Governance, Entrepreneurship and Employment Growth in Africa: Does Resource Richness Matter?

Abstract

Economic retardation in resource rich economies continues to elicit concerns among economists and development experts. This retardation has been linked to resource endowments and the neglect for institutions of governance in resource rich economies. This paper investigates the effects of governance, financial market development, labor market freedom and human capital on economic performance in resource rich countries in Africa. Using micro level employment growth as a proxy for economic performance and based on OLS model, the study shows that governance and financial market development have a positive and statistically significant relationship with employment growth. Labor market freedom and human capital development exert a negative impact on employment growth. These results imply that good governance, measured by political stability and government integrity provides assurance to investors and entrepreneurs, thus fostering private sector investment in the economy. When the economy is characterized by higher degree of uncertainty as a result of poor governance, investors perceive of higher risk of investment. Consequently, risk-averse investors may hesitate to take economically productive initiatives or may exit the economy altogether. Financial market development encourages growth by enhancing allocative efficiency and flow of finance to productive and nascent entrepreneurs who often rely on external financing. The negative relationship between labor market freedom and employment growth in resource rich countries is counterintuitive. This result could imply that when employers have more freedom to hire and fire due to less government control of the labor market, they become less committed to employees since they find it easy to dismiss them without incurring significant costs. Human capital development could exert a negative influence on employment growth by delaying the joining of and participation in the labor market as potential employees delay seeking jobs to pursue education.