Understanding the Total Factor Productivity Shortfall in Sub-Saharan Africa

Some argue that Sub-Saharan Africa (SSA) is unique and the fundamental policies and institutions that govern income or productivity variation across countries do not explain the total factor productivity (TFP) shortfall within SSA. This study puts this hypothesis in question and attempts to explain the TFP shortfall in SSA using institutional quality, restrictiveness of trade policy, geographical location and other controls. Using IV estimation to take care of potential endogeneity of the measures of institutional quality and trade policy, and including a SSA dummy and its interaction with TFP determinants in a cross-country regression, the study shows that the dismal TFP in SSA could broadly be understood in relation to its poor institutions, restrictive trade policy and most importantly, its tropical location and the meager domestic credit available to the private sector.

Also, the marginal effect of institutions or trade policy on TFP in SSA is not found to be meaningfully different from their effect on TFP in the remaining sample. The findings imply that there is substantial room for improving SSA’s TFP through better institutional quality, less restrictive trade policy, better access to finance for the private sector, and better connectivity of landlocked countries with their non-landlocked neighbors. Moreover, it also calls for emphasis in facilitating a structural shift towards less dependence in agriculture in the long run, while investing in research on drought resistance crops, tropical diseases, and irrigation infrastructure to mitigate the consequences of its tropical location in the short run.

By: Abdurahman Ali Hussein (MSc)