The current socio-economic situation in Africa as a continent is precarious. The continent faces multiple crises that include those of religion, politics, and economics. Each crisis is significant in its own right and together they are mutually reinforcing. One begins to wonder if the leaders have the will and/or the means to put the continent on a growth trajectory and once and for all address the wide spectrum of inextricably linked development issues. While the significance of politics on religion, or vice versa is recognized, what is more crucial is the impact of politics on economy, and vice versa. This book examines the direction of causality and finds that political instability perpetuates underdevelopment among other things. It is also interesting to discover that the deleterious effect of political instability is different across sectors. The reader will also observe that a few countries may have benefited from some degree of instability.

ECONOMIC DEVELOPMENT UNDER CRISES—AN ECONOMETRIC ANALYSIS

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Contents

Introduction.....................................................................................................1Some Stylized Facts..............................................................................................4Overview of Eco-Political Environment of Sub-Saharan Africa......................................................29Political Instability and Economic Development – Econometric Analysis......................................36Political Instability and Economic Development — Estimations and Results...................................58Differential Effects of Political Instability Across Sectors — Estimation and Results......................71Summary..........................................................................................................114

Chapter One

AFrica, from all accounts, has been a difficult region to analyze. Many observers tend to make proclamations and prognostications on the continent as if it were a relatively small country that a simple macroeconomic model or political ideology can define. As an analyst, one must resist the temptation of making any prediction about the future of the continent, whether apocalyptic or full of optimism. The record since independence for most extrapolates to project the coming of apocalypse. Considering the degree of political instability in the region, an assertion of political transformation and economic resurgence at a sustainable level would be a poor calculation.

The current socioeconomic situation in Africa as a continent is precarious. The continent faces multiple crises, including those of religion, politics, and economics. Each crisis is significant in its own right, and together they are mutually reinforcing. One begins to wonder if the leaders have the will and/or the means to put the continent on a growth trajectory and once and for all address the wide spectrum of inextricably linked development issues. While the significance of politics on religion or vice versa is recognized, what is more crucial is the impact of politics on economy and vice versa. This relationship between politics and economy deserves a little mention.

The economy and the polity interact in many ways with respect to resource allocation, income distribution, and stabilization policies. For these obvious reasons, neither the economy nor the polity can be looked at in isolation. Many of the decision-makers do not have the political will to embark on the kind of macroeconomic policies that may bring about development, simply because these policies are not politically popular domestically. Equally important, these countries do not have domestic resources to pursue required macroeconomic policies capable of generating growth. Hence, they rely on international financial institutions to provide funds, which often come with conditionalities. For those leaders with political will, external funds can jumpstart their distressed economies and put them on a sustainable growth path.

Bruno Frey (1983) identified the interdependence of economy and polity: The economy and polity formed a closed system with the two parts linked by feedback. Accordingly, ... the upper link shows political intervention working on the economy; and the lower link shows the influence of economic conditions on the political sector (Ibid., 9).

There are lots of bits and pieces of evidence to support the fact that politics in general does affect economic development. At least everyone—governments and international lending institutions included—believes that policies affect growth, and in turn, scholars tend to think that politics affect policies (Przeworski and Limongi, 1993, 65). Also, Reynolds (1983), having reviewed the historical experience of several countries, concluded that spurts of growth are often associated with major political transformation. A reversed argument can be made in the sense that the political instability that plagues the region has been responsible for the deleterious growth pattern experienced in the last forty years by many of the countries. Even in cases where there were stable dictatorships, the deleterious effect of long-term dictatorship is just as inimical to growth as those of several military interventions. Certainly the issue of direction of causality cannot be ignored, whether economic development drives regime change or whether it is the stability of political regime that drives economic development. Again Przeworski and Limongi, (p. 62), asserted that the reason social scientists have little robust statistical knowledge about the impact of regimes on growth (or growth on regime, for that matter) is that the research design required to generate knowledge is complex (Ibid.).

Since independence, many of the countries in the region have formulated numerous initiatives and implemented several reforms aiming to put them on a development path. Yet, in general, the outcome is abysmal because the leaders lack the political fortitude to carry the reforms to their natural conclusion. It is recognized, however, that the aggregate data on economic performances will vary from one country to another because reform measures, resource inflows, and political climates will also vary. In most cases, rather than citing leadership incompetency as the fundamental reason for failure to fully implement reforms, it is convenient to blame the abysmal performance on lack of resources. Usually, the domestic resources component of the funds necessary for implementation falls short of projections, due to a host of reasons that are also traced to inept management.

Assuming it is not a lip service, the concerted efforts being made by African leaders through proclamations at various summits regarding precarious socioeconomic conditions show that the region is ready to pursue measures that can put the continent on the growth path and subsequently, toward a sustainable economic development. Again history has taught us not to be too optimistic about any positive transformation, as the analysis of the region cannot be constructed by simple economic and or political models.

Chapter Two

2.1 ON INSTITUTIONAL STRUCTURE

Mankind has made great material progress in modern times, and much of this progress has been affected by the choice of the institutional framework designed to bring it about. The Western industrial economies and many other former colonies chose an institutional framework that permitted wide latitude for individual initiative, choice, and responsibility. In general, these countries are capitalist and democratic and are committed to the rule of law.

It is a generally observed phenomenon that the rising nationalism and independence movement after World War II gave many new nations the opportunity to choose an institutional framework by which they could progress. In some cases, what became a fashionable idea was state control and economic planning, with a concomitant de-emphasis, if not denigration, of individual initiative. Many nations selected this route for economic development. As Scully (1988) pointed out, there are two contrasting paradigms that point to the path by which men progress economically: individualism and statism. Both paradigms are old and still debated. That the state direction leads to material progress is the older vision. The wisdom of the state in creating the conditions for material progress through intervention and regulation was first articulated systematically by the mercantilists. In modern times, state intervention is justified by the vicious circle of poverty thesis. Albeit this thesis has been advanced by many writers, it has been elaborated substantially by Myrdal (1957, 1968).

The contrasting vision that Scully pointed out is that material progress is greatest if individuals have the right to pursue their own affairs without state intervention. The conceptualization of society as a nexus of private arrangements that are mutually beneficial is contained in the contractarian political theory of David Hume, the concept of law as sanctioned private arrangements by Sir Edward Coke, and the economic theory and policy of laissez-faire by Adam Smith. The great concern of the twentieth century, after the reconstruction of the war-ravaged economies and the restoration of the international economic order, has been the improvement in the standard of living of the underdeveloped nations. The fashionable view was that the gap between the rich and poor nations was caused by a vicious circle of poverty that required draconian measures to break. The remedy for breaking the circle is state control and economic planning.

In a nation's commercial relations with the world, import restrictions, export subsidization, and foreign exchange controls are the appropriate commercial policy. The theory of comparative advantage and free trade are viewed as fallacious. There are sound reasons why it may choose to produce at home things which it could import more cheaply or to export things at a loss to be covered by subsidy (Myrdal 1957, 98). A decade later, in Asian Drama, Myrdal (1968, 67, 115–116, passim) abandoned what could be interpreted as an educative approach to social change for compulsion. Now he wanted a complete transformation of the values and attitudes that people hold and in the institutions that foster those values.

Of course, Adam Smith ([1776] 1937) would have none of this. Self-interest promoted the general welfare. For his mercantilist predecessors, national wealth was the stock of precious metals at hand. There were policies for their accumulation. For Smith, national wealth was the aggregation of individual wealth. His conception of national wealth was radically different from the mercantilist conception, and hence, the appropriate institutional structure, property rights, and policies were quite different. To the mercantilist, the legal, political, and economic institutions of mercantilism were justified in the public interest of increasing the national wealth (the stock of precious metals). Smith, of course, condemned this institutional framework as anathema to private interest. Given his theorem of the invisible hand, mercantilist policies conflicted with the public interest as well.

The choice of the institutional framework of the economy has consequences for the allocation of resources (efficiency) in the economy. Resources are predisposed to flow to their highest valued use. But a necessary condition for achieving this efficiency result is that all resources be owned exclusively by private individuals and that these resources are transferable. The political, social, legal, and economic framework of society defines what resources can be owned, who can own them, and how they can be employed. The institutional framework sets the parameters of rights in a society.

The menu of choices open to nations is rich. In politics, the range is from democracy—in which everything is settled by citizens—to totalitarian states, where even the most private of matters between people must be sanctioned by the state. In economics, the range is from purely private economies—in which even the legitimacy of the public-goods property of the lighthouse is disputed—to communist societies (and certain religious orders), in which everything is owned in common.

In a study of the world's 115 market economies over the period 1960 to 1980, Scully (1988) compared the compound growth rates of real domestic product per capita and a measure of economic efficiency with measures of political, civil, and economic liberty. It was found that the choice of the institutional structure has profound consequences on the efficiency and growth of economies. Scully found that politically open societies, which bind themselves to the rule of law, to provide property, and to the market allocation of resources, grow at three times the rate and are two and a half times as efficient as societies in which these freedoms are circumscribed or proscribed.

Scully's study, described above, suggests that democracy in the political realm fosters economic growth. There are literatures that suggest just the opposite. Albeit everyone seems to agree that secure property rights foster growth, it is controversial whether democracies or dictatorships better secure these rights. The main mechanism by which democracy is thought to hinder growth is pressure for immediate consumption, which reduces investment. Only states that are institutionally insulated from such pressures can resist them, and democratic states are not. The main argument against dictatorships is that authoritarian rulers have no interest in maximizing total output. These views are succinctly summarized in Przeworski and Limongi (1993, 51–69). Furthermore, they wrote that conservatives and socialists agreed that democracy—specifically universal suffrage and freedom to form unions—must threaten property (Ibid.).

Karl Marx expressed the conviction that private property and universal suffrage are incompatible. According to his analysis, democracy inevitably unchains this class struggle. The poor use democracy to expropriate the riches; the rich are threatened and subvert democracy, typically by abdicating political power to the permanently organized armed forces. As a result, either capitalism or democracy crumbles. The combination of democracy and capitalism is thus an inherently unstable form of organization of society. Certainly, sufficient time has passed to judge if these conclusions are obviously too strong. There are fourteen countries in the world today that have been continuously capitalistic and democratic for the past half century. Yet these classical views should be sufficient to at least call into question the recently fashionable claim that democracy necessarily promotes development by safeguarding property rights.

Although Douglas North (North and Thomas, 1973; North, 1990) has argued that secure property rights are critical for growth, he has not provided a link between property rights and democracy. According to North and Weingast (1989, 803): The more likely it is that the sovereign will alter property rights for his or her own benefit, the lower the expected returns from investment, and the lower in turn the incentive to invest. For economic growth to occur the sovereign or government must merely establish the relevant sets of rights, but make a credible commitment to them. The property-rights literature treats the state as the only source of potential threat. But property rights are threatened by private actors: capitalist property is threatened by organized workers, landlords' property by landless peasants. It is by no means clear that the villain is necessarily the ruler. Indeed, one liberal dilemma is that a strong state is required to protect property from private encroachments, but a strong state is a potential threat itself.

As Mancur Olson (1991, 153) argued, an autocrat cannot credibly commit himself under any circumstance: If he runs the society, there is no one who can force him to keep his commitments. Moreover, what matters is not only the commitment of the current regime to follow a particular policy; it must also be credible that the regime itself will last. An insecure autocrat, in particular, is likely to plunder the society. But Olson also fails to explain how democratic institutions could provide such a credible commitment.

The market is a system in which scarce resources are allocated to alternative uses by decentralized decisions. Yet under capitalism, property is institutionally distinct from authority. This is so because individuals are simultaneously market agents and citizens. As a result, there are two mechanisms by which resources can be allocated to uses and distributed among households—the market and the state. The market is a mechanism in which individuals cast votes for allocations with the resources they own, and these resources are always distributed unequally; the state is a system that allocates resources it does not own, with rights distributed differently from the market. Hence, the allocation of resources that individuals prefer as citizens does not, in general, coincide with that at which they arrive via the market.

As to whether democracy is better than dictatorship, Przeworski and Limongi (op. cit.) present a number of arguments both against and in favor of democracy. Against democracy, they presented the line of argument that was revived in the early 1960s with a focus on growth. The first modern statements that democracy undermines growth are perhaps those by Walter Galenson and Karl de Schweinitz, who argued in 1959 that democracy unleashes pressures for immediate consumption, which occurs at the cost of investment, hence of growth. The argument acquired widespread acceptance under the influence of Samuel Huntington (1968; also Huntington and Dominguez, 1975). In this view, democracy generates an explosion of demands for current consumption. These demands, in turn, threaten profits; hence they reduce investment and retard growth. Democracy is thus inimical to economic development.

(Continues...)

Excerpted from ECONOMIC DEVELOPMENT UNDER CRISES—AN ECONOMETRIC ANALYSISby Henry O. Akintunde Copyright © 2011 by Henry Akintunde. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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