Social Protection and Economic Growth

By Patterson, Zuriashe; Patterson, Seymour | American Economist, Fall 2012 | Go to article overview

Social Protection and Economic Growth


Patterson, Zuriashe, Patterson, Seymour, American Economist


I. Introduction

The economic literature has many studies on the causes of economic growth. These studies run the gamut from exports, to corruption, to foreign direct investment, to ethnic fragmentation, to foreign aid, and to political institutions such as democracy, among other things. For example, Michaely (1977) looks at the correlation between exports and economic growth and found, at some level of income (or development), a positive relationship between exports and economic growth. Sentsho (2000) finds that exports had a positive effect on economic growth in Botswana; Jordaan (2007) found that exports Granger causes GDP, i.e., export-led growth has a positive influence on GDP growth. Vohra (2001) also found that exports had a positive impact of economic growth when a country had achieved some level of economic development. Mauro (1995) considers the relationship between corruption and growth and finds corruption diminishes growth. Meon and Sekkat (2006) show that the quality of institutions has a positive influence on exports by controlling corruption. Collier (1999) argues that there is a connection between ethnic fragmentation and economic growth. Some studies (Barro 1991), and (Gyimah-Brempong 1991, 2003) found that political instability harms economic growth. There are also institutional issues that are pro-growth--democracy such as Quinn (2003) and Scully (1988).

What inhibits economic growth? Trade restriction can have a negative effect on growth. According to Sachs and Warner (1997) restrictions--specifically, restrictive trade policy, poor access to the sea, and Dutch disease--account for a 1.2 percent per year growth reduction. Easterly and Levine (1997) found a reduction in growth of 0.4 percent due to some restrictions. Blomstrom (1996) notes that fixed investment can lead to economic growth. Bertochi (1998) looks at the relationship between Africa's colonial heritage and economic growth. But Easterly (1998) reminds us that what is really needed for economic growth are incentives.

Siekpe and Greene (2006) say that countries are developed because of labor laws and employment legislation. They examined three countries (South Africa, Ghana, and the USA) with varying degrees of labor protection legislations. When these legislations are in place and enforced--some may not be enforced as in Ghana--economic growth follows. The implication is that the USA and other developed countries are developed because they protect their workers. However, it might be the case that the protections are the result of wealth--workers demanding their share of it from employers and the government through workmen compensation schemes and retirement benefits, and social and unemployment benefits from the government. They argue that employment relations that work well promote a stable and productive work environment that enables investment, job creation, and economic growth. Employment and labor legislations are different across African countries and these differences might explain differences in economic growth among African countries.

The purpose of this paper is to examine data for social protection legislations (that cover labor laws and employment legislations) to determine their effect on economic growth in Africa. One would infer from Siekpe and Greene (2006) that this relationship is positive, given the impact of social protection on worker productivity. It is possible that economic development will lead to a greater demand for social protection of workers. The rest of the paper is developed as follows: Section II presents the methodology used in the paper; Section III discusses the data; Section IV contains the regression results; Section V presents some summary and concluding remarks; and VI offers some recommendations.

II. Methodology

The economic model for the paper is based on a neo-classical production function consisting of two inputs--labor and capital. This production function is assumed to be well behaved.

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