An empirical analysis of the impact of economic institutions on poverty levels in Sub-Saharan Africa regions

Abstract

The main objective of this study is to investigate the relative effect of ten different indicators of economic institutions on three measures of poverty: poverty headcount, extreme poverty measured as a poverty gap below $2.15 per day, and moderate poverty captured as a poverty gap below $3.65. A panel data from forty-one Sub-Saharan African (SSA) countries over a period of 2007 to 2021 is analyzed using the two-step System-Generalised Method of Moments (system-GMM) technique. The Sargan test for overidentification restrictions and the Arellano-Bond test for second-order serial correlation were conducted. The findings revealed that improvements in government integrity, business freedom, investment freedom, and financial freedom are crucial to reducing poverty in SSA. It is also revealed that a rise in tax burden would significantly result in an increase in poverty. Similarly, more trade freedom would lead to increase in moderate poverty and poverty headcount, though it would significantly reduce extreme poverty. To win the war against poverty in SSA, it is recommended that efforts be directed towards improving the integrity of government by making government decisions and activities more transparent. The process of starting and operating a business should also be made easy, while the financial system should be made more open and fairly accessible to all. On the other hand, a high tax burden in terms of multiple taxes, a high tax rate, high public debt, and unproductive public spending should be avoided. Trade openness should be done with caution so as not to hurt infant industries.