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Adu-Darko, Eunice Adwoa (2021) Institutional quality in the finance-growth nexus in Sub-Saharan Africa. Doctoral thesis, London Metropolitan University.
This thesis investigates whether productivity can be enhanced by institutional quality through financial development in the sub-Saharan African region. Specifically, it seeks to achieve four main objectives: first, to capture both the market and non-market features of institutional quality in order to bring out the full contribution of institutional quality to economic growth within the framework of finance-growth nexus; second, to investigate the role of market and non-market institutions in the finance-growth nexus for a group of twenty-one SSA economies; third, to detect and account for structural breaks introduced by historical events to produce more reliable estimates in our investigation; and fourth, to consider the constant elasticity of substitution and the variable elasticity of substitution in addition to the Cobb-Douglas production function to not only relax the constraints but also check the robustness of the analysis. Total factor productivity is decomposed into two items: 1) pure technical progress; and 2) institutional quality linked efficiency gain, which captures financial development and institutional quality. Twenty-one sub Saharan African countries were selected to test this proposition using annual data from 1985 to 2015. Based on the Solow neoclassical framework, the Cobb-Douglas, Constant Elasticity of Substitution and Variable Elasticity of Substitution specifications of the production function are employed where the pure technical progress and institutional quality linked efficiency gain were incorporated. Both panel and time series cointegration techniques that account for structural breaks and cross-sectional dependence to increase the power of the regressions and avoid possible model misspecification are employed. The results indicate that there are significant and positive long-run associations between growth, capital, financial development and institutional quality that generate productivity gains over net factor productivity in the panel of 21 countries from sub-Saharan Africa only when structural breaks and cross-sectional dependence are considered within the Cobb-Douglas framework. The impact of institutional quality through finance on productivity and growth is positive and significant for eight countries when there are no structural breaks but reduce to six countries with the incorporation of a full regime break. In the cases of the constant elasticity of substitution and the variable elasticity of substitution production functions, such productivity generating impact remained significantly positive and generally higher for the panel but insignificant for Mali, the case country tested. This study provides important policy implications in the effective strategies for stimulating economic growth via financial development and institutional quality in sub-Saharan Africa.
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