Government size, institutional quality and economic welfare in Africa

Abstract

PURPOSE :

Most African countries operate large government sizes but with little corresponding economic outcomes. Institutional economics however, show that strong institution is fundamental in promoting economic growth. This study examines the linkages between government size, institutional quality and economic welfare in Africa. DESIGN/METHODOLOGY/APPROACH :

This study deploys the System Generalized Method of Moments estimation strategy on panel data of 52 African economies from 2000–2018. FINDINGS :

The result shows that government size has a negative impact on economic welfare, while institutional quality has a positive impact on economic welfare. The interaction of government size and institutional quality shows a positive impact on economic welfare, signifying synergy and complementarity. Thus, strong institutions counteract the adverse effects of large government size on economic welfare. PRACTICAL IMPLICATIONS :

To promote human development and economic welfare, and attain key Sustainable Development Goals such as good health and well-being, quality education, decent work and economic growth, African policy makers need to keep their government sizes at optimal levels and promote strong institutions. ORIGINALITY/VALUE :

This paper provides first-hand empirical evidence of the relevance of institutional quality in counteracting the adverse influence of large government size in Africa. It determines the thresholds of government size and uses a composite index as proxy for same. In addition, this study uses the World Governance Indicators and the Fraser Institute Economic Freedom Index as alternative measures of institutional quality and Gross Domestic Product per capita and Human Development Index as proxies for economic welfare.