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Axel Addy and Sebastian Petric

Degree:

EMBA

Location:

United Kingdom

Year:

Sep 2019 – May 2022

By Axel Addy and Sebastian Petric

Benchmarks for Sustainable Improvements on the Continent

In our Executive MBA class at the University of Oxford, we agree that there is a need for higher quality institutions on the African continent; making institutional quality visible helps to constrain actors and empower those without means. More depth and a higher frequency of measurement of indicators, than currently performed by organisations, is needed: Institutional variation must be visible across countries and within a country to establish benchmarks and create the basis for sustainable improvements.

Part 1

Nobel Laureate Douglass North noted that institutions are the ‘rules of the game’ in a society, which is inseparably linked to the provision of economic incentives and hence, to a country’s developmental trajectory. Indeed, ‘the question is no longer whether institutions matter, but which institutions matter and how to develop them’, as Dani Rodrik stated. While institutions in a society are not limited to government institutions, these certainly play a vital role: Property rights, regulation, economic policy, social insurance, conflict management, as well as political rights are among those institutions determining whether a country ends up in poverty or is able to rise and improve the lives of its citizens.

The importance of institutions and governance is taken account of by the World Bank as the international organisation developed six broad themes measuring the quality of the following factors across countries: Voice and accountability, political stability and lack of violence, government effectiveness, regulatory quality, rule of law, as well as corruption. A higher level of institutional quality, as measured by the average of these six indicators, produces an increased level of GDP per capita, higher economic growth rates, as well as less uncertainty with respect to a country’s prospects. One caveat is that whether institutions are successful in supporting the developmental trajectory of a country may depend on factors such as culture and history, which makes for a large variety of institutions with some of them difficult to duplicate (indigenous vs. alien, formal vs. informal institutions). In addition, institutions tend to be quite sticky and hence, changing the institutional structure may prove to be difficult, i.e. take a significant amount of time, as Ralf Dahrendorf noted.

Why is poverty so widespread on the continent? Africa is among the poorest, as well as slowest growing regions globally. That being said, there are some success stories such as Botswana, but the overall economic performance of the continent is disappointing. Low investment rates, low educational standards, and/or insufficient infrastructure are among the reasons for this. Why is this the case? Why are investment rates so low? Research puts forward the effects of geography, diseases, colonialism, borders, geopolitics, aid dependency, as well as the curse of natural resources, entailing conflicts and economic volatility, as well as bribery and rent-seeking. These are among the main reasons why countries do not catch up with advanced economies and why poverty seems to be an insurmountable obstacle for many people on the African continent.

What can be done? Increased visibility of the current state of institutions and governance mechanisms is a key means to improve the quality, as well as reduce the volatility of said factors. Constraining powerful actors and empowering those without any means are the ultimate goals of functioning institutions supporting the economic trajectories of countries. By creating the means to better monitor institutional quality and governance mechanisms, an early warning system can be created in case of deteriorations in these factors, as well as the basis for improvements can be laid by establishing benchmarks.

Part 2

More depth and a higher frequency of measurement is needed to effectively create such benchmarks. Country rankings, as the previously-mentioned one by the World Bank, often form the basis for the evaluation of realities on the ground and are, indeed, a good starting point. However, with these lists it is impossible to differentiate among decent, bad or predatory institutions across countries. As Khanna et al. note, ‘contrary to what these rankings suggest, however, the market infrastructure in each of these countries varies widely’. In addition, institutional quality and governance not only vary across countries, but there is also substantial variation within a country. The question is, how to map institutions and governance mechanisms in order to create increased visibility and hence, a basis for monitoring and sustainable improvements?

Such mapping can be critical to moving countries on the African continent towards financial self-sufficiency by improving monitoring mechanisms, as well as leading to greater revenue generation to fund sustainable development agendas. A closer look is taken at Liberia, a small post-conflict nation of some 4 million people. Liberia, recognised as one of the poorest nations in the world, is a richly endowed nation with natural resources and arable land, high rainfall and beautiful beaches ideal for tourism. However, weak institutions, limited human and infrastructure capacity, as well as the absence of political maturity have sentenced Liberians to a life in poverty. In this respect, a detailed mapping of institutions and governance mechanisms is often overlooked in the fight against poverty.

In Liberia, increased visibility of institutions and governance mechanisms, leading to a review of legal mandates and institutional budget allocations, could drive innovations resulting in significant improvements in efficiency, as well as more equitable outcomes. In this respect, the budget allocation of the Ministry of Commerce and Industry can serve as an example. The goals of the Ministry, created in 1972, ‘include the promotion, development, regulation, control, operation and expansion of commercial, industrial enterprises and activities in the Republic’. However, this broad mandate is only equipped with an allocation of resources that is negligible in percentage of the national budget. Creating increased visibility of institutions and governance mechanisms could trigger significant changes in the country. Furthermore, the mapping of Liberia’s national budget would reflect the dominance of recurring costs which leave no room for truly revenue generating activities. Improvements could broaden domestic resource mobilisation and give confidence to the private sector.

The mapping of government institutions would lead to the identification of nuances in institutional arrangements. In our example, this could significantly influence national agendas by leading to budgets more focused on lifting people out of poverty. Transformative investment in human and infrastructure capacity can only be realised in a sustainable way when African countries can pay for their own development priorities. To achieve such transformation, variation in institutional quality and governance mechanisms must be visible across countries and within a country to establish benchmarks and create the basis for sustainable improvements.

 

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  • Augustine

    Strong and effective institutions are what Africa needs to move up the development continuum. Great article!