Institutions, Economic Freedom and Structural Transformation in 11 Sub-Saharan Countries

Good institutions are a fundamental pre-requisite to successfully achieve structural transformation in growing developing countries (UNECA, 2016). Sub-Saharan Africa is experiencing a rapid growth but a weak and slow structural transformation process, which is mainly characterized by the reallocation of labour from agriculture to low skilled services. The focus of this paper is to explore how political and economic institutions affect structural transformation in a panel of 11 sub-Saharan African countries. Our empirical analysis reveals a positive and statistically significant effect of quality of institutions and economic freedom measures on structural transformation between sectors, which translates into movement out of agriculture. Better institutions appear to not improve productivity within sectors, however results highlight the important role played by institutions in facilitating reallocation or resources across sectors. Our findings suggest that improving the legal system, providing a stable macroeconomic environment, and improving freedom to exchange across borders will facilitate structural transformation processes in sub-Saharan African countries. We finally recommend that measures undertaken by governments should be included in a set of targeted policies designed according to countries’ characteristics.