Institutional Quality and Infrastructure Financing

Effects of Institutional Quality on Infrastructure Investment in SSA[Writer][Date]

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ABSTRACTThe aim of this study is to identify the effect of institutional quality on infrastructuredevelopment in Sub Saharan African. The macroeconomic variables are also investigated inthis context including GDP per capita, savings, Foreign Direct Investment (FDI), inflation,exchange rate, real interest rate and grants. The research has followed a quantitative design.
Correlation analysis has showed that institutional quality has a weak relationship with
infrastructure development. However, from the regression analysis and GMM, it has been
analysed that there is a significant impact of institutional quality on infrastructuredevelopment. It is recommended •Control of corruption is a necessary measure because

most of the Sub-Saharan African regions have been ranked negatively so, it has been
determined that the public power has to be used for public gain thus, reducing corruption.
The regulatory quality is related to soundness of policies and the government should seek tocraft sound, feasible and sustainable policies for improving institutional quality andultimately the infrastructure development.

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Table of Contents
CHAPTER 1: INTRODUCTION .................................................................................. 5
1.1 Introduction .......................................................................................................... 5
1.2 Contextual background ........................................................................................ 5
1.3 Problem Statement ............................................................................................... 7
1.4 Aim and Objectives.............................................................................................. 8
CHAPTER 2: LITERATURE REVIEW ....................................................................... 9
2.1 Sub-Saharan African region infrastructure development and financing .............. 9
2.2 Institutional quality in infrastructure development and financing in Sub-SaharanAfrican Region ..................................................................................................................... 10
2.3 Type of Institutions for infrastructure development in Sub-Saharan African
Region .................................................................................................................................. 11
2.4 Impact of institutional quality on infrastructure development financing in SSA.............................................................................................................................................. 13
2.5 Research Gap ..................................................................................................... 14
CHAPTER THREE: METHDOLOGY AND DATA ................................................. 15
3.1 Research Philosophy .......................................................................................... 16
3.2 Research Design................................................. Error! Bookmark not defined.
3.3 Data Collection .................................................. Error! Bookmark not defined.
3.4 Sample Size........................................................................................................ 17
3.5 Data Description ................................................................................................ 17
3.6 Data Analysis ..................................................................................................... 18

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CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ................ 16
4.1 Introduction ........................................................................................................ 20
4.2 Descriptive Analysis .......................................................................................... 20
4.3 Correlation Analysis .......................................................................................... 23
4.4 Pooled OLS Regression – Fixed Effects ............................................................ 34
4.5 Pooled OLS Regression – Random Effects ....................................................... 36
4.6 Generalised Method of Moments....................................................................... 38
4.7 Discussion .......................................................................................................... 40
CHAPTER 5: CONCLUSION AND RECOMMENDATIONS ................................. 42
5.1 Conclusion ......................................................................................................... 42
5.2 Recommendation ............................................................................................... 42
References .................................................................................................................... 43

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CHAPTER 1: INTRODUCTION
1.1 Introduction
This essay has been carried out in order to find out the nexus between the effects ofinstitutional quality on infrastructure investment in the Sub-Saharan region. There are anumber of determinants of macroeconomic stability which helps in the determination of
infrastructure development in the context of Sub-Saharan Region. As for this essay the
researcher has taken into account GDP per Capita, savings, FDI, inflation, exchange rate,
domestic investment, interest rate grants, and Macro instability. These factors are used as themetrics to determine their influence on the infrastructure development of Sub-Saharan region.
The major variables of this essay are institutional quality and infrastructure development ofSSA. Through this essay, the researcher has shed light on both the above mentioned variables
in order to provide useful insights for the ultimate purpose of policy making.
In order to fulfil the major aim of the study which is to find out the nexus between
institution quality and investment in infrastructure in the region of Sub-Saharan region thisessay has extracted relevant data regarding the above mentioned variables for 40 countries
which belong from the Sub-Saharan African region. With the help of this essay, theresearcher has contributed significantly to the very little literature which is available in thisregard. For this essay, the researcher has used certain baseline papers and research articles forthe purpose of benchmarking the results of this essay.
1.2 Contextual background
Most of the researches which have been carried out in this regard have focused on theeconomic growth in the SSA region because of infrastructure development. According to theresearch conducted by Kodongo and Ojah (2016) there is a significant impact of investment
regarding infrastructure and increments in the infrastructure spending on the infrastructureInstitutional Quality and Infrastructure Financing

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development with the economic growth of the Sub-Saharan countries. Moreover in thisresearch the authors have also stated that there is also relationship of quality of infrastructurewith the economic growth indirectly via the export diversification. It has been recommended
by Kodongo and Ojah (2016) that the government and regulatory authorities to reduce theinfrastructure gap and to improve the institutional quality for the purpose of ensuring that theeconomic growth and development of the countries is carried out in an efficient manner.
Institutional quality plays a vital role in terms of the infrastructure development of
any country. Hence institutional quality is important to be considered in order to ensure thatthe economic development and growth takes place in the country. Francois and Manchin(2006) in their study related the concept of institutional quality with the export of goods andinfrastructure. In their study as well, they have stressed on the importance of institutional
quality in regard to infrastructure development. The results of this study show that
institutional quality is greatly dependent on the infrastructure development of the country.
The cumulative analysis of the literature shows that institutional quality has a direct
relationship with the infrastructure development. In order to improve the infrastructure of any
region it is extremely important for the government and other regulatory bodies to focus on
the factors of institutional quality in order to ensure that the infrastructure development is
impacted in a positive manner. There are also past researches which have focused on theimpact of institutional quality in the infrastructure development with respect to the financial
development. The empirical results in this regard show that because of poor institutional
quality in the Sub-Saharan African region the financial development is impacted in a negative
manner (Gries and Meierrieks, 2010).
There are also other researches which have been carried out by the researcher in
specific regard to Sub-Saharan countries. For example the research conducted by Okoi,
Benjamin and Bassey (2015) is carried out mainly on the country of Nigeria. The researchInstitutional Quality and Infrastructure Financing

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has concluded that there is an inverse relationship quality of institutions and the money whichis spent on the infrastructure of Nigeria. This means that if the quality of institutions which
work on the infrastructure projects is high it will result in less investment on the projects
because of the increase in efficiency.
1.3 Problem Statement
From the analysis of economic data it is evident that the growth of most of theAfrican countries has been slow since years which mean that due to certain factors andelements the countries are not able to perform in an efficient manner. The poor economic,
social, political, and environmental conditions of the countries have created numerous
problems for entire continent of Africa in terms of prosperity and even international trade.
Lack of infrastructure development is one of the problems which are highly prominent in thearticles, books, and journal articles are the lack of infrastructure which is prevalent majorly in
the Sub-Saharan region. Impedance of economic growth is caused because of lack ofinfrastructure in these countries. These problems have been considered with great detail in theprior essay. The major problem of this essay is also related to the infrastructure development
however it is connected with the institutional quality of the economic and political
departments which are responsible for the infrastructure development of the country. There
are different determinants of institutional quality which has been pointed by different
researches. The cumulative institutional quality of most of the Sub-Saharan countries is quite
low which is contributing negatively towards the infrastructure development. This essay has
focused specifically on study and assessment of institutional quality in regard to theinfrastructure development of Sub-Saharan countries.

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1.4 Aim and Objectives
The major aim of this study is to determine the nexus between institutional
quality and infrastructure investment in the Sub-Saharan African region. As this aim is quite
broad hence the following objectives are also answered in this essay:
1. To identify and examine the determinants of institutional quality that contributes
towards infrastructure development and financing in Sub-Saharan African countries.
2. To examine the effect of institutional quality on SSA infrastructure development.
3. To recommend institutions and governments regarding ways to improve
management of institutions to positively steer the infrastructure development and financing in
Sub-Saharan African countries.

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CHAPTER 2: LITERATURE REVIEW
2.1 Sub-Saharan African region infrastructure development and financing
Over the past decades there has been significant improvement in the social andeconomic aspects. Different reports and articles show that the countries have invested in theinfrastructure development. In 2015, it has been estimated that the overall GDP in the regionof Africa has been 4.5% annually (Policy Brief, 2015). However it is important here to notethat the increment in the growth rate is not significant enough to bring about significant
changes in the economic and social segments. The infrastructure development in most of the
Sub-Saharan African region is in adequate which is causing problems in the overall economyof the country. The infrastructure deficit of the sub-Saharan countries both in the soft andhard form has been undermining the efforts made towards the sustainable development andstructural transformation in Africa.
In regard to the financing of the infrastructure development in the Sub-Saharan region
it has been found that the financing has been inadequate. This gap in the infrastructure
financing has resulted in several social and economic conditions of the countries in thisregion. The government has constantly been searching for different ways to bring in funds forthe infrastructure development. Because of the massive infrastructure gap in the Sub-Saharancountries which is $94 billion per year the government and other regulatory bodies has been
focusing on determining and assessing different sources of finances for the infrastructuredevelopment (Sy, 2017).
According to Sy (2017) the government of Africa has been utilizing different
sources for the purpose of infrastructure development in order to ensure that the deficit gap isfulfilled and economic and social development takes place in the countries. A senior fellowof Africa Growth Initiative, the government should focus on utilizing the pension funds forInstitutional Quality and Infrastructure Financing

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the purpose of reduction in infrastructure development keeping in mind the changing
demographics of Sub-Saharan African region. It is consensus of the policy makers of Africa
that the economy of the Sub-Saharan African countries is impacted in a negative manner
because of limited infrastructure.
In the entire region of Africa, the deficit in terms of infrastructuredevelopment can be found in the Sub-Saharan African region. There are various economists
and analysts according to whom if the investment for the infrastructure development isincreased it is going to benefit the economic and social conditions of the Sub-Saharancountries (Golubski, 2017). Improvement in the irrigation, roads, transport, and telecom of
the sub-Saharan countries the international trade conditions will also get better. Overall, fromthe analysis of journal articles, books, and past researches it can be found that the financing in
the infrastructure development is low which has led to increased infrastructure gap.

2.2 Institutional quality in infrastructure development and financing in Sub-SaharanAfrican Region
There are different definitions of institution which can be found in the form of
secondary resources however the gist behind all the different definitions is that institutions
refers to the collection of beliefs, rules, values, and organisations which comes together forthe purpose of encouragement of proper behaviour by the individuals of the society. It has
been defined by Levchenko (2006) that the institutions refer to different structures which tend
to impact the economic outcomes. In regard to the infrastructure development, institutional
quality refers to the quality of institutions which works for the purpose of development andimprovement in infrastructure.

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The above part of the literature has already established the fact the financing
and development in the infrastructure department of Sub-Saharan African countries is below
par which is causing problems for the countries in social, economic, and environmental
terms. Most of the studies which have been carried out in this regard show that there is asignificant impact of quality of the institutions which work for infrastructure development on
the infrastructure of the companies. The empirical results of the research in this regard showthat if the institutions are strong it results in better economic growth. The same thing goes forthe institutions which are responsible for infrastructure development in the region of SubSaharan African countries.
The determinants of the institutional quality in the region of Sub-SaharanAfrican Countries which has been used for this research are: control of corruption,
government effectiveness, and political stability, rule of law, regulatory quality, andaccountability.
2.3 Type of Institutions for infrastructure development in Sub-Saharan African Region
There are different institutions which are responsible for infrastructure development;
they can be either political or economic. However it should be noted that the institutions andtheir quality is of great importance and significance for the efficiency of infrastructuredevelopment. There are also certain financial institutions which are working towards
decreasing the deficit in the infrastructure development by providing new ways and financing
sources with the help of which the gap in financing can be reduced in order to ensure that the
infrastructure of Sub-Saharan countries is developed in an efficient and effective manner. The
Development Finance Institution (DFI) in Africa tends to fill the gap in the infrastructuredevelopment by focusing on mobilising the private investment. This institution ensures that
their activities and operations are carried out in such a manner that it helps the infrastructuredevelopment of SSA region in a rather positive manner.

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In order to ensure the quality of the institution to contribute positively towards theinfrastructure development the financial institutions should not only focus on the quantity of
the funds they are generating but they should also provide a persistent focus on the quality of
the funds. Overall, in the context of Sub-Saharan African region the financial institutions areplaying their part for the purpose of collecting funds and even exploring new ways to financethe infrastructure development. Although the impact of the funds in terms of infrastructure ispositive however still the institutional quality of the financial institution is not up to the markas enhancement is still required for the purpose infrastructure development in the region of
Sub-Saharan African countries.
As the development in the Sub-Saharan African countries is very slow and sluggish
hence the institutional framework in this region is quite weak. This weak form of institutionalframework has contributed negatively towards the infrastructure development and economic
growth (Gutman, Sy, and Chattopadhyay, 2015). In the political regard, the institutions in the
Sub-Saharan African region are also weak and are not performing with maximum efficiency
because of which the countries are experiencing poor infrastructure and increased
infrastructure deficit (Allence, 2004, p. 163). Weak policy formulation, ineffective public
administration, and corruption in the political institutions of Sub-Saharan countries tend tonegatively impact the development in the infrastructure.
From the review of literature and assessment of different report and past researches
the consensus is found that because of dysfunctional political institutions in the region of
Sub-Saharan African region most of the infrastructure development strategies fail (van deWalle, 2001). From this the importance of both economic and political institutions can beestablished in regard to infrastructure development. According to Policy Brief (2015) in orderto improve the institutional framework and architecture of Sub-Saharan African countries theAfrican leaders has implemented Programme for infrastructure development in Africa

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13(PIDA). One of the major reason for forming this institution is to strengthen the coordinationand collaboration among the member states, Regional economic communities and institutions
and lastly the key stakeholders.
2.4 Impact of institutional quality on infrastructure development financing in SSA
It has been established by the review of literature and results of empirical studies that
institutional quality plays and important role in the infrastructure development of the country.
However now it is important to discuss how the institutional quality impacts the financing of
infrastructure development specifically in the context of Sub-Saharan African countries. If
the institutions which are responsible for infrastructure development are working in an
efficient manner the development of infrastructure will take place in a rather effective
manner. The efficiency of this development encourages and brings in influx of sources offinance for the SSA countries. Through increased amount of sources of finance and funding
for infrastructure development the deficit or gap which is of $93 billion will eventually
reduce (Sy, 2017).
There are also other researches which have been carried out by the researcher in
specific regard to Sub-Saharan countries. For example the research conducted by Okoi,
Benjamin and Bassey (2015) is carried out mainly on the country of Nigeria. The research
has concluded that there is an inverse relationship quality of institutions and the money whichis spent on the infrastructure of Nigeria. This means that if the quality of institutions which
work on the infrastructure projects is high it will result in less investment on the projects
because of the increase in efficiency
In the current context it can be said that the institutional context is very weakin majority of the Sub-Saharan African countries because of which the financing forinfrastructure development is insufficient. The institutional architecture helps the country toInstitutional Quality and Infrastructure Financing

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formulate and implement efficient strategy in order to increase the infrastructure development
so that the growth and economy of the country is impacted in a positive manner. As theinstitutional framework both in regard to political institutions and economic institutions isquite weak because of which the policies and strategies to extract finances and funds forinfrastructure development is also not done in an effective manner (Ndulu, 2006, p. 212).
Ultimately, it has led to increased infrastructure gap. In this situation, the government isliable to take necessary step to improve the institutional quality and reduce the instability andcorruption in the economic and political context for the purpose increasing funding andfinancing for infrastructure development.
2.5 Research Gap
In order to carry out this essay, the researcher has extensively andcomprehensively studied the literature which is available in regard to the institutional quality
and infrastructure development. From the analysis of literature it is found that separately
there is information which is available regarding the variables of the research. Moreover the
past researches has provided a detailed focus on the economic and growth aspect of
infrastructure development and institutional quality (Claderon and Serven, 2010, p. 13). The
past researches shows that the poor economic, social, political, and environmental conditionsof the countries have created numerous problems for entire continent of Africa in terms ofprosperity and even international trade (Claderon and Serven, 2008). Lack of infrastructuredevelopment is one of the problems which are highly prominent in the articles, books, andjournal articles are the lack of infrastructure which is prevalent majorly in the Sub-Saharanregion. There are no researches which have focused on the role of institutional quality inregard to infrastructure financing in the Sub-Saharan African region. In order to bridge thisgap, this essay has focused specifically on study and assessment of institutional quality inregard to the infrastructure development of Sub-Saharan countries.

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2.6 Theoretical Framework
As this essay discusses the investment and financing of the infrastructuredevelopment in the Sub-Saharan African region hence it is significant assess different
theoretical aspects and frameworks which are related in this regard. One of the models orframeworks which is relevant to be discussed is the “Accelerator model of investment”.
Investment or capital accumulation is of great importance and significance for the purpose ofraising income at both firm level and national level (Christen and Dib, 2008, p. 155). The
accelerator framework suggests that when income and consumption of people increases itbrings about a positive change in the investment. It can be said that with the increase inpeople’s income they demand more goods and in order to fulfil this demand more production
is required and hence more investment. In regard to the infrastructural development in the
Sub-Saharan region it should be noted that the demand for better infrastructure has increased
over the time which means that the with the increment in the income level and consumption
level of people residing in Sub-Saharan African region the people are now demanding for
improvements and developments in the infrastructure. However due to the poor quality of
institutions working for the infrastructure development in this region they are not able to raise
enough funds for efficient infrastructure development.

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CHAPTER THREE: METHODOLOGY AND DATA
For this essay, the researcher has followed an appropriate and suitable methodology inorder to extract data for the research and to analyse the data for the purpose of finding out thenexus between institutional quality and infrastructure investment in the Sub Saharan African
region. In order to fulfil the aim and objectives of the essay this essay has extracted real time
data from World Bank website for the time period of 1996-2016. The description of thevariables and control variables which are used for this essay are mentioned in the following
section.
3.1 Research Philosophy
Research philosophy is considered to be a set of beliefs or ideas which helps theresearcher to gain a direction to conduct the data collection in an efficient manner. Moreover
the researcher Philosophy also helps the researcher in terms of how the collected data can beanalysed in order to gain useful insights about the data. There are different kinds of researchphilosophies which are used by researchers for their researches however the most common
ones are positivism and interpretivism. Positivism refers to the research philosophy orparadigm according to which there is a scientific reasoning and logic behind the data of theresearch. As it supports the logical reasoning hence positivism is mostly used in quantitative
researches which involve numbers and numeric values. On the other hand, interpretivism is a
research paradigm basically opposes and negates the concept of logical reasoning of
positivism. Interpretivism is an approach in which different elements of the research areevaluated on the basis of their quality and content.
As for this research, the researcher has analysed the data based on numeric figuresand values which are obtained from different data bases hence the philosophy behind thisresearch is positivism. With the help of numeric data the researcher has provided a logicalInstitutional Quality and Infrastructure Financing

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reasoning behind the nexus between institutional quality and financing of infrastructuredevelopment in Sub-Saharan African Region.
3.2 Sample Size
The sample size selected for this study has been 40 countries in Sub Saharan Africa.
Moreover, the countries selected have been the same as previous in the first part of this study
regarding infrastructure development and growth. The countries have been selected as per theavailability of data for all the variables in study and related to the time period of data
available. Most of the past researches which have been carried out in relation to the Sub
Saharan African region include some of these 40 countries. The rationale behind selecting 40
countries from the Sub Saharan African region is that it efficiently represents the entire SSA
region. The time period selected for the study is from 1996 to 2016 which entails the latest
data of past 20 years in order to reflect upon the current information of infrastructure gap anddevelopment in Sub-Saharan African region. However, due to limitation of non-availabilityof data, data prior to 1996 has not been included in the study.
3.3 Data Description
The data which has been analysed in this study is composite of total 9 main variables.
Among the main variables, the dependent variable is considered to the infrastructuredevelopment and financing which is based upon sub-variables including electricity
production (total kilowatt hours), water and sanitation (measured by improved water sourcesthat is available to the percentage of population and easily accessible), roadways (the lengthof roads network measured in kilometres) and ICT (ICT service exports expressed in theterms of balance of payments at current USD). The other variable of institutional quality is
the main independent variable or regressor which has been made of certain sub-variables
which includes control of corruption, government effectiveness, political instability andabsence of violence/terrorism, rule of law, regulatory quality and voice and accountability

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which make up the variable of institutional quality. The institutional quality variables havebeen adopted from the study of Kauffman, Kraay and Mastruzzi (2009) which have used thesame variables for institutional quality indicators for the world. Other variables included inthis context that are part of 9 main variables are macroeconomic indicators of GDP per
capita, savings, Foreign Direct Investment (FDI), inflation, exchange rate, real interest rate
and grants. The inclusion of macroeconomic indicators reflects the macroeconomic policy ofthe country and its effect on infrastructure development.
The above mentioned variables and control variables are selected for this research inorder to depict the nexus among institutional quality and infrastructure investment in the Sub
Saharan African region.
3.4 Data Analysis
The data analysis is one of the most important parts of research because it helps indetermining the methods employed for generating the results for the study. As this study is
aimed at examining the effect of institutional quality on infrastructure development andfinancing within the SSA region, various analysis methods have been applied througheconometrics software because of it being a panel data. The specific techniques include
descriptive analysis, correlation analysis, fixed effects regression, Pooled (Ordinary Least
Square) OLS regression and generalised methods of moments (GMM) technique for
estimating the effect of institutional quality on infrastructure development and financing.
Pooled OLS is carried out with respect to fixed effects and random effects. The software used
for this purpose is Econometric Views (E-Views) version 8. The next chapter builds upon the
results of study through the analysis techniques specified above.

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3.5 Regression Equation
In order to depict the nexus among institutional quality and infrastructuredevelopment in the Sub Saharan African Region, this research has made use of different
statistical techniques in order to come up with efficient and accurate results. Following is theregression equation for this research:
Δ Infrastructure Investment i,t = a + β1Institutional Quality i,t + β2GDP per Capita i,t +β3Savings i,t + β4FDI i,t + β5Inflation i,t + β6Exchange Rate i,t + β7Real Interest Rate i,t +β8Grants i,t + εi,t
The above equation shows that infrastructure investment in Sub Saharan African
region is the dependent variable whereas; Institutional quality is the independent variable. Β
represents the slope of the line and “a” is the intercept when the value of Institutional Quality
is 0. GDP per capita, Savings, Foreign Direct Investment (FDI), Inflation, Exchange rate,
Real Interest rates, and grants are the control variables which are used for this study.
In the equation above the subscripts i and t shows the cross sectional indices and time
period indices respectively. “ε” refers to the error term of the equation which shows that themodel does not fully represent the actual relationship between independent and dependent
variables.

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CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION
4.1 Introduction
The following study is aimed at examining the effect of institutional quality on
infrastructure investment in SSA region. In this context, the descriptive statistics, correlation
analysis, FE regression, Pooled OLS regression and GMM methods are applied to get theresults. The following section presents the results of this study.
4.2 Descriptive Analysis

The following table above describes the descriptive statistics for the study. Thisshows that infrastructure investment over the past 21 years has shown variation by 1.49 units
showing low standard deviation. Secondly, the GDP per capita shows a large standard
deviation that is deviation from mean by 2909 units which is even higher than the mean
showing macroeconomic instability in most of the regions among the sample due to which
GDP per capita has a high standard deviation. The savings expressed as a percentage of GDP
has shown that mean and standard deviation are almost equal for the countries thus there areno significant changes in the savings variable. The inflation shows a mean value of 274%

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while the standard deviation is 2405% which is high value. Inflation occurs when the value ofmoney decreases and prices of goods increase. Thus, the high standard deviation for the subSaharan African countries have indicated that there is macroeconomic instability in the
country because of inflation showing a great deviation from the mean value This is because
many countries have high inflation including Zimbabwe having inflation of over 29000% in
its economy as compared to standard consumer price index. Thirdly, the grants have shown ahigh value which means macroeconomic instability exists in the study. Then, the FDI isinvestigated which shows a low value as compared to mean and shows that macroeconomic
instability is not much worse in the case of FDI in SSA. Then, the institutional quality isinvestigated expressed as a percentage of each variable which is measured on a scale of -2.5
to +2.5 where the negative value close to 2.5 shows worse indication of institutional quality
and positive value close to 2.5 indicates high institutional quality in the country. The meanscore is 0.36 which is a mediocre score in terms of percentage while the overall score as innegative for most of the estimates and most of countries showing that institutional quality has
been in poor from in the SSA region. However, standard deviation is low at 0.13 showingthat scores do not mediate but still is a sign of danger for the SSA economies as they are
already reflecting poor institutional quality. Then, the interest rate for the country has beenshown which also reflects a high percentage of over 34% indicating real interest rate is
unstable and overall, macroeconomic instability exists and prevails in the country.

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4.3 Panel Unit Root

The above depicted image illustrates the results of a panel unit root test which is thetesting of unit root in the data set combining all the observations and variables. The criterion
for Levin, Lin & Chu, IPS, Fisher – ADF and Fisher – PP test the null hypothesis as thepresence of a unit root in the data set indicating that data is not stationary. From theprobability or p-values in the output image above shows 0.0000 which is lesser thanstatistical significance level thus indicating that null hypothesis has been rejected. In otherwords, it can be stated that the data is stationary and no presence of unit root is observed.

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4.4 Unit Root – ADF

The ADF test for testing unit root for exchange rate is determined. Based on thecriterion for statistical significance, it has been determined that data for exchange rate is
stationary and does not contain unit root because the probability value is 0.000 which is lessthan 0.05 indicating rejection of null hypothesis. Therefore, the data for exchange rate is
stationary.

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Next, the data for FDI was investigated and it has been analysed that there is no unit
root in the data set because of significance value being less than 0.05 and therefore, the null
hypothesis is rejected. The data for FDI is stationary and there is no unit root in data set.

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The GDP per capita is also investigated in the unit root test. The test illustrated that
there is no unit root in data set and data is stationary over the time period. This has beenconcluded based on the significance value which is 0.0000 less than alpha value of 0.05 thus,
the null hypothesis is rejected for GDP per capita.

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The next variable investigated was grants to countries in terms of US dollars. The
results showed that data for grants is stationary and unit root is not observed in the data set.
This is because the probability value is 0.0000 less than 0.05 indicating rejection of null
hypothesis and thus, the data is said to be stationary.

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The data was inflation was furthermore analysed producing the same results as othervariables indicating that data for inflation in terms of CPI and there is no unit root in the data
due to significance value being 0.000 less than statistical alpha value of 0.05. Therefore, thedata is considered to be stationary.

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The data for infrastructure development and financing is also stationary because ofsignificance value being 0.0000 that is less than acceptable value of 0.05 indicating that null
hypothesis for ADF test is rejected. Therefore, it can be safely concluded that there is no unit
root in the data set.

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The institutional quality variable was investigated in this study opining that there is nounit root in data set and data is stationary. This is due to the significance value being 0.0000
less than 0.05 indicating the rejection of ADF null hypothesis. Conclusively, the data is
stationary for institutional quality.

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The real interest rate which is a control variable in this study has been investigated
and thus, it is determined that the data is stationary. The significance value is 0.000 which islesser than 0.05 indicates the alternate hypothesis of the ADF test has been accepted and there
is no unit root in the data set.

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The study has tested the variable of savings in $US and has produced the results
which have shown that there is no unit root in the data set because of probability value lessthan 0.05 which has rejected the null hypothesis for the study. Overall, the data is stationary
for savings.
Overall from the ADF test for all variables, it has been determined that all variables
have a stationary data and no presence of unit root is observed in either of the variables.

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4.5 Correlation Analysis

The above table shows the correlation analysis conducted to analyse the relationshipbetween institutional quality, infrastructure investment and other variables reflecting upon themacroeconomic variables in the study. As the dependent variable for this study is
infrastructure development, the relationship of infrastructure development with othervariables is investigated. The results from the study show the coefficient for the relationshipbetween different variables. The infrastructure development has a weak relationship withexchange rate of the 40 SSA countries in this context. This shows that even if the exchange
rate goes up or comes down, the infrastructure development does not get affected. Then, theinfrastructure relationship has been examined with the foreign direct investment (FDI). The
coefficient shows that there is a 64.3% relationship between infrastructure and FDI whichshows that increase in FDI leads to infrastructure development and no investment in the
country through FDI leads to slow or no infrastructure development. Then, the relationship ofinfrastructure with grants is determined through the analysis and it has been noted that thereis 0.04 or 4% relationship between the two variables showing that grants has a negligible
relationship with infrastructure. This shows that even if the grants increase or decrease, there
will be slight change in infrastructure. Then, the inflation has been investigated with theinfrastructure and it has been investigated that there is 9% relationship between the variables.
This shows that inflation in the country does not have any effect on infrastructuredevelopment within the SSA region. In the correlation, it has also been determined that there

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is a weak and negligible relationship between infrastructure investment and institutional
quality with regards to political and economic institutions. This tends to show that even if theinstitutional quality is high and effective, it would have no relationship with the infrastructuredevelopment within the country. Then, the relationship of infrastructure with real interest rate
has been determined and it has been investigated that there is a 5% relationship between realinterest rate and infrastructure development showing a weak impact. Then, the last impact
investigated is of infrastructure development and savings for the country. It has been
investigated that savings and infrastructure development are negatively correlated but therelationship is very weak having a value of 2%.
Overall from the results, it has been examined that institutional quality has a weak andnegligible relationship with infrastructure development showing that the variables do not
influence each other. Among the other macroeconomic variables, it has been determined that
FDI has a significant impact on infrastructure development and financing while others have aweak relationship with it.

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4.6 Pooled OLS Regression – Fixed Effects

The Pooled OLS regression is an estimated technique applied to panel data analysis
that is used to extract and generate unbiased consistent estimates of regression parameters
even if there is a time constraint. Here, the fixed and random effect is investigated separately
for fixed and random effects.
The fixed effect model is presented above which shows the impact of different
macroeconomic variables on the infrastructure development and financing in the Sub-SaharanInstitutional Quality and Infrastructure Financing

35

African region. The results from the study have shown that all of the variables except forsavings and real interest rate have a significant impact on infrastructure development. This
tends to show that exchange rate, foreign direct investment, GDP per capita, grants, inflation,and institutional quality significantly impact the infrastructure development. As per thecoefficients regarding the main aim of study that is to analyse the effect of institutional
quality on infrastructure development, it has been determined that one unit change ininstitutional quality will lead to a 4.67 unit change in infrastructure development with asignificance value of 0.0000 which is less than 0.05 indicating significant impact. This tends
to show that impact is strong and it is necessary under the fixed effect results to better thequality of institutions within the Sub-Saharan African region with respect to control ofcorruption, political stability, rule of law, regulatory quality, voice and accountability, andgovernment effectiveness should be made better for better infrastructure development within
the Sub-Saharan African region.
The R-squared value shows that overall from the model all the independent variables
explain 42.9% variance in the dependent variable of study. The Adjusted R-squared is anadvanced value of R-squared which eliminates the value of regressor having insufficient
power to explain the model. The Adjusted R-squared value in this context is 38.2% showingthat originally, the independent variables overall explain 42.8% variance in dependent
variable of model.
Overall from the fixed effect regression analysis, it has been determined that there is asignificant overall impact because of probability at the bottom half of the table presents a pvalue of 0.000 which is less than 0.05 indicating overall significance of impact of all
independent variables on the dependent variable.

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4.7 Pooled OLS Regression – Random Effects
The second analysis conducted in this context relates to the presentation of random
effect model results. The random effect model is the hierarchical linear model which tends toshow that data is drawn from different populations that are present in a hierarchy and theirdifferences are related to that hierarchy. The results extracted from the analysis are presented
as follows as part of output from E-views software.

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37

The second table in this study has been investigated related to Pooled OLS regression
but this time, the random effects have been analysed for the model. From the analysis, it canbe observed that results for the main variables of the study are identical for the independentand dependent variables showing that institutional quality have a significant impact on thedependent variable of infrastructure development indicating that improving the quality of
infrastructure leads to infrastructure development in the country that further helps in closing
the gap of $93 billion in the Sub Saharan African region.
The R-squared value shows that overall from the model all the independent variables
explain 42.9% variance in the dependent variable of study. The Adjusted R-squared is anadvanced value of R-squared which eliminates the value of regressor having insufficient
power to explain the model. The Adjusted R-squared value in this context is 42.97% showingthat originally, the independent variables overall explain 42.91% variance in dependent
variable of model.

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4.8 Generalised Method of Moments

The last analysis technique applied in this case is the Generalised Methods ofMoments which is another parameter estimation technique similar to regression analysis. The
GMM regression is applied for the finite dimension where maximum likelihood cannot beapplied and therefore, the GMM is used. From the analysis above, it can be observed that
institutional quality which is the independent variable in this study and estimated through six
other variables which reflect the institutional quality of variables. The significance value of
0.01 which is less than 0.05 indicates a significant impact of institutional quality on
infrastructure development and financing which indicates that effect of institutional quality
on infrastructure development is noteworthy because improving the institutional quality of
economic and political institutions will help in determining the development and financing
infrastructure.

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39

The overall impact, however, is significant at 10% level indicating a p-value of 0.09
showing that under 10% significance level, the impact of institutional quality and othermacroeconomic variables on the infrastructure development is significant.
4.9 Co-integration (FMOLS)
The fully modified least square (FMOLS) is used for determining the cointegration
using variables for correcting the problem of endogeneity and serial correlation. This test has
been applied in this study to test the cointegration between dependent and independent
variables in the study. The results from the test are as follows.

The results from the study indicate that except for FDI, none of the variables arecointegrated with the dependent variable of infrastructure development and financing whichshows that FDI in the 40 SSA countries selected, foreign direct investments can aid in
financing and development of infrastructure in SSA region. Moreover, the coefficient for FDI
shows that 1 unit increase in FDI leads to 0.95 unit increase in infrastructure development

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and financing showing that FDI positively contributes to infrastructure development andfinancing. The R-squared value shows that overall from the model all the independent
variables explain 38.8% variance in the dependent variable of study. The Adjusted R-squared
value in this context is 38.2% showing that originally, the independent variables overall
explain 38.2% variance in dependent variable of model.
However, the results of FMOLS test deteriorate from the Pooled OLS regression and
GMM which has determined a significant impact of institutional quality on infrastructure anddevelopment. Yet in the FMOLS test, the cointegration of institutional quality with
infrastructure financing and development is not significant.
4.10 Discussion
Objective 1: To identify and examine the determinants of institutional quality that
contributes towards infrastructure development and financing in Sub-Saharan Africancountries.
The first objective of the study was to shed light upon the determinants of institutional
quality that contribute towards infrastructure development and financing in the Sub-SaharanAfrican region. This objective is achieved through the literature review and data collection
process where the study of Kauffmann, Kraay and Mastruzzi (2009) is referred forinstitutional quality variables and it has been determined that there are six notable
determinants of institutional quality that help in predicting the infrastructure development andfinancing in the Sub-Saharan African region. The determinants are control of corruption,
government effectiveness, political instability and absence of violence/terrorism, rule of law,regulatory quality and voice and accountability. The control of corruption refers to the extent
to which public power is used for private gain. The second is the government effectiveness
which reflects upon the availability of government service quality and civil service against

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any political pressure. The political instability and absence of violence/terrorism reflects upon
the perception of general public regarding political instability and the absence of terrorism orviolence from the country. The rule of law reflects the confidence of public in the law ofcountry and its judicial system to which people abide by the rules. The regulatory quality
reflects regarding the soundness of policies formulated by the government of any country for
the welfare of its people. Lastly, the voice and accountability reflects the perception of extent
to which people have the power to take decisions and select their own government.
Objective 2: To examine the effect of institutional quality on SSA infrastructuredevelopment.
The second objective was to examine the effect of institutional quality on SSA
infrastructure development. From the analysis where several techniques have been appliedsuch as Pooled OLS, both fixed effect and random effect model, and Generalised Method ofMoments technique has been applied which tests the effect of institutional quality on theinfrastructure development in Sub Saharan African countries. However, the FMOLS
regression has shown that institutional quality is not cointegrated with infrastructuredevelopment and financing in the Sub-Saharan Africa region. From the results of Pooled OLS
regression analysis for fixed and random effects, the results are almost identical showing thatthe effect of institutional quality on infrastructure development within the Sub-SaharanAfrican region. Secondly, the GMM technique has also tested the effect of institutional
quality on infrastructure development. The results have shown that there is a significant andpositive effect of institutional quality on infrastructure development.

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CHAPTER 5: CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion
The following study is aimed at examining the effect of institutional quality on theinfrastructure development and financing in the Sub Saharan African region. The results havebeen extracted by taking the results from correlation analysis, Pooled OLS regression and
GMM techniques. Correlation analysis has showed that institutional quality has a weakrelationship with infrastructure development. However, from the regression analysis andGMM, it has been analysed that there is a significant impact of institutional quality on
infrastructure development. Thus, it can be concluded that for fostering the infrastructuredevelopment, it is vital for the countries to improve their institutional quality.
5.2 Recommendation
The following recommendations have been analysed after conducting the study.
•

Control of corruption is a necessary measure because most of the Sub-Saharan African
regions have been ranked negatively so, it has been determined that the public power has
to be used for public gain thus, reducing corruption.

•

The rule of law should be applied that builds a positive perception of public regarding
judicial system so that the rules are applicable in the country.

•

The regulatory quality is related to soundness of policies and the government should seek
to craft sound, feasible and sustainable policies for improving institutional quality andultimately the infrastructure development.

•

The voice and accountability, government effectiveness and political stability are alsosignificant contributors of infrastructure development. Thus, the government of thesecountries seek to makes the institutions better for infrastructure development.

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