Working Paper 264 - Institutional Reforms and Economic Outcomes in Africa

There is voluminous literature on the impact of reforms, but little attention to the impact of institutional reforms on economic outcomes. Therefore, the focus of this paper is to examine the effects of economic and political institutional reforms on growth and investment in Africa. Treatment analysis was employed using difference in-difference estimation techniques to gauge the effect of reforms. The analysis revealed that democracy does not necessarily translate into reform of political institutions. Countries that embark on small and gradual reforms in economic institutions seem to grow faster. It is also observed that both economic and political institutional reforms are triggered by crises of low growth and low investment. There is no evidence that one form of reform induces another. The sequence of reforms seems to matter for investment though it does not matter for growth. Countries that start with reforms in economic institutions invest more, while those that start with political reform invest less. The results also show that countries that embark only on political reform grow slower and invest less. It is therefore recommended that countries that have not started any kind of reform should start with reform of economic institutions. And those that started with political reform should also give comparable attention to economic institutions’ reform.