Fiscal policy and economic growth in Sub-Saharan Africa: Do governance indicators matter?

Abstract

This study investigated the linkage between fiscal policy-governance indicators interaction and economic growth in 36 Sub-Saharan Africa (SSA) countries from the periods of 2011-2021 inclusive. The study employed two-step system Generalized Method of Moment (GMM) estimation technique due to its practical relevance in panel data analysis. The data obtained from World Bank and World governance indicator was checked for unit root through the help of Im Pesaran Shin and Levin-Lin-Chu unit-root tests, and the result revealed that data was stationary and safe for further analysis. The result of the study also presented that direct economic effect of fiscal policy is negative and significant in SSA countries. However, the interaction of fiscal policy with governance indicators has positive and significant effect on economic growth. Accordingly, before interacting with governance indicators, a percentage change in fiscal policy leads to a 0.20 percent decline in economic growth of SSA countries. Contrary to this, the interactive coefficient of fiscal policy and government effectiveness (0.019) and interactive coefficient of fiscal policy and corruption control (0.0046) are found to be positive and significant. Further, the finding of the study revealed that fiscal policy-voice and accountability interaction coefficient (0.011) and interactive coefficient of fiscal policy-regulatory qualities (0.014) are positively and significantly affecting economic growth of SSA countries. The policy implication is that policy makers in SSA countries should encourage economic policies that improve government effectiveness, strong corruption control, clean public services and better regulatory qualities.