How do a country’s institutions relate to its economic growth, and to inequality? This paper from the African Development Bank looks at these relationships with a view to understanding the institutional conditions for pro-poor and shared growth. It evaluates the growth-inequality-poverty nexus, and identifies conditions which may have contributed to poverty-enhancing patterns of growth in sub-Saharan Africa. Institutions in sub-Saharan Africa do need to be transformed, but there can be no universal model for designing a shared growth strategy.
A growing emphasis on poverty reduction in development has seen a resurgence of interest in the relationship between equity and growth. This is critical in Sub-Saharan Africa, where poverty-increasing growth has led to uneven income distribution, putting the achievement of the Millennium Development Goals in doubt. It is established that institutional environments are a critical factor in shaping growth patterns. It is also recognised that the pattern of economic growth (rather than the rate) affects a country’s income distribution and poverty profile. This leads to the question of what constitutes pro-poor growth.
Key points in terms of the relationship between pro-poor growth, shared growth and institutions are:
- There is debate on whether pro-poor growth should be defined in relative or absolute terms. There is, however, general agreement that poverty reduction requires both higher growth and more pro-poor distribution of gains from growth.
- The concept of shared growth is broader than that of pro-poor growth. It can relate to gains from growth being redistributed retrospectively, during growth or as an inclusive process that identifies opportunities for sharing growth at an early stage.
- Economic growth is increasingly seen as linked to institutional quality. Inequality and poverty are an outcome of economic, social and political processes and their interactions, which are mediated through institutions.
- Institutional poverty traps arise when institutions foster unequal distribution of wealth and offer no efficiency advantages over more egalitarian arrangements.
These concepts are particularly relevant in sub-Saharan Africa, which is characterised by institutional conditions that prevent economies achieving shared growth. A number of explanations and possible solutions arise:
- Some traditional norms and institutions impede shared growth. Group memberships based on kinship, age, gender or ethnicity, for example, prevent wider cooperation.
- Sub-Saharan Africa is characterised by fragmented economic activities and social polarisation. Constraints on state formation have led to unstable political regimes. State institutions are weak and there is a reliance on local allegiances.
- The failure of public institutions and policies hampers links between economic sectors and between the private sector and governments. These are needed for shared growth.
- Decisive steps are needed to induce significant institutional change. This implies a transformation of political, social and economic institutions and formal and informal rules and norms.
- The goal of institutional change would be to eliminate divisive norms and create positive incentives and structures to overcome social and economic fragmentation.
- The exact design of equitable, shared growth policies and institutions should be country-specific, taking into account existing conditions. There is no universal strategy for encouraging shared growth.
