Threshold Effects of Institutional Quality in the Infrastructure-Growth Nexus

This study estimates the threshold level of institutional quality that will ensure the efficient use of infrastructure in stimulating growth in Sub-Saharan Africa based on panel data from 41 countries in the region between 1996 and 2015. It employs a dynamic panel threshold regression model which is derived from the New Institutional Economics theory and this is estimated using the first-differenced Generalized Method of Moments estimator. Results reveal that the relationship between infrastructure and growth is non-linear which provides support for the use of a threshold regression model, with institutional quality serving as the threshold variable. In terms of the threshold level, the findings show that the index of institutional quality that will ensure the efficient use of infrastructure in stimulating growth is 0.410. The study also finds that, on average, countries in the region operate below this threshold level, hence their poor growth. The conclusion that is drawn from the analysis is that poor or low institutional quality is one of the factors hampering the growth of countries in the SSA region. A major limitation of the study is that the estimator employed for the threshold analysis is developed for models with single threshold value only and so does not allow for multiple threshold values. Thus, it is recommended that governments in the region need to formulate and implement policies targeted at improving the level of institutional quality in their countries.