The Dividends of Good Governance: A New IMF Report Suggests That Weak Institutions Are a Major Constraint on Economic Growth in Most African Countries

By Siddioi, Moin | African Business, March 2005 | Go to article overview

The Dividends of Good Governance: A New IMF Report Suggests That Weak Institutions Are a Major Constraint on Economic Growth in Most African Countries


Siddioi, Moin, African Business


Reliable, 'non-corrupt' civil institutions are an indispensable precondition for sustainable development and for achieving the Millennium Development Goals (MDGs). The soundness of macroeconomic and structural policies, including privatisation and trade liberalisation, depends largely on an open, efficient regulatory and institutional environment for private sector activity. In fact, state institutions provide the bedrock for a country to function efficiently.

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The sad truth is that Africa's economic growth has lagged far behind the rest of the developing world. According to the IMF, growth, in terms of real GDP per capita--i.e. overall living standards--between 1960 and 2000 in sub-Saharan Africa averaged an annual 0.8% compared with 2.3% for all developing nations.

A research paper compiled by Arvind Subramanian for the IMF claims that while incompetent economic governance, civil strife and corruption have all served to undermine Africa's growth, the main deterrent is poor institutional infrastructure--political, legal and economic.

The World Bank's Governance Index, based on the quality of public organisations, transparency, accountability and corruption prevention measures, places just five sub-Saharan countries above the global average.

Role model

A handful of countries--Mauritius, Uganda, Mozambique, Botswana and Equatorial Guinea--grew at a brisk pace in the 1990s. The rapid 17% GDP growth of Equatorial Guinea was fuelled by its booming oil industry while the other countries have enjoyed a broaderbased expansion of their economies.

Botswana and Mauritius, ranked as middle-income countries, have achieved annual growth rates of 5.3% and 3.7% respectively during the past three decades. Both enjoy high status within the international community thanks to a proven record of sound governance and political stability. Botswana's sovereign debt rating [A2] is similar to several Organisation for Economic Cooperation and Development (OECD) countries.

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Global credit-ratings agencies also classify Mauritius as an 'investment-grade' country [Baa2]--on a par with oil-rich Saudi Arabia. Only investment-grade borrowers can tap international capital markets at lower interest rates. Subramanian suggests that the underlying reasons behind two of Africa's most successful countries are economic variables such as natural resources and appropriate fiscal-monetary policies such as trade liberalisation. The level of initial national income and human capital variables such as education, vocational training and healthcare also plays a part, as do geographic variables such as climate and access to seaports.

The evidence indicates that Botswana and Mauritius perform better than typical African countries in terms of these variables.

The pursuit of competent macroeconomic policies has underpinned lower inflation rates and healthier public finances in Botswana and Mauritius. The former's trade policies were similar in terms of their restrictiveness to those of an average African country, whilst those of Mauritius were more restrictive.

Key determinants

The IMF study concluded: "One and perhaps the key difference is that the quality of institutions in Mauritius and Botswana is much higher than in the rest of Africa, and indeed is comparable to those elsewhere in the world."

Institutions have underpinned prosperity in three particular ways that are unique within the African context.

In Botswana, the world's biggest diamond exporter, institutions have prevented the natural resource curse that has gripped oil-producing countries. The political influence of cattle ranchers also ensured that the exploitation of immense diamond reserves did not lead to an 'overvalued' exchange rate, which could have crowded out non-mineral exports.

By contrast, Nigeria's booming oil output during the 1980s has resulted in a steeply overvalued Naira, which, in turn, has almost destroyed non-oil sectors. …

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