Does economic complexity enhance governance quality in Africa?

ABSTRACT

The importance of governance in promoting economic growth and its crucial role in the achievement of other Sustainable Development Goals have been largely discussed in the literature. Given the importance of governance and the desire of all nations to ameliorate the level of governance, a growing literature has engaged in understanding its determinants. This study attempts to contribute to this literature by examining, for the first time, the effect of economic complexity on governance using data from 32 African countries over the period from 2002 to 2019. We elaborate four governance indicators based on a principal component analysis. Results provide strong evidence of a positive relationship, suggesting that moving to higher levels of economic complexity leads to better governance performance. We identify human capital, foreign direct investment, and income inequality as some transmission channels through which economic complexity promotes governance. Based on these results, several policy implications are discussed.

RÉSUMÉ

L’importance de la gouvernance dans le développement de la croissance économique, ainsi que son rôle crucial dans la réalisation d’autres Objectifs de Développement Durable, ont été longuement débattus dans le milieu académique. Ce rôle important qui lui est donné, ainsi que la volonté de toutes les nations d’améliorer leur niveau de gouvernance, ont mené à un nombre croissant d’études ayant pour sujet la compréhension des déterminants de la gouvernance. Dans cet article, nous contribuons à cette littérature en analysant, pour la première fois, les effets de la complexité économique sur la gouvernance dans 32 pays africains, en nous basant sur des données collectées entre 2002 et 2019. Au fil d’une analyse en composantes principales, nous dégageons quatre indicateurs de gouvernance. Nos résultats indiquent l’existence d’une relation positive, suggérant ainsi que l’adoption de niveaux de complexité économique plus élevés mène à une meilleure performance de gouvernance. Nous identifions le capital humain, les investissements directs étrangers, et l’inégalité de revenus comme certains des canaux de transmission par le biais desquels la complexité économique stimule la gouvernance. En nous basant sur ces résultats, nous considérons les implications politiques de cette relation entre complexité économique et gouvernance.

KEYWORDS:

• Economic complexity
• governance
• Africa
• sustainable development

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For instance, according to a recent report on the Global Terrorism Index, Nigeria’s Boko Haram represents the deadliest terrorist organization with 6,644 deaths. Some other notable terrorists’ movements on the continent include: Ansar Al-Shariya in Tunisia; Al-Qaeda in the Islamic Maghreb; AlShabab in Kenya and Somalia; Boko Haram in Nigeria and central Africa (Asongu and Biekpe 2018; Asongu and Nwachukwu 2017).

2 http://atlas.media.mit.edu.

3 Nigeria (−1.6289), Guinea (−1.7804), Angola (−2.2458), and Libya (−3.1767).

4 Governance is a multidimensional and complex phenomenon that has many definitions. Governance is the exercise of political, economic and administrative authority to manage the affairs of a country at all levels. “Good governance” includes the following main components: legitimacy, whereby the government has the consent of the governed; accountability, which ensures transparency and responsibility for actions; respect for the law and protection of human rights; competence, which is the effective development of policies and programs; and decision-making capacity (Human Security Centre 2005). Dixit (2009) defines economic governance as “ … structure and functioning of the legal and social institutions that support economic activity and economic transactions by protecting property rights, enforcing contracts, and taking collective action to provide physical and organizational infrastructure.” Kaufmann, Kraay, and Mastruzzi (2010) define governance as three main indicators namely: political, economic, and institutional. (i) Political governance is defined as the election and replacement of political leaders. It is measured by two indicators: political stability/no violence and voice and accountability. (ii) Economic governance is defined as the formulation and implementation of policies that deliver public commodities. It is also measured by two indicators: regulation quality and government effectiveness. (iii) Institutional governance is defined as the respect by the State and citizens of institutions that govern interactions between them.

5 See Alonso and Garcimartín (2013) and Alonso, Garcimartin, and Kvedaras (2020) for a review of the literature.

6 According to Asongu and Nwachukwu (2017), institutional governance is the respect by the State and citizens of institutions that govern interactions between them. Economic governance is the formulation and implementation of policies that deliver public commodities. Political governance is defined as the election and replacement of political leaders.

7 Data on ECI+ is only available up to 2015.

8 Net official development assistance (ODA) consists of disbursements of loans made on concessional terms (net of repayments of principal) and grants by official agencies of the members of the Development Assistance Committee (DAC), by multilateral institutions, and by non-DAC countries to promote economic development and welfare in countries and territories in the DAC list of ODA recipients. It includes loans with a grant element of at least 25 percent (calculated at a rate of discount of 10 percent) (WDI 2023).

9 Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product (WDI 2023).

10 This estimator is asymptotically more efficient than difference GMM (Roodman 2009).

11 All explanatory variables are considered as potentially endogenous.

12 We take lags of order 1 through 3. We performed the estimations using the Stata module xtabond2 following Roodman (2009). The choice of lags was based on the results of Arellano and Bond’s residual autocorrelation tests.

13 However, it is worth noting that the above-mentioned approached used to minimize the various risks do not constitute a panacea.

Additional information

Notes on contributors

Ronald Djeunankan

Ronald Djeunankan is a PhD student in Economics at the University of Dschang (Cameroon). He holds a master degree in International Economics from the University of Dschang, Cameroon. His research has appeared in Revue d’Economie Politique, Utilities policy, Environmental Science and Pollution Research, Journal of Development Issues, SN Business and Economics, African Development Review, and Economics of Transition and Institutional Change (forthcoming) among others.

Brice Kamguia

Brice Kamguia is an assistant lecturer in the University of Yaoundé (Cameroon). He holds a Ph.D degree in International Economics from the University of Dschang, Cameroon. His research has appeared in the Journal of International Trade and Economic Development, International Economics, Resources Policy, Revue d’Economie de Développement, Utilities policy, African Development Review, and Economics of Transition and Institutional Change (forthcoming) among others. He is also a consultant at the United Nations Commission for Africa.

Sosson Tadadjeu

Sosson Tadadjeu is an assistant lecturer in the University of Dschang (Cameroon). He holds a Ph.D degree in International Economics from the University of Dschang, Cameroon. His research has appeared in World Development, Energy Policy, Resources policy, Revue d’Economie Politique, Revue d’Economie de Développement, Utilities policy, African Development Review, and Economics of Transition and Institutional Change (forthcoming) among others.