Managing Risk in Africa through Institutional Reform

1. Managing Risk in Africa through Institutional Reform Phillip LeBel, Ph.D. Professor of EconomicsSchool of Business Montclair State UniversityUpper Montclair, New Jersey 07043Lebelp@mail.montclair.edu

2. Understanding Africa’s Weak Economic Performance • By almost any measure, Africa’s economic growth has been weak over the past twenty-five years • While mean PPP GDP per capita has increased by modest amounts, median PPP GDP per capita has hardly increased at all.

3. The Mixed Record of African Development Indicators:

4. Adult Illiteracy Rate

5. Drought Frequency in Africa

6. Cereal Crop Yields

7. Africa’s Share in World Trade

8. Africa’s Share in Global Merchandise Trade

9. Reframing African Development Strategies Must Begin With An Emphasis on Risk Management • Aggregate country risk, which includes political, economic, financial, and environmental factors, is inversely related to the level of per capita GDP

10. Corruption is a Determinant of Risk • Corruption is directly related to the level of risk.

11. In turn, corruption is a function of several factors: • Judicial independence is inversely related to the level of corruption

12. Economic Freedom Affects the Level of Per Capita GDP • Economic freedom, an important contributor to development, has improved little in Africa over the past twenty-five years.

13. Rising International Aid In Africa International Aid has had a negative impact on per capita GDP • International aid, which has often served political over economic interests, has largely failed to raise per capita income in Africa, even when increases have been made.

14. As a result, even rising levels of FDI have had a lower impact than elsewhere • As a result, even rising levels of FDI have but a limited impact on economic development in Africa. In part this is because the level of FDI is so small relative to GDP, which in turn reflects the overall level of aggregate country risk.

15. Despite political instability, military spending in Africa has remained relatively low • Despite political instability, military spending in Africa has been lower than in some developed countries. At the same time, it has been higher than in most parts of Asia, China and North Korea being the principal exceptions.

16. The Quality of Institutional Governance is a Key to Managing Risk • Property rights in Africa have experienced some modest improvements, with some relapses in more recent years. The effect has been negative on the level of economic freedom, with higher risk resulting in lower levels of per capita GDP.

17. Democracy Offers Some Modest Gains in Per Capita GDP • Democracy, which in addition to transparent and fair elections, consists in the level of civil liberties and political rights. Despite some gains in Africa, the effects on per capita GDP have been weak.

18. Some Stylized Patterns of African Development

19. Determinants of Risk in Africa

20. Panel Nested Regression Equations

21. Basic Model Estimating Equations:

22. Basic Model Institutional Valuations: • Estimates are based on parametric changes in selected independent variables

23. Regional Variation Valuations:

24. Africa Sample Profile:

25. Model Descriptive Statistics:

26. Model Definitions and Sources:

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