Macroeconomic consequences of state fragility in sub‐Saharan Africa

• Author: Chuku Chuku,Kenneth Onye
• DOI: http://doi.org/10.1111/rode.12570
• Published date: 01 August 2019
• Date: 01 August 2019

SPECIAL ISSUE ARTICLE

Macroeconomic consequences of state fragility in

sub-Saharan Africa

Chuku Chuku

1,2

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Kenneth Onye

2

1

Macroeconomics Policy, Forecasting

and Research Department, African

Development Bank, Abidjan

2

Department of Economics, University of

Uyo, Uyo, Nigeria

Correspondence

Chuku Chuku, Macroeconomics Policy,

Forecasting and Research Department,

African Development Bank, Abidjan.

Emails: chukuachuku@gmail.com,

c.chuku@afdb.org

Funding information

African Economic Research Consortium,

Grant Number: RC15509.

Abstract

Are poor macroeconomic outcomes primarily the result of

economic policies, or of deeper underlying state fragility

problems in sub-Saharan Africa? We attempt to answer

this question by using carefully specified dynamic panel

regression techniques to show how state fragility condi-

tions help to explain the differences in the macroeco-

nomic performance of sub-Saharan African economies,

and to identify the most plausible mechanisms of trans-

mission. We find that countries with greater fragility suf-

fer higher macroeconomic volatility and crisis; they also

experience weaker growth. When we disaggregate state

fragility into its various components, we find that it is the

security and social components that have the strongest

causal impact on macroeconomic outcomes, while the

political component is, at best, weak. Therefore, we con-

clude that it is state fragility conditions, and not necessar-

ily macroeconomic policies, that are of first-order

importance in explaining the differences in macroeco-

nomic performance for African countries. The knock-on

effects are mostly mediated through the fiscal channel,

the aid channel, and the finance channel. Accordingly,

we recommend that interventions in fragile states should

best focus on exploiting the potential for using fiscal pol-

icy, aid, and finance as instruments to improve macroeco-

nomic outcomes in sub-Saharan Africa.

JEL CLASSIFICATION

EO2, O43, D72

DOI: 10.1111/rode.12570

Rev Dev Econ. 2019;23:1101–1140. wileyonlinelibrary.com/journal/rode © 2018 John Wiley & Sons Ltd

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KEYWORDS

State fragility, macroeconomic volatility and crisis, dynamic panel

model, macroeconomic policies, sub-Saharan Africa

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INTRODUCTION

Despite significant progress made in the last two decades, sub-Saharan African (SSA) economies

have lagged behind other regions on almost any real measure of macroeconomic performance. At

the same time, SSA countries dominate the top 50 percentile of rankings on almost all indicators of

state fragility. Could it be that Africa's predominantly fragile situation is primarily responsible for its

broad poor macroeconomic performance? Maybe. But such a proposition would be contentious,

especially in the light of the tenaciously propagated views of the Washington consensus, which

argues that macroeconomic outcomes in developing economies are mainly determined by macroeco-

nomic policies (see Williamson, 2000; Stiglitz, 2005). Although, admittedly, the empirical connec-

tion between macroeconomic policies and macroeconomic performance is somewhat established

(see Easterly, 2005; Collier & Gunning, 1999), there remain ambiguities about the underlying dri-

vers of this relationship. Two important questions emerge: Are poor macroeconomic outcomes the

result of not only, or not even primarily, economic factors but those of deep underlying state fragility

problems? What are the mechanisms by which state fragility affects macroeconomic outcomes in

sub-Saharan Africa?

To answer these questions, it is instructive to first lay a foundation for thinking about the multidis-

ciplinary and multifaceted concept of state fragility. Fragility refers to situations where the “social

contract" is broken due to the state's incapacity or unwillingness to deal with its basic functions and

obligations regarding the rule of law, poverty reduction, protection of human rights and freedoms,

security and safety of its population, service delivery, equitable distribution of resources and opportu-

nities, among others (see European Report on Development, 2009). The reference in this definition to

the “social contract," which is an outcome of continuously updated bargaining between state and soci-

ety, helps to broaden the relevance of the definition and enables us to consider its pervasive effects on

and consequences for the economy. Despite the definitional differences in the literature, Stewart and

Brown (2009), after a meta-analysis, find that all existing definitions are built around the three main

themes of authority, service delivery, and legitimacy. This categorization forms the basis for how we

think about the concept of fragility in the rest of the discussion.

Our aim is to better understand how an important consequence of poor institutional quality (i.e.

state fragility conditions) helps to explain the differences in the macroeconomic performance of

SSA economies, especially in terms of real economic volatility, crisis, and growth; and to identify

the most plausible mechanisms of transmission from state fragility to macroeconom ic outcomes.

An understanding of this relationship is important in many respects. For one, although an enormous

literature points to a diverse set of potential causes of sub-Saharan Africa's poor macroeconomic

performance, including bad polices (Page, 2009; Norman & Stiglitz, 2012), political instability

(Ndulu, 2008; Easterly & Levine, 1997; Fosu, 1992), inadequate infrastructure (Ndulu, 2006),

colonial foundations (Bertocchi & Canova, 2002; Tusalem, 2016; Bertocchi & Guerzoni, 2012),

slow accumulation of capital, slow productivity growth, a delayed demographic transition (Ndulu,

2008; Hoeffler, 2002), and, more importantly, the role of institutions and governance (Fosu, Bates, &

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Hoeffler, 2006), these factors still do not completely explain the differences in economic performance

of SSA economies. This observation informs our proposition that, given the acknowledged impor-

tance of institutions, there could be other deep, underlying consequences of institutions that may

matter, perhaps even more, for understanding the differences in the economic performance of

SSA countries. Thus, we drill further into the consequences of state fragility on macroeconomic

performance in the region.

Moreover, given that the channels of transmission from state fragility conditions to the macroe-

conomy could be multifaceted and interconnected, it is not obvious which channels of transmission

are the most relevant. This is particularly important to help inform domestic and international pol-

icy interventions that are sure to be effective. Further, from an empirical point of view, the task of

understanding the relationship between state fragility and macroeconomic performance is compli-

cated by potential endogenous causation (which may exist between state fragility and macroeco-

nomic outcomes) and could be further confounded by the spill-over or “bad neighbors effect”

described in Chauvet and Collier (2005). In spite of these potential complications, we exploit the

dynamic history of state fragility conditions in Africa, which offers an excellent opportunity, in

terms of wider Ncross-sections and longer Ttime periods, to undertake a thorough examination of

the consequences of state fragility for macroeconomic outcomes in Africa.

We use insights from stylized facts and carefully specified regression analyses to unmask the

relationship. In particularly, cross-sectional regressions, internal instrumentation-based dynamic

panel system generalized method of moments (SGMM), and structural vector autoregressions are

applied to data on 48 SSA economies over the period 1995–2014. Data collected from the Center

for Systemic Peace (see Marshall & Cole, 2014) on state fragility indicators and different dimen-

sion clusters of state fragility are used in the analysis. And data on macroeconomic indicators are

retrieved from the World Development Indicators (WDI). The main results of the paper show that

both state fragility and macroeconomic policies play independent and interdependent, but non-tri-

vial, roles in the determination of macroeconomic outcomes in Africa.

Overall, we find that more fragile countries suffer higher macroeconomic volatility (measured

by the relative standard deviation of the growth rate), and more severe crisis (measured by the

worst drop in output). There is also evidence that countries with higher fragility experience lower

macroeconomic performance (measured in terms of gross domestic product (GDP) growth),

although this aspect does not survive well in different models. Furthermore, when we jointly con-

trol for state fragility conditions along with selected macroeconomic policy variables, which are

often regarded as key determinants of macroeconomic outcomes, we find that macroeconomic pol-

icy variables cease to play a significant role, while fragility continues to be significant. This

implies that macroeconomic policies are not the primary determinants of macroeconomic outcomes

in Africa, but could be a reflection of the underlying fragility conditions. There is no wonder why

most conventional macroeconomic policy prescriptions have hardly achieved the desired results in

the continent (for evidence, see Easterly & Levine, 1997; Lin & Monga, 2017). A logical interpre-

tation for this observation would be the so-called “seesaw effect”(see Acemoglu, Johnson, Robin-

son, & Thaicharoen, 2003). This is a mechanism whereby severe state fragility conditions make it

possible for the ruling class to keep switching between macroeconomic policy instruments in ways

that allow them to self-appropriate rents whenever they are prevented from using a hitherto

exploitative instrument.

In search of plausible mechanisms of transmission, we find that state fragility exerts knock-on

effects on macroeconomic volatility through the fiscal policy channel (measured by the size of

government expenditure), the aid channel, and the finance channel. In particular, fragile states with

more developed financial sectors have a greater propensity to experience macroeconomic problems

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