ABSTRACT Title of Document: AFRICA’S RECENT ECONOMIC REVIVAL: ROLE OF POLICIES, POLITICS AND INSTITUTIONS Niko Hobdari Doctor of Philosophy, 2011 Directed By: Professor Allan Drazen Department of Economics Sub-Saharan Africa (SSA) has made significant progress in democracy and economic performance since mid-1990s, but the continent remains by far the poorest region in the world. This dissertation consists of three chapters. Chapter 1 reviews SSA’s history of democracy and economic policy since independence, including a literature review. It argues that while SSA’s disappointing economic performance is, in part, due to its difficult geography, high incidence of disease, and colonial legacy, the main reason for Africa’s woes until mid-1990s seem to be the failure of economic policies adopted by most SSA governments after independence. Chapter 2 examines SSA’s recent economic growth acceleration, and finds that such acceleration is mainly due to better institutions and policies adopted by most SSA governments (as a result of more open and democratic societies), as well as lower incidence of armed conflicts, whereas the role of aid and terms of trade is relatively limited. Chapter 3 reviews the impact on fiscal policy of competitive presidential elections in SSA during 1980- 2005, and finds that (i) the magnitude of political budget cycles has declined over time as a result of stronger checks and balances and more experienced electorates; and (ii) that looser fiscal policies do not help reelect incumbents. AFRICA’S RECENT ECONOMIC REVIVAL: ROLE OF POLICIES, POLITICS AND INSTITUTIONS By Niko Hobdari Dissertation submitted to the Faculty of the Graduate School of the University of Maryland, College Park, in partial fulfillment of the requirements for the degree of PhD 2011 Advisory Committee: Allan Drazen, Chair Kenneth Leonard, Member Pablo D’Erasmo, Member Peter Murrell, Member Razvan Vlaicu, Member © Copyright by Niko Hobdari 2011 Table of Contents List of Tables ............................................................................................................... iv List of Figures ............................................................................................................... v Chapter 1: History of Electoral and Economic Policy in SSA ..................................... 1 Introduction ............................................................................................................... 1 Democracy and Elections in SSA: A Historical Perspective .................................... 3 First Wave: End of World War II to Independence .............................................. 4 Second wave: Independence to late-1980s/early-1990s ....................................... 5 Third wave: Late-1980s to Late-1990s ................................................................. 9 Economic Policy Management in SSA: A Historical Perspective.......................... 15 The First Phase: Independence to End-1970s ..................................................... 15 The Second Phase: Late-1970s to Late-1980s .................................................... 19 The Third Phase: End of the Cold War (1989) Onward ..................................... 22 Summary ................................................................................................................. 23 Chapter 2: What Explains the Recent Growth Acceleration in SSA? ........................ 25 Introduction ............................................................................................................. 25 Stylized Facts on Potential Factors Behind SSA Growth Acceleration ................. 26 Macroeconomic policies and quality of institutions ........................................... 26 Terms of trade ..................................................................................................... 27 Foreign aid .......................................................................................................... 28 Main Questions and Proposed Methodology .......................................................... 30 Criticism of traditional growth approaches ......................................................... 30 ii In defense of traditional growth approaches ....................................................... 32 Methodological issues and main findings in literature ....................................... 34 Issues of Robustness ........................................................................................... 42 Role of Aid .......................................................................................................... 44 Results ..................................................................................................................... 47 Growth Accounting ............................................................................................. 47 Standard Panel Regressions ................................................................................ 50 Growth accelerations........................................................................................... 53 Complimentary Information ............................................................................... 56 Conclusions ............................................................................................................. 57 Chapter 3: Political Budget Cycles in SSA................................................................. 65 Introduction ............................................................................................................. 65 Some stylized facts ................................................................................................. 67 Does Evidence Support Hypothesis of Political Budget Cycles? ........................... 69 Estimation ........................................................................................................... 69 Results ................................................................................................................. 71 Robustness .......................................................................................................... 72 Do political budget cycles affect chances of reelection? ........................................ 74 Conclusions ............................................................................................................. 76 Bibliography ........................................................................................................... 87 iii List of Tables 1.1. History of Democratic Elections in Sub-Saharan Africa ....................................................7 1.2. Presidential Elections Since Founding Multi-Party Elections in Sub-Saharan Africa .......................................................................................................................................14 2.1. Sources of Growth in SSA, 1981-2007.............................................................................60 2.2. Growth Panel Regressions for SSA ..................................................................................61 2.3. Growth Acceleration Episodes in SSA, 1980-2007 ..........................................................62 2.4. Predictability of Growth Accelerations in SSA during 1980-2007 ..................................63 2.5. Probit Analysis of Growth Accelerations in SSA .............................................................64 3.1. Presidential Elections in Sub-Saharan Africa, 1975-2005 ................................................79 3.2. Fiscal Deficit in SSA Countries with Direct Presidential Elections, 1980-2005 ..............80 3.3. The Political Budget Cycle in Sub-Saharan Africa, OLS Panel Estimates with Fixed Country Effects ..............................................................................................................81 3.4. Sub-Saharan Africa: Political Budget Cycle Over Time ..................................................82 3.5. Robustness Tests of Political Budget Cycles in SSA .......................................................83 3.6. Sub-Saharan Africa: Presidents of the Republic, 1975-2005 ...........................................83 3.7. Impact of Fiscal Balance, GDP Growth and Inflation on Election Results ......................86 iv List of Figures 2.1. Average Growth and Its Volatility in Sub-Saharan Africa ...............................................25 2.2. GDP Growth in SSA and the Global Economy, 1981-2007 .............................................25 2.3. Growth and Inflation in Sub-Saharan Africa, 1981-2007 .................................................26 2.4. Change in Growth and Inflation in SSA, 2001-06 vs 1990-2000 .....................................26 2.5. Sub-Saharan Africa: Democracy Indicators, 1975-2009 ..................................................27 2.6. Changes in GDP Growth and Terms of Trade in Sub-Saharan Africa .............................28 2.7. Net Official Development Assistance in Sub-Saharan Africa, 1980-2006 .......................30 2.8.Changes in Aid and GDP Growth during 2001-06 vs 1991-2000 .....................................30 2.9.Contribution of Physical Capital and TFP in SSA Growth Differences ............................49 2.10 Aid, Policy and Institutional Indicators in SSA ...............................................................59 3.1. Sub-Saharan Africa: Democracy Indicators, 1975-2004 ..................................................78 3.2. Average Annual Fiscal Balance in Sub-Saharan Africa, 1980-2005 ................................78