lower social classes. Given that IFI reforms require substantial restructuring, a condition to secure the cooperation of local elites is sparing them of the costs of adjustment. This exemption constitutes the incentive needed for local elites to accept the influence of IFIs, which can occur at the expense of working classes, widening income disparity (Clark et al., 2011 p. 11). Hence, these exogenously imposed conditions for openness serves the interests of local elites and capitalists at the expense of the working class and endures elite power. Using these insights, it should be expected that international institutions lead to power distributions and income changes that prioritize elites and go against popular classes.
Hypothesis 3: International institutions will have a negative impact on income distribution and increase corruption, hence strengthening the power of elites.
IV. Data
The investigation utilizes country level aggregate panel data retrieved from the World Bank’s World Development Indicators (2019) and Worldwide Governance Indicators (2019). The data used for the analysis at hand was compiled manually in order to specify the scope of the investigation and select the key variables of interest. The scope involved concentrating on African states during the period 1996-2017. While the investigation regularly references the African continent, this refers to Sub Saharan Africa exclusively. Only Sub Saharan Africa was included in the analysis because North African countries differ substantially in their level of development and in how they are influenced by international institutions. In addition, concentrating on specific and individual African countries was
not possible given this would limit the data to a few observations. Hence, all of Sub Saharan Africa is included to minimize the potential biases in the results.
Concentrating on Africa for this analysis is particularly valuable for a number of reasons. First, it is common knowledge that Africa’s path to development has been an arduous one. Thus, shedding light on an issue that could plausibly influence it is particularly relevant. Second, while it has been recognized that the African continent is particularly unique and structurally different from the rest of world (Asiedu, 2005 p. 24), there are potential lessons to be learned. On the one hand, the African region can learn from its own experience. In particular, African leaders would do well learning from each other and their own countries’ results to avert many of the plights they currently suffer from in the future. On the other, the developing world at large can utilize these teachings to decide whether accepting the influence of international institutions would do well for its developing prospects.
In addition, the scope of the investigation is limited by its time frame. The time period, 1996-2017, was selected based on data availability. Ideally, the time scope would have been extended to incorporate earlier decades, especially the 1960s and 1980s. Given that during these decades Africa embarked on a period of structural reform where international institutions and political reorganization were popular (Jeffries, 1993), including this time frame would have been especially salient. Nevertheless, the period 1996-2017 also sheds light on the issue being investigated given the continued prevalence of international institutions in the region.
Furthermore, obtaining data on disenfranchisement constituted a challenge. Naturally, the data banks sourced do not provide data and statistics on a country’s ‘disenfranchisement’ as it is an arbitrary definition unique to this investigation. However, given that a country’s level of disenfranchisement is assessed by the impact on three key independent variables – namely, economic performance, domestic institutional quality, and the power of elites – the investigation uses specific variables provided by the data source as proxy. First, a country’s economic performance is proxied by its level of gross domestic product (GDP). While not an exact measure, a high level of GDP typically implies a country is developed, competitive, advanced and rich. This would indicate economic robustness. In addition, countries with higher levels of GDP typically exhibit lower poverty levels, which has been a worrying element in African countries (Bloom et al., 1998 p. 207). Thus, GDP serves as a clear match for economic performance.
The quality of domestic institutions is proxied by computing an average – yearly – score of three key governance indicators. These are rule of law, government effectiveness and regulatory quality. Here, the World Bank Data Indicators (2019) define the data on government effectiveness as providing a score that “captures perceptions of the quality of public services, the civil service and the degree of its independence from political pressures, and the quality of policy formulation and implementation. Furthermore, according to the World Bank Data Indicators (2019), a country’s measure of regulatory quality reveals perceptions of the ability of the government to formulate and implement sound policies
and regulations that promote private sector development. Moreover, the indicator on rule of law shows perceptions of the extent of contract enforcement, property rights, the courts, as well as the likelihood of crime and violence (World Bank, 2019). Hence, utilizing these indicators therefore allow to quantify the impact that international institutions may have on key political and economic institutions. Country scores are retrieved from the Worldwide Governance Indicators, while the yearly average is manually calculated.
Finally, the power of elites is assessed by looking at a country’s income inequality and prevalence of corruption. To analyze income inequality, the investigation utilizes yearly Gini coefficients as its independent variable. This indicator calculates the extent to which the distribution of income among individuals within a country deviates from perfect equality (World Bank, 2019). The main advantage of using the Gini coefficient as a measure is its popularity in assessments of inequality. The limitations, which revolve around the fact that it necessarily introduces an element of social justice judgment, are discussed in detail later in Section VII. In addition, the second variable accounting for the power of elites is corruption, which is measured by the Worldwide Governance Indicators. Here, the World Bank’s (2019) corruption score captures the extent to which public power is exercised for private gain and capture of the state by elites and private interests. Hence, this provides an appealing standard for the power elites not just because it
Finding variables that account for international institutions is also problematic, as the data banks do not specifically include variables accounting for MNEs, aid and NGOs and international financial institutions. Furthermore, alternative variables will necessarily be subject to considerations and judgements. However, the proposed measures aim to reduce these problems by providing proxies that closely resemble the three different types of international institutions being studied. First, the impact of MNEs is account for by using foreign direct investment (FDI) inflows into individual African countries. This accounts for international private financial flows, equity and debt. Hence, this is a relevant proxy as it reveals the degree of influence and control of external investment in the local economy (Naude & Krugell, 2007 p. 1224). Moreover, while not mirroring the impact of MNEs, utilizing FDI as a proxy is a common approach across the literature.
Second, aid and NGOs are measured by using data on total aid and development assistance received. This accounts for all transfers by official agencies, including state and local governments, that work towards development and development cooperation (World Bank, 2019). Thus, this most accurately reflects the extent of the presence and influence of these organizations. Finally, data on the use of IMF credit serves as the measure replicating international financial institutions. While this does not provide data for all international financial institutions, its utilization has two main advantages. Frist, the IMF is the most common, salient and present international financial institution operating in Africa (Brautigam & Knack, 2004 p. 265). Second, the availability of this data provides a complete and consistent measure on the level of international financial institutions, which helps in accounting for the
changes in these values. Thus, it highlights how external indebtedness with IFIs can affect a country’s creditworthiness and investor perceptions.
Summary statistics for the dependent and independent variables just described are presented in Table 1 below, while the summary statistics for the logged values may be found in Appendix 3. In addition, dependent and main independent country ranks are illustrated in Appendix 4.
Table 1: Summary Statistics Main Dependent and Independent Variables
Variable Obs Mean Std. Dev. Min Max
De pe nd en t Va ri ab le s GDP 1,034 26,800 68,400 536 464,000 GDP per Capita 1,034 2121.83 3109.17 186.66 20333.94 Institutional Quality 1,034 -0.76 0.62 -2.55 1.03 Gini Coefficient 1,034 44.56 7.94 29.80 65.80 Corruption 1,034 -0.68 0.60 -1.87 1.22 Government Effectiveness 1,034 -0.79 0.63 -2.48 1.05 Regulatory Quality 1,034 -0.72 0.65 -2.65 1.13 Rule of Law 1,034 -0.75 0.66 -2.61 1.08 In de pe nd en t Va ri ab le s FDI 1,034 523 1,260 7.4 9,890
Aid & Development Assistance
Flows 1,034 654 808 16.8 11,300
IMF Credit 1,034 280 377 0 2,630
Trade (% GDP) 1,034 72.62 37.35 17.86 311.35
Total Rents from Natural
Resources (% GDP) 1,034 12.80 12.32 0.00 84.24
Labor Force Participation Rate 1,034 67.60 12.10 41.68 89.05
Ethnolinguistic Fragmentation 1,034 0.38 0.25 0.00 0.80
HCI 1,034 0.40 0.07 0.29 0.68
Gov. Expenditure in Education 1,034 16.57 5.88 0.85 37.52
Notes: Data retrieved from World Bank Worldwide Governance Indicators (2019) and World Development Indicators (2019); money values are in dollars; GDP, FDI, aid flows and IMF credit are presented in millions of
V. Methodology
i. Model Specification
In order to test the investigation’s hypotheses, three different models are utilized: one specifying economic performance; a second looking at domestic institutions; and a third measuring the power of elites. The first of these is specified as follows.
A country’s economic performance is best described by its level of economic output, which can be thought of as the result of an economic process that uses factors of production to produce goods or services. While perhaps this is a simple and narrow categorization, it serves to illustrate a country’s total economic activity, which in turn reveals whether it is rich, competitive, developed and advanced. Here, a country’s level of output is captured by its gross domestic product (GDP), which is a common measure of the value of the goods and services produced typically within a year. Therefore, assuming a Cobb-Douglas production function, output (") is determined by a state’s level of two physical inputs, labor (#) and capital (%), as illustrated in Equation 1.
" = '#(%)ℇ+ (1)
where ' is a constant and ℇ is a random noise term with mean 0 and constant standard error ,. According to Equation 1, the growth rate of " will depend on the growth rates of # and %, which in turn is contingent on the sizes of the elasticities represented by the squares - and .. The model can thus be expanded to include other explanatory variables that may influence a state’s level of output. Assuming the multiplier, ', is not constant, it may be influenced by a set of non-physical variables such as human capital and external institutions. According to Yao (2006), these variables can be comprised into two groups: one constituting the “internal production environment”, which is formed by, for instance, a state’s infrastructure; a second relating to the “external environment”, which covers international institutions, exports and the likes. Thus, this discussion reveals that the relationship between output and the two physical variables labor and capital form the cornerstone of production, while the two groups of variables consisting of the external and internal environments affect its efficiency. As such, the multiplier ' is a function of these quantities. Therefore, an augmented version of Equation 1 will include all variables from the internal and external environments that can influence and affect production. Hence, the multiplier ' in Equation 1 takes the form
