In the race towards development, many African
countries have adopted the western conception of modernization. In the west,
open market economies fast-tracked nations to modern-hood. Less
barriers to market, and the less influence of government boosted the growth of enterprise in these economies.
Private sector led growth has a multiplying effect, boosting growth several
times higher state intervention. Private sector, especially small
and medium enterprises, provide the majority of jobs, and therefore can improve
the livelihood of workers. State intervention and large government spending can
crowd out the private sector, limiting opportunities for entrepreneurs sell
those services and solutions to the market. It also diminishes the competition to
state-owned enterprise, and less competition means a less transformative economy.
Ethiopian
PM at the test-run of a newly developed light rail
http://english.gov.cn/premier/news/2015/02/03/content_281475049660622.htm |
Whether a country has state-led development or
private led development is signaled by their economic markets. If the market is
closed, this means heavy spending and intervention is occurring on the part of governments.
If the market is liberalized, this means there is an openness to private
investment. Many countries began with state intervention in their path to
development (South Korea, Brazil, and Tanzania) but ultimately opened their
markets once their domestic economy was fully developed. Countries like China, Ethiopia,
and Russia continue to have state-led development although this puts limits on
their private sectors.
While there is no right or wrong path to
develop, one method might lead to greater human development than the other. It seems fast growth
rates in many places have not reduced wealth inequality and standard of living
for all. Some of the fastest growing nations, like Mozambique, have not been
able to comprehensively address poverty and the standard of living. While China has rapidly industrialized it was able to lift a billion people out of poverty. Can the
developmental state model ensure that growth is equal and comprehensive? To
answer these question I study African countries and the effects economic
liberalization has had on their human development.[1]
The two variables of interest for my study are
human development and economic liberalization. I use a cross sectional time
series (CSTS) with fixed effects model over 1990-2014. This model allows me to
measure the effect of economic liberalization on human development over a long
period of time and control for time independent effects. Changes in the
explanatory variables of this model correlate to the changes in the level of human development. All the
countries used in the data are in the sub-Saharan Africa region. CTST method
addresses time order bias of the variables of interests. It also addresses
confounding bias from things like culture, state identity, and geopolitical
factors that I control for.
To operationalize economic liberalization, the
dependent variable of this study, I use the Economic Freedom of the World
index. This distinguished if the country has a closed market economy versus
fully liberal market economy by a score on a scale of zero (closed market) to
100 (open market). To operationalize human development I use real
GDP per capita as measurement.I control for the effects of a several variables,
Instability, foreign aid, and economic institutional strength. Instability is
operationalized by the Fragility Index provided by Fund for Peace. This
measures fragility of a state on a variety of factors and gives a score on a
scale of 0 to 120 (0 being the most stable, 120 being very unstable). Economic
institutional strength is operationalized by the absolute economic
institutional quality provided by the Heritage Foundation’s economic freedom
index. This measures the strength of economic institutions by a score of 0
(worst) to 100 (best). This controls for the effects of colonial institution
legacies on the continent, francophone and anglophone cultural differences in
institutions, and the effectiveness of a countries central banks and finance
ministers.
Foreign aid is the sum of dollar amounts received, and is distinguished between aid from international organizations and, and aid from other organizations or donors. Levels of stability are influenced by an increasing presence of non-state violent actors that might have a negative effect on a country’s modernization despite democracy, liberalization, or economic industrialization policies. Foreign Aid might influence a country’s economic growth.
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Photo of
MTN shop in Nigeria. MTN is a private Nigerian telecommunications firm.
http://uk.reuters.com/article/2014/03/05/us-safrica-mtn-idUKBREA240DF20140305 |
So what is the outcome or effect of economic
liberalization on human development? My hypothesis is that economic
liberalization has zero (or and infinitely small) effect in in the level of human
development. In my analysis however, I found my hypothesis was wrong as there
is a positive effect, which is statistically significant.
I create a regression model of of the variables
I use on in this study (table one).
The regression shows that economic
liberalization has a positive effect on human development. For every improved
score on the economic liberalization index the Real GDP per capita increases by
1.35 units. This positive effect is also statistically significant at the 0.1%
level, which means it is a substantial effect relative to the sum of GDP.
There are many reasons for this outcome. A
factor I’d like to focus on is GDP measurements. I used. I used the measurement
of real GDP per capita. This measurement might not have captured larger picture
of inequality and human development. There are other measurements created by
the UNDP that try to grasp the whole picture of wealth. Private sector can
boost a country's GDP (like Mozambique, China) but if this boost is not being
realized in all provinces and levels of society, it can mask larger equality
and poor standards of living. In a future study, I’d like to isolate the
effects further by either switching measurements, or considering a different
and more robust time series statistical model.
[1] Using
a Hausman test we can see that there is little difference between the fixed
effects and random effects estimation. So there is little room for endogeneity.
The test says it is okay to use random effects estimation. Although it is okay
to use the random effects, I conclude with my model of the fixed effects would
or create bias as the results would be similar.
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