The spatial effects on the rate of economic growth: Evidence from Sub-Saharan Africa

Abstract

Since 1960’s, many African countries have experienced anemic growth and high levels of acute poverty, even in the presence of natural resources abundance. Ending this poverty trap has been the goal of the 2015 UN Millennium Project. There are a myriad of reasons cited for this trend. The explanations include the inward looking policies adopted by the African countries since 1960s, poor policy management or other socio/political issues, macroeconomic issues such as inflation, exchange rate volatility, poor governance, and institutions. While many previous studies have analyzed the determinants of economic growth of African countries, they fail to consider the possible impact of the economic performance of proximate countries. Results from such studies may be biased as stated in Greene, 2003. It is, therefore, important to properly investigate the determinants of economic growth in Africa and propose appropriate policy directions. In this study, we estimate a spatial economic growth model with spatial correlations in the dependent variable and the error terms by using a panel data on 48 African countries for the years spanning 1980 to 2011. The model controls for some of the conventional sources of economic growth such as gross capital formation, openness of the economy, overseas development assistance, and inflation. We use a variety of proximity matrices including cultural, ecological, developmental, economic, and regional to explore the effect of the rate of economic growth of one country on the growth rates of its proximate countries. We find significant positive spatial linkages in the dependent variable and negative ones in the error terms, indicating that proximate sub-Saharan African countries experience similar levels of economic growth due to the cluster effects and the fact that they compete intensively for growth sources when shocks such as global capital retreats occur. Based on this result, the implication is that the policy makers in Africa should consider planning and implementing strategic and comprehensive regional growth agenda for all proximate countries and consider growth forecasts of proximate nations in the process of making fiscal and monetary policy decisions. Further, our result indicates that without correcting for spatial linkages in determining growth rates, the estimation results may be downward biased. The only significant determinants of economic growth are the gross fixed capital formation as a percent of GDP and gross secondary school enrollment with larger magnitudes for the spatial model. This result, perhaps, indicates that the most important driver of economic growth and development in Africa is fixed capital formation and infrastructure development. In a continent where capital is scarce and the availability and quality of infrastructure is for the most part pathetic, it is a very important for decision makers to implement policies that improve the availability and quality of capital formation and infrastructure development.