Do Institutions Matter in Poverty Reduction? A Panel Evidence from Sub - Saharan Africa
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Date
2007-07
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A.A.U
Abstract
Th is paper provides a perspective on and review of the relationship between
in stitut ions, income and poverty, as it relates to poverty patterns in Sub-Saharan
Africa. It tries to ana lyze the importance of in stitutions on growth process and
poverty reduct ion in the region. The study employs a random effect error component
model to investigate the envisaged relation ships in the system of simul taneous
equation models of open ness, in stitutions, income and poverty. It is a GMM type
random effect model that hand les systems of eq uations simultaneo usly. It also
handles the problems of endogeneity, control individual unobserved heterogeneity
and hand le unbalanced-ness of the data. Accordingly, while institut ions have been
shown to have a direct impact on economic performance (income), we argue in this
paper for a weak direct relation ship between institutions and poverty measures. We
find that in stitutions, as measured by a strong commitment to the rule of law among
other things, matter for poverty reduction largely through their effect on economic
growth (income). Moreover, the analysis demonstrates that the institutional quality
indicato rs that are rel ated with the economic in sti tutions (government effectiveness,
regulatory qua lity, rule of law and control of co rruption) have a stronger impact on
income thereby on poverty reduction. Thus taking into account this, the most
important institutions to be built or to be strengthened include rule of law (prope rty
ri ght), regulatory institutions that stimulate investment, resource allocation and
efficiency are more relevant for growth and poverty reducti on than the nature of the
political system in the region. Thereby we can improve the mapp ing of growth in to
poverty in the region.
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Keywords
Institutions Income, Poverty, Openness, Geography And EC3SLS