Trade policy, Geography, Institutions and
Economic Development in Sub-Saharan
Africa
A RESEARCH PROPOSAL
Submitted for the registration of the topic for Doctor of
Philosophy in Economics (PHD 304) in the faculty of
Economics in University of Johannesburg (UJ).
2016.
Submitted by:
Stephen Ogolu
P.O Box 810, Soroti
Uganda
E-mail: ogolu_stephen@yahoo.com
Tel : +256 772-368669
Skype: stephen2146
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Table of Contents
1.1 INTRODUCTION: ................................................................................................................................. 2
1.2 Statement of the problem ........................................................................................................................ 3
1.3 The Purpose of the Study: ....................................................................................................................... 4
1.4 The Research questions of the study ....................................................................................................... 4
2. REVIEW OF RELATED LITERATURE: ............................................................................................... 5
2.1 introduction ............................................................................................................................................. 5
2.2 Theoretical foundations on Trade policy, Geography, Institutions and Economic Development
relationship:................................................................................................................................................... 5
2.3 Empirical studies on trade policy and Economic development .............................................................. 6
2.4: Literature on Geography and Economic development .......................................................................... 7
2.5 Literature on Institutions and Economic development ........................................................................... 7
3. METHODOLOGY: .................................................................................................................................. 8
3.0 Introduction ............................................................................................................................................. 8
3.1 Research Design and Approach .............................................................................................................. 8
3.2 Data Sources, Collection and Analysis ................................................................................................... 9
3.3 Estimation Methods ................................................................................................................................ 9
3.4 Dissemination of Results ........................................................................................................................ 9
3.5 Expected Layout of the chapters in the final Report/ Thesis ................................................................ 10
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1.1 INTRODUCTION:
Economic development1 is desired by most countries because of the advantages it has especially
in addressing the issue of unemployment and low incomes in these countries. Economic
development has been recognized as a complex process driven by economic, political, social and
biophysical forces and would not fully be understood unless the analysis of these forces is done
(McCord & Sach, 2013). There have been attempts to study the sources of economic
development especially with the support of adequately chosen cross-country regression equations
containing variables that explain growth in per capita incomes. But cross-country regressions
have been criticized as enjoying a “fifteen minutes of fame” (Wacziarg, 2002). Over the last
three decades, cross-country studies have proposed panaceas for growth in income per capita,
and included accumulation factors (high rates of physical-capital investment, rapid human capital
accumulation), demographic transition (low fertility),
geographic factors (Sach, 2003) and
institutional factors (Acemoglu et al., 2014; Acemoglu & Robinson, 2012; Rodrik et al., 2004),
policies like trade policy2 (Alcala &Ciccone, 2002; Dollar & Kraay 2002, Frankel & Romer,
1999), ethnic homogeneity (Collier &Gunning, 1999), British colonial origins, a common-law
legal system, the protection of property rights and the rule of law, good governance, political
stability (Acemoglu et al., 2005; 2001), foreign direct investment and suitably conditioned
foreign aid (Roy and Berg 2006). This list is a growing one and non-exhaustive in nature, but
never providing conclusive answers to what drives economic development.
There is then a need to ask an important question as to what really drives economic growth, in
general and in Africa3 in particular? This question has been the subject of much economic
debate with no side able to convincingly conclude it. Adam Smith in 1776 tried to answer this
question in his study: An inquiry into the Nature and Causes of Wealth of Nations, where he
addressed issues of labor, prices and money among other factors. The modern examination of
this question by economists dates back to the studies by Solow (1956) and Swan (1956), in what
came to be known as the neoclassical growth model. Their models tried to answer the above
1
. The use of the term Economic Development also refers to Economic growth or its variables, for the purpose of
this study.
2. Trade policy in this case is taken to refer to a policy of trade openness for purposes of this study.
3. Africa, in this study, means Sub-Saharan Africa.
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mentioned question by emphasizing the role played by physical capital accumulation over time
and predicted the steady state growth path of the economy. The major contribution was to
present the steady state growth rate of per capital income as determined by technological
progress, a process that was influenced exogenously.
However, by the 1980s, with the availability of data and theoretical developments on
endogenous growth, it was possible to test the debate of what drives economic development
empirically. For-example, studies by Kormendi & Meguire (1985), Barro (1991) & Mankiw et
al. (1992), became crucial landmarks for empirical cross-country growth literature. The
pioneering work of Mankiw et al. (1992) extends the neoclassical growth model with the
inclusion of human capital, and as such became the cornerstone of empirical growth literature,
where growth in output was seen as a function of production factors and technology.
This implies that, with the accumulation of production factors with technological progress in
place, it is possible to achieve economic growth as production factors and technology are seen as
key determinants of growth.
1.2 Statement of the problem
Economic development continues to be more elusive in most of the countries, both developed
and developing, with average income levels between the world’s richest and poorest countries
differing by a factor of more than 100 (Rodrik et al., 2004). Countries have made effort to pull
their citizens out of deep rooted poverty with growth enhancing policies and institutional
improvements, some have succeeded while others have continued to fail, as is the case with most
African countries over the past three decades.
Although some countries in Africa have made huge improvement in the living conditions of their
citizens and have managed to cut poverty levels, there are still lingering challenges with the
drivers of economic development, (institutions, technology and geography), in most of these
countries (McCord & Sach, 2013). Recent literature still supports the role institutions play as
fundamental determinants of economic development of any country. Cross-country and crossregional regressions have shown that institutions influence economic development and that their
impact on long-run development is robust (Acemoglu et al., 2014). In a related study, it was
found that the existing explanation about the emergence of prosperity and poverty lies in the
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fundamental determinants of economic development, that is, geography, economic policies and
institutions. These fundamental determinants of economic development are either insufficient or
lacking in most African countries. The functioning of a democratic country that guarantees the
rule of law and enforcement of contracts, is able to harness the local ideas and talents of the
population and win over investor confidence (Acemoglu & Robinson, 2012).
However, our understanding on why income per capita varies among countries is drawn from
cross-country regressions or analyses with limited within country analyses. Some researchers
have continued to question these results, with others recognizing that the evidence remains
circumstantial, and must be bolstered by more detailed analyses at the microeconomic level.
They suggest future research to study the inter-regional dynamics of a single country that shares
similar institutions but is varied in its physical geography and resource base with bench mark
economies. (Acemoglu et al., 2014; McCord & Sach, 2013). They have suggested that a within
country analysis would test and provide a clear understanding of the fundamental determinants
of economic development- trade policy, institutions and geography; which is why this study
considers country analysis of Uganda; using Kenya, Tanzania, and Rwanda (members of the East
African Community) as bench mark economies, to bolster our understanding of the fundamental
determinants of economic development. The bench mark countries have been chosen because of
the special characteristics- Kenya and Tanzania are near ports, compared to Uganda and Rwanda
that are landlocked.
1.3 The Purpose of the Study:
The main objective of this study is to analyze the empirical relationship between Trade policy,
Geography, Institutions and Economic Development in Sub-Saharan Africa. With the following
four specific objectives in mind:
1- To examine the relationship between trade policy and economic development
2- To analyze the relationship between Geography and economic development
3- To examine the relationship between institutions and economic development
4- To analyze the simultaneous effect of the three variables on economic development
1.4 The Research questions of the study
1- What is the relationship between Trade policy and economic development?
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2- What is the relationship between Geography and economic development?
3- What is the relationship between institutions and economic development?
4- What is the simultaneous effect of the three variables on economic development?
2. REVIEW OF RELATED LITERATURE:
2.1 introduction
Economic theory suggests that trade policy is a catalyst to economic development and is a major
driver to economic development (Winters, 2004). There is a growing evidence that Africa’s
poverty is declining, and doing so rapidly, with real GDP growing at an average rate of 4.3
percent between 1995 and 2009, and real per capita GDP growth averaging about 1.8 percent
over the same period. But to catch up with the developed countries, a higher and more sustained
economic growth is needed (McCord & Sachs, 2013; Sala-i-Martin & Pinkovskiy, 2010). There
is now considerable debate as to whether the recent episode of high growth in Sub-Saharan
Africa is based on solid fundamentals, broad-based, and likely to be sustainable. Some studies
show that the post 1995 growth acceleration was not accompanied by improvements in variables
often correlated with long-run growth, such as investment, and therefore that it is so fragile.
However, average income levels among countries continue to differ markedly, with deep
implications leading to continued debate on what really drives economic development in Africa.
2.2 Theoretical foundations on Trade policy, Geography, Institutions
and Economic Development relationship:
The theoretical relationship between trade policy and economic growth has been assessed
previously in the framework of traditional Ricardian-Hecksher- Ohlin trade theory which
postulates that openness to trade brings a one-time increase in output as the country allocates its
resources more efficiently in response to the policy stance as postulated by law of comparative
advantage and specialization, which was highly stressed by the theory. However, this theory fell
short of predicting any implications for long-run economic growth and development in countries
involved. This therefore gave birth to extension of the Richardian framework by incorporating
factor intensity, factor equalization of prices and resource endowments, in what came to be
known as the neoclassical growth model. In the neoclassical model, the growth rate of per capita
output is determined by the exogenous technological progress. According to the neoclassical
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growth model, an increase in the savings rate generates a temporary rise in the growth rate. In
this case, openness may impact on the long run growth rate if there is a technology stimulating
effect of openness. However, neither the traditional Ricardian-Hecksher-Ohlin trade theory nor
the neoclassical growth model is able to provide a theoretical framework for the proposition that
openness stimulates technological progress which in turn leads to economic growth. Because of
this limitation, only the newer endogenous growth theories pay attention to implications of trade
policy on long-run growth as openness facilitates easier access to new technologies embodied in
imported inputs, channels domestic resources towards Research and Development (R&D) sectors
and increases market size. Though endogenous growth models address the limitations of the
traditional and neoclassical growth theories, they do not clearly conclude that openness promotes
the long-run economic growth. This has been the subject of much economic debate in academia,
for which more studies continue to provide conflicting answers to this relationship.
The theoretical foundation on the importance of institutions is well established in the pioneering
work of North & Thomas (1973). They provide a unified explanation for the growth of Western
Europe between 900 AD and 1700 providing a general theoretical framework for institutional
change. Institutions have also been recognized to affect economic performance explaining the
differential performance of economies over time (North, 1990). Although the importance of
economic geography is quite neglected in the theory of economics, theorists have also modeled
the effect of economic geography on economic development and concluded that it plays
important role in economic development (Krugman, 1991).
2.3 Empirical studies on trade policy and Economic development
The conventional trade theory predicts the pattern of trade and its welfare effect across countries
in a static framework which relates trade patterns to comparative advantage and specialization
and proposes that for countries to trade with each other, they will specialize in the production of
goods in which they have the comparative advantage. However, there is a sharp disagreement on
the growth effects of international trade. The empirical analyses that have been conducted
estimate positive growth effects of trade policy, but the size of these effects is often rather small,
and there is disagreement on the empirical methods used to estimate this positive relationship.
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Several empirical studies support a positive impact of trade openness on economic growth
(Villaverde & Maza, 2011; Frankel & Romer, 1999; Wacziarg, 2001; Vamvakidis, 2002; Chang
et al., 2009; Dollar & Kraay, 2002; Alcala & Ciccone, 2004; Rodrik et al., 2004).
However, other empirical studies have disagreed with the above positive relationship. The
studies have shown that trade openness benefits the rich countries more than the poor countries
and as such may not confer any welfare gains on developing countries (Kim, 2011; Dowrick &
Golley, 2004; Kim & Lin, 2009). With the debate continuing, this study seeks to reexamine this
relationship using a microeconomic analysis of Uganda; using bench mark economies of Kenya,
Tanzania and Rwanda.
2.4: Literature on Geography and Economic development
Geography continues to play a key role in economic development of any country. It has been
argued that Africa has several geographic characteristics that have predisposed the continent to
slow economic growth. These characteristics include being tropical, having hostile conditions for
Agricultural production, poor soils with much of the continent being semi-arid, low population
density, ethnic fractionalization and colonial heritage (Collier & Gunning, 1999; Easterly &
Levine, 1997; Sachs & Warner, 1997). Empirical evidence underscores the role of geography in
explaining cross-country patterns of income per capita. It is shown that levels of income per
capita, economic growth and other economic and demographic dimensions are strongly
correlated with key geographical and ecological variables, such as climate zone, disease ecology,
and distance from the coast (McCord & Sach, 2013; Gallup et al., 1998; Gallup & Sachs, 2001;
Sachs & Malaney, 2002; Sachs, 2003).
However, other studies dispute the role of geography as a fundamental determinant of economic
development. These studies show that the role geography plays in explaining cross-country
patterns of income per capita operates predominantly through the choice of institutions, with
little direct effect of geography on income (Acemoglu & Robinson, 2012; Acemoglu et al., 2001;
Easterly & Levine, 2002, Rodrik et al., 2004).
2.5 Literature on Institutions and Economic development
Economic importance of institutions in economic development is well documented, and are
considered the fundamental determinant of economic development. Institutions are the rule of a
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game in society and as such shape economic interactions in any society by structuring incentives
in human exchange (North, 1994). Studies have dealt with the question of growth effect of
institutions in isolation and concluded that they are the fundamental cause of economic
development (Acemoglu et al., 2014; Acemoglu & Robinson, 2012; McCord & Sach, 2013;
Acemoglu & Johnson, 2005; Acemoglu et al., 2001; Easterly & Levine, 2002; Rodrik et al.,
2004; Hall & Jones, 1999; North, 1990; 1994). There is also growing consensus that institutions
are critical to long-run economic growth in most countries as complicated regulatory framework
affects the profitability of the firms as this raises costs, risks, and barriers to entry and
competition of these firms.
While both theoretical and empirical literature find independent positive effect of institutions on
economic development, there is still a debate about the growth effect of institutions, with some
studies showing that institutions per se do not cause economic development but rather their
choice (Sachs, 2003). Other studies show that it is trade, not institutions, that had significant role
in the long-run per-capita income growth (Dollar & Kraay, 2003). They concluded that, as trade
and institutions go together; it is difficult to trace partial effects of trade and institutions on
economic growth in cross-section studies, while they have shown substantial partial effects of
trade, and a little role of institutions, on economic growth through decadal dynamic regressions.
From the above debate on the previous literature, it is clear that the debate still remains unsettled
giving this study room to contribute to the debate. Therefore, this study will make two important
contributions to the debate: First, the study will use a country analysis to understand the
dynamics of trade policy, geography and institutions in explaining economic development in
Sub-Saharan Africa.
3. METHODOLOGY:
3.0 Introduction
This section elaborates how the study will be designed and accomplished. It will provide an
account of the research design, measurement of variables, data sources, data collection methods,
processing and analysis of the data.
3.1 Research Design and Approach
A case study, and cross-sectional design will be adopted for this study while approaching the
research questions using the quantitative approach; while seeking to underpin theoretical and
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empirical findings. Using quantitative approach to research will help me generate quantitative
data in a formal way which will then be subjected to rigorous quantitative analysis in order to
draw inferences and relationships of the variables being studied. The study seeks to answer the
research questions using empirical approach. An empirical framework will be constructed to
answer each research question empirically.
3.2 Data Sources, Collection and Analysis
The data that will be used for estimation of the model will be got from Penn World Tables
(PWT) 7.0. and or 8.0; international trade statistics of the United nations, world bank and World
Trade organization for trade policy and GDP data, data for geography variables will be got from
CEPII database, World bank, masters and McMillan, and Polity IV dataset, Political rights
index-freedom house, and International Country Risk Guide (ICRG) data developed and
maintained by Political Risk Service (PRS) for institutional indicators. Data will be collected by
first subscribing to the data sources- for those that require financial subscription, although I have
subscribed to some of the sources mentioned above. Secondly, if access is granted, downloading
the data in the formats that can be accessed by Eviews version 8 or Stata version10 Statistical
packages. Data analysis will be conducted using Eviews version 8 by the researcher or Stata
version 10.
3.3 Estimation Methods
This study will follow the estimation methods used by Rodrik et al., (2004) using the Frankel and
Romer (1999) and Acemoglu et al (2001) instruments simultaneously to estimate the
relationships. This is because the two instruments are considered to have passed the American
Economic Review test, and as such, useful in enhancing our understanding of cause-and-effect
relationships involved. The study will develop some equations that will be systematically
estimated using a series of regressions in which incomes are regressed to measures of trade
policy, geography and institutions. The analysis will allow the study to answer an important
question; “what is the independent contribution of these three sets of deep determinants to the
cross-national variation in income levels?” The first stage of these regressions provides us in
turn with information about the causal links among determinants (Rodrik et al., 2004).
3.4 Dissemination of Results
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The expected results from this study are expected to provide important knowledge on the
advancement of our understanding of income per capita within the country and across-national
boundaries. The findings will be disseminated in internal seminars of the university, conference
presentations, regular reporting to the key stakeholders and publication of articles in peer
reviewed journals.
3.5 Expected Layout of the chapters in the final Report/ Thesis
To achieve the overall objective of this research, we attempt to find an answer for the main
research question, which is whether and how the three fundamental determinants of economic
development cause economic development and how their effect is significant in Sub-Saharan
Africa. This question is broken down into four specific questions, which will be addressed in
four empirical chapters in the final thesis, thus:
First empirical chapter will attempt to find an answer to the question whether trade policy
contributes positively to economic growth and whether these results are robust. Generally, this
chapter aims to investigate empirically the relationships between trade policy and economic
development in the short and long-run. The second empirical chapter will attempt to find an
answer to the question of whether geography has any effect on economic development. The third
empirical chapter will attempt to address the question of whether institutions have an effect on economic
development. The fourth empirical chapter will attempt to address the question of whether there is
simultaneous effect of the three variables on economic development.
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