International Business & Economics Studies

ISSN 2640-9852 (Print) ISSN 2640-9860 (Online)

Vol. 4, No. 4, 2022
www.scholink.org/ojs/index.php/ibes

Original Paper

Institutions and Economic Growth: Evidence from Ecowas

Bini Debordjo Marie O’brin1 & Xiaoiao Luo1
1
SILC Business School, Shanghai University, Shanghai, China

Received: September 18, 2022 Accepted: October 28, 2022 Online Published: November 4, 2022
doi:10.22158/ibes.v4n4p58 URL: http://dx.doi.org/10.22158/ibes.v4n4p58

Abstract
This study examines institutions and economic growth: evidence from ECOWAS for 2000-2018. We use
eight alternative variables to evaluate institutions and economic growth: gross domestic product, gross
fixed capital formation, population growth, and foreign direct investment, control of corruption,
government effectiveness, political stability & absence of violence/terrorism, and rule and law. Then,
we adopted the combined OLS model, the fixed effects model, the random effects model, the
difference-GMM, and the system-GMM model. The results show that different measures of institutional
indicators significantly impact the economic growth of ECOWAS. However, the institution’s quality has
nothing to do with the financial results expected by ECOWAS. In most cases, foreign direct investment,
gross fixed capital formation, and population growth positively impact the economic development of
ECOWAS, while political stability, rule and law, control of corruption, and effectiveness of government
harm the economic growth of ECOWAS. Therefore, decision-makers and competent authorities should
reduce the organization’s quality through appropriate development strategies such as derivatives.
Keywords
ECOWAS, INSTITUTION, ECONOMIC GROWTH, POLITICAL INSTITUTION

1. Introduction
The economic and social circumstance in the Economic Community of West African States (ECOWAS)
has remained delicate and unprotected from domestic and external shocks Ulku (2004). Some African
countries appear from civil wars and armed conflicts that affect economic growth. According to Ulku
(2004) and Nkurunziza and Bates (2003), armed bumps, coupled with impoverished weather
circumstances and trade damage, have caused a loss in economic angular momentum in Africa. For a
clear understanding, even though ECOWAS is given natural resources, it is one of the poorest areas in
the world. To shed light on this argument, we compare the trend of GDP per capita in developing
regions from 2000 to 2018.
What these specific policies are and the possible consequences are largely unclear. Expected systems

58
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

and economic growth may also be diverse and depend on specific circumstances because dictators have
motivations to suppress the population and other potential components of the political elite. Still, they
also have strong motivations to protect the quality of the basic system. And to a certain extent, freedom
of speech and media freedom Egorov et al. (2009); Boudreaux and Holcombe (2013). In most cases,
the successful implementation of new policies or institutional reforms after the coup means that certain
obstacles in existing political or judicial obstacles must be eliminated. However, in other cases, it is
undoubtedly a more effective strategy for the new regime to increase certain barriers to protect the
regime, policies, and systems.
In this article, we focus on the impact on the quality of the institutions and economic growth evidence
from ECOWAS. We hypothesize that when members of the current political elite carry out a coup, they
may remove barriers to change. In contrast, coup makers outside the ruling elite are more likely to take
the opposite action to protect themselves from the influence of the elite system. In addition, the
alternative government type may affect the system. However, all coup makers may be interested in the
benefits of the group or department they represent. Recent growth models indicate that economic
institutions, such as macroeconomic stability agencies, property rights, social insurance institutions,
regulatory institutions, conflict management institutions, etc., are the main sources of economic growth
in the northern countries North (1990).
According to Penalosa (2006), institutions with culture, knowledge, and technology jointly determine
the economic movements among multiple equilibriums of the state of development.
The general meaning here is that the quality of ECOWAS institutions is very low. Undoubtedly, there is
no clear consensus on the reasons for the poor economic performance of the Economic Community of
West African states. However, some studies, such as Sachs and Warner (1997) and Hoeffler (2002),
believe that the poor performance of the African economy can be used to explain the rational variables
of growth performance. In other developing countries and promoting growth in Africa, attention should
be paid to basic factors such as physical capital investment, human capital, population growth, and
access to modern technology. Other studies have pointed out that the accumulation of factors may be
affected by institutional characteristics, such as the distribution of political and civil rights, the quality
of the legal system, and government effectiveness. It is worth nothing traditional growth models,
including Koopman (1965) and Cass (1965), explain the differences in factor accumulation in per
capita income.
Similarly, Lucas (1988) and Romer (1986) emphasized that material and human capital accumulation
can persuade sustained and stable economic growth. However, North and Thomas (1973) argued that
although innovations and factor accumulation can promote economic growth, the fundamental
explanation for the comparative economic growth of countries is institutional differences. The quality
of institutions, such as political stability, control of corruption, government effectiveness, and quality of
the rule of law, can greatly affect investment in material and human capital, technology, and industrial
production, leading to economic growth. In this context, this article examines the impact of institutional
59
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

factors, namely control of corruption, government effectiveness, political stability, and the rule of law,
on economic growth in ECOWAS.
This article also considers the importance of structural factors such as foreign direct investment, gross
domestic product, population growth, and gross fixed capital formation in explaining the economic
growth of ECOWAS. This article uses the per capita GDP growth rate as a good indicator to measure
economic growth.
The paper is structured as follows: The introduction emphasizes the study’s background in section one.
Section two is a review of the literature and theory. Section three presents a description of the empirical
study’s methodology. In section four, discussions and findings are presented. Finally, in section five,
the conclusion and implications are discussed, and the limitations of the research are provided.

2. Literature Review
Traditional growth theory emphasizes the importance of human capital, technological diffusion, and
public infrastructure or innovation in explaining differences in cross-national growth (see Lucas, 1988;
Barro, 1990; Romer, 1990). However, in recent years, people have paid more and more attention to the
role of institutions and governance in economic growth. According to Acemoglu et al. (2005), they are
showing that the system is the fundamental cause of economic growth. Similarly, North and Thomas
(1973) believe that institutions are the source of differences in economic growth among countries. In
addition, according to Acemoglu et al. (2005), institutions play a key role in development by
influencing investments and production organizations. Rodrik (2000) emphasized that the system not
only directly impacts economic growth but also affects other growth determinants, such as material and
human capital, investment, and technological changes, which lead to economic growth. Giavazzi and
Tabellini (2005) conducted an empirical study further to reveal the importance of institutions in
economic growth. Roll and Talbott (2002) and Person (2005) generally believe that there is a positive
correlation between democracy and economic growth.
Similarly, Tavares and Wacziarg (2001) revealed that democracy, in terms of credibility and political
stability, could promote growth by raising the level of education and influencing the rate of tangible
capital accumulation. This means that in countries with greater political turmoil, economic growth
tends to be lower. In a similar analysis, Mauro (1995) found that corruption significantly negatively
impacts investment and growth. He also shows that efficient bureaucracies and the rule of law
positively influence growth. He also showed that effective bureaucracy and the rule of law positively
impact growth. Hall and Jones (1999) showed that institutions promote growth. Although the system is
of great significance in explaining economic growth, the growth outlook of the system is still
inconclusive, and it is still worthless to invite traditional and opinion-given growth concepts to debate.
Understandably, the grant view holds that natural resources determine productivity and technology in
production. However, some studies, such as Mcguire and Olson (1996), point out that most economic
activities are separated from the determinants of economic performance.
60
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Nevertheless, Kormendi and Meguire (1985) estimated the correlation between institutions and growth
for 47 countries from 1950 to 1977 and found that institutions had no significant effect on economic
growth. In addition, Barro and Lee (1993) revealed a statistically insignificant relationship between
democracy and growth. In general, few studies have empirically examined the growth impact of
institutions on economic growth. In many international economic discussion forums, Institutions and
growth have recently become important topics because many believe that it is an effective solution to
the problem of poverty and war, which is common in many countries around the world. In addition,
these studies show that the impact of institutions on economic growth differs from country to country.
Therefore, this article adds to the debate by empirically studying the impact of institutional quality on
economic growth in ECOWAS, taking into account the influence of traditional or fundamental
variables. In this study, information has been provided to capture various aspects of the organization’s
quality. These include government effectiveness, politics and the absence of violence/terrorism, control
of corruption, and the rule of law.

3. Data and Methodology

This study examines the institutions and economic growth: evidence from ECOWAS for 2000-2018.
This article covers fifteen (15) western African countries. The country is selected based on the data
availability of all variables in the estimation model. were selected based on the availability of data for
all the variable included in estimation model. We used World Bank Development (WDI) data and
Worldwide Governance Indicators (WGI). We considered several reasons for this sample and data cycle.
First, our research follows a series of previous studies on institutions and economic growth. Elsner
(2017) links the theory of institutional change with game theory in evolution and institutional
interpretation so that more in-depth analysis can be carried out to reveal the institution. The value is
basic of game theory, tools, and etiquette asymmetry. Secondly, there is no doubt about what causes the
poor performance of the African economy. Although there is no clear consensus, studies such as Sachs
and Warner (1997) and Hoeffler (2002) believe that the same variable of economic growth can explain
the poor performance of the African economy. To explain. Other developing countries’ growth
performance and promoting growth in Africa should pay attention to basic factors such as investment in
physical capital, human capital, population growth, and access to modern technology. As a result, our
research used unbalanced panel data from fifteen (15) countries in West Africa from 2000 to 2018.
3.1 Description of Variables
We can also use eight (8) variables to measure institutional and economic growth variables, which are
widely used in previous studies (Elsner, 2007; Sachs & Warner, 1997; Hoeffler, 2002), that is, annual
per capita GDP growth rate, gross fixed capital formation, foreign direct investment, population growth,
political stability & absence of violence/terrorism, the rule of law, control of corruption and
government effectiveness. Table 1 gives a detailed description of all variables.

61
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Table 1. Definition of the Variable and Source of the Data

Variables Definition Source Exp. Sign.
GDP Growth Gross Domestic Product per capita, currency US WDI.
dollars 2019
FDI Foreign Direct Investment (FDI to GDP ratio) WDI,
2019
GFCF Gross Fixed Capital Formation (% of GDP) WDI,
2019
POPULATION Population (annual growth rate) WDI,
2019
Political Awareness of the possibility of political and/or WGI,
Stability politically motivated violence including terrorism. 2019
Effectiveness of Understanding of public services, the quality of the WGI,
Government civil servants, and their degree of independence 2019
from political pressure.
Rule and Law The degree to which the agent has confidence in and WGI,
abides by social rules. 2019
Control of Awareness of the extent to which public power is WGI,
Corruption exercised for personal gain, including small-scale 2019
and serious forms of corruption.

3.2 Model Specification and Empirical Procedures

3.2.1 Model Specification
In this section, we first use the dynamic Solow model. The model is based on previous empirical
research, using an enhanced Solow growth model Romer and Weil (1992) and considering the problem
of non-stationary variables:

(1)

Among them, and are real GDPs per capita at time T and T-r; a row

vector includes the measure of the steady-state determinants in the augmented Solow model. The
population growth rate of t-r and T-1 in each period. The share of FDI and GFFC during each period is

in the final element . is institutional quality.

62
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

The possible endogeneity of the institutions and economic growth variables provides an appropriate
tool strategy for analyzing the impact of ECOWAS institutions and economic growth. This research
uses panel data estimation techniques. However, GMM estimation uses a sample that only includes the
Economic Community of West African States countries. Therefore, we used a broad sample of
countries to point out the impact of the institutions on economic growth in ECOWAS. Consider the
following equation:

is the actual per capita GDP, is the growth rate of per capita GDP,

is the initial level of per capita GDP, represents a vector of the structure

Represents the institutions and governance variables vector. Where is a country/region-specific

effect that has not been observed, is an error term. , , are unknown parameters to

be estimated. In addition, the subscripts and represent countries and periods, respectively.

Equation 2 could also be determined from its past value, as shown below:

To solve the problem of simultaneity deviation and endogeneity (this is a well-known problem in
growth regression) and eliminate the country-specific effect, equation 3 can be converted into the first
difference equation as follows:

63
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

However, using the lagged dependent variable, to construct a new error term

can correct the endogeneity of the variable Levine et al. (2000), R. Santos Alimi

(2015).
Use the formula for the GMM panel estimator:

E[ for

E[ for

E[ for

The time condition estimation above equation may suffer from sample deviation, especially when the
time series persists and the lag value conveys little information about its future changes, making the lag
value a weak tool. Intuitively, GMM considers the data’s time series dimension and the unobservable
impact of specific countries/regions. It also considers the possibility that the explanatory variables
include lagged dependent variables and that all explanatory variables are endogenous Bond et al.
(2001).
However, as Alonso-Borrego and Arellano (1996) and Blundell and Bond (1998), the statistical flaw of
this estimator is that when the regression variables persist over time, the lag level of these variables is a
weak tool for the regression equation of the difference equation.
3.2.2 Empirical Procedure
First, our empirical analysis starts with descriptive statistics and correlation analysis to avoid
multicollinearity problems between variables. As a result, we removed the highly correlated variables
from the model before regression analysis. Secondly, we estimate the equation by considering various
econometric techniques and selecting the most suitable model from the ordinary least squares model
(Pooled OLS) while ignoring country-specific effects, the fixed effect model, and the random effects
model. The fixed effects model assumes that the specific characteristics of each country are related to
the independent variables. Unlike the random effect model, the group average is constant in the fixed
effects model. The random effect model assumes no correlation between country-specific effects and
independent variables. Therefore, an appropriate model was selected based on the test developed by
Husman (1978). The Hausman test determined the best model between the combined OLS and fixed
64
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

effect models. The null hypothesis assumes that a single effect is equal to zero, that is, the most
convenient is the aggregate OLS model (POLS). The alternative hypothesis suggests that the fixed
effects model is better. The Hausman test is used to select a suitable and effective model between the
random effect model is the most suitable model. Breusch and Pagan Lagrangian Multiplier (LM test)
check for random effects. The LM test is implemented under the null hypothesis that the variance of the
specific effect is equal to zero; POLS is the most suitable model. Alternative hypotheses indicate that
random effects models are better. Then, estimate and select in the test (POOLED OLS, fixed or random
effects model), and report its robust standard error for autocorrelation and heteroscedasticity analysis
within panel units. The interpretations of the results are based on the selected model.
Next, we estimated the dynamic model and conducted a further analysis based on empirical literature.
We used the generalized methods of moments (GMM) to solve the endogeneity problem caused by the
lagged dependent variables as regression. In particular, we used the Arellano and Bond (1991)
difference GMM and Arellano and Bover’s (1995) system GMM to explore other analyses. Difference
GMM uses the first difference to transform all independent variables, thereby eliminating
time-invariant fixed effects. Similarly, the difference GMM constructs instruments a tool for
endogenous independent variables that must be uncorrelated with error term but strongly correlated
with the main independent variables. However, the system GMM is an alternative estimator that
eliminates the potential tool imperfections in the difference GMM by adding a new set of tools. System
GMM creates an equation system by combining horizontal equations with different equations to create
effective tools to solve endogenous problems.

4. Empirical Results and Discussion

4.1 Descriptive Statistics
Panel data presents the results of the Institutions and Economic growth variable: Evidence from
ECOWAS. The number of observations is 361 for the whole variables from 2000-2018. The mean
value of GDP, FDI, GFCF, and population growth is 3.632, 3.551, 18.7, and 1.57, respectively, showing
that on the average gross domestic product, foreign direct investment, gross fixed capital formation,
and population growth have increased by 3.63%, 3.55%, 18.7%, and 1.57% respectively, over the
period 2000-2018. The results also show the mean value of political stability, government effectiveness,
rule and law, and control of corruption is -0.58, -0.838, -0.77, and -0.776, respectively, showing that
institution variables have declined by 58%, 83%, 77%, and 78% respectively over period 2000-2018.
The results also show a significant variation in political stability absence and violence/terrorism (71%),
government effectiveness (42%), rule and law (47%), and control of corruption (0.42), as described by
a value of their standard deviation. GDP ranges from -36.5 (a loss) to 56.78, whereas the maximum
value of control of corruption was 0.17, political stability, government effectiveness, and rule and law
0.82, 0.16, and 0.23, respectively.

65
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Table 2. Descriptive Statistics

Variables Obs Mean Std. Dev. Min Max
GDP 361 3.632 6.203 -36.5 56.78
FDI 361 3.551 9.826 -8.07 103.33
GFCF 361 18.7 126.02 -43.0 2357.67
POPULATION 361 1.57e+07 3.44e+07 0.25 1.96e+08
POLITICAL 361 -0.518 0.7102 -2.4 0.82
GOV EFFECT 361 -0.838 0.4299 -1.7 0.16
RULE & LAW 361 -0.77 0.479 -2.00 0.23
CONTR of 361 -0.776 0.429 -1.8 0.17
CORR

4.2 Correlation Analysis

This table shows the results of the correlation levels between the variables. We found that, in most
cases, population growth, foreign direct investment, and gross fixed capital formation variables
negatively correlate with political stability and absence of violence/terrorism, government effectiveness,
rule and law, and control of corruption at a 5% level. Besides, gross domestic product (GDP) is positive
and significant at the10% level.

Table 3. Correlation Matrix between Variables

Variables GDP FDI GFCF POP POLI GOV RULE CONTR
EFF & OF
LAW CORR
GDP 1.0000
FDI 0.0375 1.0000
GFCF 0.0289 0.0194 1.0000
POPULATION 0.1164 -0.0411 -0.0424 1.0000
POLITICAL 0.0217 -0.0286 -0.0799 -0.4530 1.0000
GOV EFFECT 0.1483 -0.1423 -0.0860 0.1646 0.3131 1.0000
RULE & LAW 0.1467 -0.0412 -0.0784 -0.0572 0.5289 0.8125 1.0000
CONTR OF 0.1938 0.0403 -0.0290 -0.0691 0.3496 0.8058 0.8560 1.0000
CORR
Note. GDP= gross domestic product, FDI= foreign direct investment, GFCF= gross fixed capital
formation, POP= population growth, POLI= political stability and absence of violence/terrorism, GOV
EFF= government effectiveness, CONTR OF CORR= control of corruption.

66
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

*** , ** , and * .

4.3 Results of the Regression Analysis

This section describes the estimation result using the models introduced in the methodology section.
The following table shows the results of Institutions and economic growth results: Evidence from
ECOWAS from 2000-2018. We considered the pooled OLS model, the fixed effects model, and the
random effects model to estimate the models (1), (2), (3), (4), and (5). However, different tests
developed by Hausman (1978) and Breusch and Pagan (1980) show that the results of pooled OLS
estimators are the most appropriate. The statistics of these tests are very important and significant. Our
interpretations are based on the results of the pooled OLS, which are corrected using the robust
standard error corrected for autocorrelation and heteroscedasticity within panel units. Therefore,
column (1) results show that the degree of FDI, GFCF, and Population growth has significant adverse
effects on economic growth, respectively, 10% and 5%.

Table 4. The Effect of the Institution and Economic Growth

Variable Model 1 Model 2 Model 3 Model 4 Model 5
Y(-1) 0.261374 0.36813 0.296638 0.226531
(0,3578) (0.03575) (0.0354) (0.3507)
FDI 0.025*** 0.001*** 0.036*** 0.029*** 0.022***
(0.035) (0.002) (0.035) (0.035) (0.035)
GFCF 0.001*** 0.001*** 0.001*** 0.001*** 0.001***
(0.002) (0.002) (0.002) (0.002) (0.002)
POPULATION 1.91e*** 2.74e*** 1.39*** 2.11e*** 2.23e**
(1.35e) (1.47e) (1.37e) (1.35e) (1.32e)
Political 0.861*
Stability (0.594)
Gov EFFECT 2.731***
(0.929)
Rule & Law 2.591***
(0.813)
Contr of Corr 3.629***
(0.897)
Constant 3.213*** 3.517*** 5.533*** 5.148*** 5.981***
(0.533) (0.576) (0.955) (0.813) (0.861)
R2 (within) 0.30 0.34 0.30 0.32 0.31
R2 (between) 0.50 0.52 0.50 0.53 0.51

67
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Note. POLS denotes pooled OLS whereas robust indicates that we use standard errors corrected for
autocorrelation and heteroscedasticity. The numbers in parentheses are the robust standard errors.

*** , ** , and * .

For example, a 1% increase in the degree of FDI, GFCF, and Population growth significantly increased
by approximately 0.26% and by 0.001%, respectively. In contrast, a similar increase in population
growth significantly increased by about 1.91%.
Columns (2), (3), (4), and (5) of the tables summarize the analysis of the relationship between variables.
The results are similar to the previous findings. In addition, the significance of Wald tests shows that
these variables indicators collectively positively impact economic growth at the 1%, 5%, and 10%
levels. The diagnostic test’s significance shows that the aggregate OLS results are better than those
from the fixed effects (FE) and Random effects (RE) models reported in table 5.

Table 5. Fixed Effect Regression

Variable Model 1 Model 2 Model 3 Model 4 Model 5
Y(-1)
FDI 0.017*** 0.033*** 0.030*** 0.020*** 0.005*
(0.080) (0.083) (0.083) (0.080) (0.079)
GFCF 0.011*** 0.010*** 0.015*** 0.014*** 0.015**
(0.016) (0.016) (0.017) (0.016) (0.016)
POPULATION 2.51e*** 3.38e*** 2.32e*** 2.67e*** 2.70e***
(1.41e) (1.74e) (1.44e) (1.41e) (1.38e)
Political 0.951***
stability (1.098)

Gov Effect 1.241*

(0.761)
Rule & Law 1.320*
(1.265)
Contr of Corr 1.805*
(1.389)
Year effect Yes Yes Yes Yes Yes
Country effect Yes Yes Yes Yes Yes
Note. POLS and FE represent the pooled OLS model and fixed effect model, respectively.

*** , ** , and * .

68
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

4.4 Results of the Dynamic Panel Models

This section presents the results of the dynamic approach of Institutions and economic growth. This
table shows the results of using the GMM difference developed by Arellano and Bond (1991) on FDI,
GFCF, and the effect of population growth on GDP. Therefore, when foreign direct investment
increases by 1%, GFCF drops significantly, and population growth decreases by 0.7% and 0.02%,
respectively. Columns (2) to (5) significantly negatively impact GDP, but FDI and population growth
positively impact GDP.

Table 6. Results of the Difference-Generalized Method of Moments GMM

Variables Model 1 Model 2 Model 3 Model 4 Model 5
Y(-1) 0.983686 0.0965946 0.0939182 0.0962213 0.0846702
(0.046) (0.0462) (0.0458) (0.4628) (0.0460)
FDI 0.071*** 0.0715*** 0.084*** 0.070*** 0.066***
(0.024) (0.028) (0.024) (0.024) (0.025)
GFCF 0.010*** -0.009*** -0.002*** -0.010*** -0.013***
(0.024) (0.0144) (0.014) (0.014) (0.014)
POPULATION 1.85e*** 2.34e*** 1.08e*** 1.69e*** 1.75e***
(6.85e) (8.22e) (7.10e) (7.02e) (7.00e)
Political 0.727***
variable (0.443)
Gov Effect 2.718***
(0.727)
Rule & Law 1.898***
(0.626)
Contr of Corr 3.163***
(0.687)
N 341 341 341 341 341
No. of IVs 17 18 18 18 18
Number of 19 19 19 19 19
groups
AR(-2) test 0.893 0.931 0.936 0.962 0.974
Hansen test 0.448 0.360 0.303 0.359 0.346
Note. GMM denotes the generalized method of moments whereas robust indicates that we use standard

error corrected for autocorrelation and heteroscedasticity problems. *** , ** ,

and * .
69
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Finally, the table shows the institutional and economic growth results using the one-step system-GMM
in Arellano and Bover (1995). In most cases, the results are similar to those in difference-GMM. FDI,
GFCF, and population growth simultaneously positively impact 1% of GDP. These results show that the
ECOWAS countries have achieved economic liberalization, and the inflow of foreign direct investment
is a higher economic growth rate. Equally important, for ECOWAS, the economy seems to grow with
gross fixed capital formation. Interestingly, population growth seems to impact the economy of
ECOWAS positively.
All in all. The impact of the institution’s quality revealed by this research aligns with expectations.
Policies that improve the quality of institutions may promote economic growth. Indeed, to track the
rapid economic growth, the peoples of ECOWAS need to have more voices and political leaders
accountable to the people of ECOWAS. Our results seem to indicate that rule and law have a direct
impact on governance. This is consistent with research showing that political institutions have
contingent effects on other dimensions of the institutional matrix (Aidt et al., 2008; Flachaire et al.,
2014; Salesman et al., 2015). Specifically, our results show that rules and laws will drive growth only
when the supporting institutions are of sufficient quality. The control of corruption, political stability
and absence of violence/terrorism, and government effectiveness with positive and significantly
reduced business costs have promoted the growth of ECOWAS countries.
Our research contributes to the empirical literature by providing new insights into institutions and
economic growth: evidence from ECOWAS. Few studies have considered such a survey in ECOWAS
or elsewhere. In addition, we used eight (8) alternative proxies of the institution and economic growth
as well as 15 countries used in previous studies. Finally, we used several econometric techniques to
verify our results: the pooled OLS model, fixed effects model, random effects model, the difference
GMM and the system-GMM models. Our findings indicate that the political institution is extremely
attractive to the economic growth of ECOWAS.

5. Conclusion
This study examined institutions and economic growth: evidence from ECOWAS for 2000-2018. We
used eight (8) substitute variables widely used in institutional and economic growth in previous
research, namely, GDP per capita; gross fixed capital formation; foreign direct investment; population
growth; government effectiveness; political stability & absence of violence/terrorism; the rule of law
and control of corruption.
First, we adopted the test developed by Hausman (1978) and Breusch and Pagan (1980) to select the
best model among the pooled ordinary least squares model, the fixed effects model, and the random
effect model. These tests show POLS is the suitable model after correcting for intra-country
autocorrelation and heteroscedasticity and having reliable standard errors. Second, we use a dynamic
framework to study the relationship between institutions and economic growth with a result between
the difference GMM model and the system GMM model to confirm our findings. However, the
70
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

elasticity is slightly different from the previous results. We conclude from the GMM results that
institutions are essential to promote the growth of ECOWAS. The empirical results of our four
institutions and governance indicators have been found to have a greater impact on the economic
growth of ECOWAS during the period 2000-2018. Other important economic growth factors in West
Africa include gross fixed capital formation, foreign direct investment, and population growth. In
contrast, it is found that the ratio of certain economic growth factors has a very small or significant
impact on per capita GDP growth. Based on the finding of this study, the following recommendations
are made. The existence of political turmoil, widespread corruption, and overall poor governance may
have gone a long way in explaining the economic growth of ECOWAS. ECOWAS should formulate
and implement a policy reform aimed at reducing the space for greed and improving the efficiency of
public investment. Strengthening the institutions in terms of strengthening political stability, rule and
law, democracy, and controlling corruption will be an important part of ensuring peace and political
stability, but also an essential element for ensuring the healthy and smooth operation of inclusive
economic development.

References
Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as the fundamental cause of long-run
growth. In P. Aghion, & S. N. Durlauf (Eds.), Handbook of Economic Growth (Vol. 1, Part. 1,
Elsevier: 385-472).
Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). The rise of Europe: Atlantic trade, Institutional
change, and economic growth. American Economic Review, 95(3), 546-576.
http://dx.doi.org/10.1257/000282854201305.
Aidt, T., Dutta, J., & Sena, V. (2008), Governance regimes, corruption, and growth: Theory and
evidence. Journal of Comparative Economics, 36, 195-220.
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error
component models. Journal of Econometrics, 68(1) 29-51.
http://dx.doi.org/10.101016/0304-4076(94)01642-D
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and
an application to employment equations. The Review of Economic Studies, 58(2), 277-297.
http://dx.doi.org/10.2307/2297968
Barro, R., & Lee, J. (1993). Losers and winners in economic growth. NBER working paper No.4341
Barro, R. J., & Sala-i-Martin, X. (1997). Technological diffusion, convergence, and growth. Journal of
Economic Growth, 2(1), 1-26. http://dx.doi.org/10.1023/A:1009746629269
Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of
Political Economy, 98(2), 103-125. http://dx.doi.org/10.1086/261726
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data
models. Journal of Econometrics, 87(1). 115-143.
71
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

http://dx.doi.org/10.1016/S0304-4076(98)00009-8
Blond, S. R., Hoeffler, A., & Temple, J. (2001). GMM estimation of empirical growth models. Working
Paper, University of Oxford.
Boudreaux, C. J., & Randall, G. H. (2013). Institutional quality and the tenure of autocrats. Public
Choice, 156, 409-421.
Breusch, T. S., & Adrian, R. P. (1980). The Lagrange multiplier test and its application to model
specification in econometrics. Review of Economic Studies, 47, 239-253.
Cass. D. (1965). Optimum growth in an aggregate model of capital accumulation. The Review of
Economic Studies, 32(3), 233-240. http://dx.doi.org/102307/2295827.
Flachaire, E., Garcia-Penalosa, C., & Konte, M. (2014). Political versus economic institutions in the
growth process. Journal of Comparative Economics, 42, 212-229.
Egorov, G., Sergei, G., & Konstantin, S. (2009). Why resource-poor dictators allow freer media: A
theory and evidence from panel data. American Political Science Review, 37, 580-593.
Elsner, W. (2017). The institutionalist theory of institutional change revisited: the institutional
dichotomy in more formal perspective. Journal of Institutional Studies, 9(2) 6-7
https://dx.doi.org/10.17835/2076-6297.2017.9.2.006-017.
Giavazzi, Z., & Tabellini, G. (2005). Economic and political liberalizations. Journal of monetary
economics, 52(7), 1297-1330. http://dx.doi.org/10.1016/j.jmoneco.2005.05002
Hall, R. E., & Jones, C. I. (1999). Why do some countries produce much more output per worker than
others? Quarterly journal of economics, 114(1), 83-116. http://dx.doi.orgjstor.org/stable/2586948
Hoeffler, A. E (2002). The augmented Solow model and African growth debate. Oxford bulletin of
economics and statistics, 64(2), 135-158. http://dx.doi.org/1468-0084.00016
Hansen, L. (1978). Specification Tests in Econometrics. Econometrica, 46(6), 1251-1271.
Hausman, J. A. (1978). Specification Tests in Econometrics Econometrica, 46(6), 1251-1271.
Koopmans, T. C. (1965). On the concept of optimal economic growth. In study week on econometric
approach to development planning (chap. 4 pp. 225-287). North-holland Publishing Co.,
Amsterdam.
Kormendi, R., & Meguire, P. (1985). Macroeconomic determinants of growth; Cross-country evidence.
Journal of monetary economics, 16(2), 141-163. http://dx.doi.org/10.1016/0304-3932(85)90027-3.
Lucas, R. (1988). On the mechanics of economic development. Journal of monetary economics, 22(10),
3-42. http://dx.doi.org/10.1016/0304-3932(88)90168-7
Mauro, P. (1995). Corruption and growth. Quarterly journal of economics, 110(3), 681-712.
McGuire, M. C., & Olson, M. J. (1996). The economics of autocracy and majority rule: The invisible
hand and the use of force. Journal of economic literature, 34(1), 72-96.
Nkurunziza, J. D., & Bates, R. H. (2003). Political institutions and economic growth in Africa. In
Center for international development working paper (No. 98). Harvard University.
North, D. C. (1990). Institutions, Institutional Change, and Economic Performance. New York:
72
Published by SCHOLINK INC.
 www.scholink.org/ojs/index.php/ibes International Business & Economics Studies Vol. 4, No. 4, 2022

Cambridge University Press.

North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history.
Cambridge: Cambridge University Press.
Penalosa, C. G., & Teksoz, U. (2006). How do institutions lead some countries to produce so much
more output per worker than others? In Institutions, Development and Economic growth. Theo
Eicher and Cecilia Garcia Penalosa eds. Cambridge, M.A: MIT Press, pp65-80.
Persson, T. (2005). Forms of democracy, policy, and economic development NBER working paper No.
11171.
R. Santos, A. (2015). Financial Deepening and Economic Growth in 7 Sub-Saharan Africa: An
application of system GMM panel analysis. Journal of Empirical Economics, Research Academy
of Social Sciences, 4(5), 244-252.
Rodrik, D. (2000). Institutions for high-quality growth: what they are and how to acquire them. Studies
in comparative international development, 35(3), 3-31. http://dx.doi.org/10.1007/BF02699764
Roll, R., & Talbott, J. (2002). Policy research and analysis. The heritage foundation.
Romer P. M. (1990). Human capital and growth: Theory and evidence. Carnegie-Rochester Conference
Series on public policy, 32, 251-286. http://dx.doi.org/10.1016/0167-2231(90)900028-J
Romer, P. M. (1986). Increasing returns and long-run growth. The journal of political economy, 94(5),
1002-1037. http://dx.doi.org//10.1086/261420
Sachs, J. D., & Warner, A. M. (1997). Source of slow growth in African economies. Journal of African
economies, 6(3), 335-376. http://dx.doi.org/10.1093/oxfordjournals.jae.a020932
Solow, R. M. (1957). A contribution of the theory of economic growth. Quarterly journal of economics,
70(1), 65-94. http://dx.doi.org/10.2307/1884513
Travares, J., & Wacziarg, R. (2001). How democracy affects growth. European economic review, 45(8),
1341-1478. http://dx.doi.org/10.1016/S0014-2921(00)00093-3
Ulku, H. (2004). R&D, innovation and economic growth: An empirical analysis. IFM working paper,
WP/14/185, 1-36.

73
Published by SCHOLINK INC.