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2008 AEC - Does institutional quality matter in limiting the growth of government in sub - saharan Africa?
Sub-Saharan Africa has the dual characteristics of low institutional quality and large-sized government, both keeping the cost of doing business high. This paper revitalizes the literature on growth of governments by highlighting the essence of upgrading institutional quality in trimming government size in several sub-Saharan economies. It contributes to existing knowledge by showing that not controlling for idiosyncrasies would lead to serious biases in regressions that try to explain growth of governments. More particularly, this paper innovates the current literature by greatly challenging factors such as globalization and population dynamics, often perceived as major drivers, of the size of public sector in developing countries. Empirical findings based on 42 economies pertaining to this region clearly indicate that, besides level of development, the quality of institutions matters tremendously in reducing growth of governments. Contrary to previous studies, weak evidence is found of trade openness, urbanization and dependency ratio determining public sector growth once idiosyncratic factors are accounted for. Of the six indicators of institutional quality applied in this assessment, ‘Control of Corruption’ is found to be most significant that policy reforms should address to reduce the overwhelming sizes of government in sub-Saharan economies.