Effect of government revenue on economic growth of sub-Saharan Africa: Does institutional quality matter?

Abstract

Following the approval of sustainable development goals at the global level, the link between fiscal policy, institutional quality, and economic growth has attracted special attention in economic literature. This study scrutinizes the effect of government revenue-institutional quality interaction on the economic growth of 43 Sub-Saharan Africa countries for the period of 2012–2022. Methodology-wise, the study employed the System Generalized Method of Moment (SGMM) to analyze the panel data gained from dependable data sources; the World Development Indicator and the Heritage Economic Freedom Index. The novelty of this study emanates from the estimation technique designated and the introduction of revenue-institutional quality into the economic growth model of SSA. The result of the study reveals that government revenue adversely affects economic growth while institutional quality positively enhances economic growth before interacting with each other. However, the interactive coefficient of government revenue and economic growth positively affected the real GDP growth rate of SSA countries over the study periods. Precisely, before interacting with institutional quality, a percentage change in government revenue, keeping all other things constant, leads to a 0.0866 percent decline in economic growth while it marks a 0.2329 percent upsurge in economic growth in the presence of institutional quality. The result of the study further shows that government revenue promotes the economic growth of the region when combined with institutional quality. On the other hand, foreign direct investment and openness to trade were the key sources of economic growth whereas the population growth rate adversely impacted economic growth in SSA countries. The policy implication of the study is that SSA needs to strengthen government revenue management. Further, the finding of the study implies that SSA countries need to improve institutional quality through promoting efficiency of the regulatory quality and the size of the SSA governments. In addition to this, the fast real GDP growth rate of SSA countries demands improved institutional quality indicators such as the rule of law and extended access to the open market.