Demographic Change, Institutions and Economic Growth: Evidence from Sub-Saharan Africa.


End date: 31 July, 2015 Project type: BSU Students' Master Thesis Project code: mge13-3A1 BSU Countries: Ghana Lead institution: University of Southern Denmark (SDU), Denmark Project coordinator: Isaac Bonu

Project summary


Economies in Sub-Saharan Africa are home to a large and growing number of people within the working age. Evidence from other regions suggest that, as the demographic transition unfolds, African economies stand a chance of reaping a demographic dividend and further spurring economic growth and poverty reduction, as a result of increases in labor productivity as the share of the working age individuals rises. However, due to the persistence of poor policy and institutional environment in the region, there is a lot of fret among economists, policymakers and other stakeholders about the implications of Africa’s demographic dynamics for future economic development. 

Drawing insights from the Unified Growth Theory as well as literature on the fundamental causes of long-run economic growth and comparative development, this paper examines the relationship between demographic change, institutions and income per capita in Sub-Saharan Africa within the framework of panel data analysis. Unlike previous studies, this paper focuses on economies in Sub-Saharan Africa, a region characterized by incipient demographic transition, low levels of income per capita, ill-developed institutional structures, and growing skepticism about the developmental consequences of its bulging youthful population. Given that institutions shape incentives, the profitability and the feasibility of engaging in economically productive activities, the study hypothesized that without the reinforcing institutional framework that encourages the creation of economic and employment avenues; saving and investment; as well as entrepreneurial activities, Sub-Saharan African countries will, at best, miss out on the opportunity to further accelerate economic growth and poverty reduction and, at worst, have to bear the high economic, social and political costs of increasing unemployed, impoverished and frustrated youths. More precisely, this paper seeks to empirically investigate the importance of the institutional environment in channeling the productive force imbedded in the rise in the relative size of the working age population, as the demographic transition unfolds, into growth in income per capita and hence poverty reduction, in the region. Along with the traditional pooled OLS and fixed effects estimators, we employed the system-GMM, which corrects for both unobserved v heterogeneity across countries and endogeneity arising from the presence of reverse causality between economic performance and institutions.
The results suggest that, after controlling for the influence of natural resources, globalization, financial development, human and physical capital and macroeconomic policy, the share of the working age population and institutional quality independently exert deleterious effects on real GDP per capita in the region over the sample period. This may be attributed to the capital dilution effect of rapid population growth and lingering pernicious effects of poorly established colonial institutions. However, an interaction of these factors is found to be robustly associated with income per capita in economically and statistically significant way; thus, the positive effect of higher shares of the working population on income per capita depends significantly on the quality of prevailing institutions. The results show that the control of corruption, the rule of law (which reflects the extent of contract enforcement and security of property rights) and political stability are the specific institutional structures that matter for harnessing the demographic dividend. Only investment in physical capital, out of seven control variables, is found to have consistent significant positive effect on income per capita in the region. The results imply that countries with better institutional environment that encourage capital formation, employment creation and entrepreneurial activities by the private sector are better poised to reap the productivity and growth effects of an increasing work force. Hence, based on these findings, the paper recommends that governments of Sub-Saharan African countries make deliberate efforts to reduce corruption to levels that allow smooth functioning of the private sector; ensure law and order; enforce contracts and protect economic agents and their investments and returns from theft, expropriation and damage through ethnic and political riots. Specifically, the number of procedures, the length of time and the cost involved in enforcing contracts through the courts, securing property rights and registering businesses must be significantly reduced to allow those doing business in these economies to operate effectively. By reducing transaction costs and guaranteeing security, it is expected that, these institutional reforms will help boost investor confidence significantly and attract foreign capital. The average individual will also be encouraged to save and acquire human capital, start and operate businesses. This will also result in firms making more profitable investment decisions which will also generate more jobs for the growing labor force.
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