Capacity Building in Africa: The Role of International Financial Institutions

• Author: Saleh M. Nsouli
• Position: Deputy Director of the IMF Institute

This article reviews the evidence on the importance of domestic institutions for economic growth and examines the role of international financial institutions, and particularly the IMF and its training, in capacity building in Africa.

Three important and interrelated components are essential to economic development: capacity building, good governance, and economic reform. Capacity building-the development of skills and institutions-is critical to the achievement of sustained economic growth. But acquired skills cannot be exploited fully, and institutions cannot operate effectively, without good governance. And economic reforms cannot be implemented properly without well-functioning institutions.

Rationale and evidence

The influence of capacity building on economic growth has been the subject of an increasing body of economic research in recent years. The emerging consensus is that the quality of institutions-itself a reflection of the extent to which capacity building has taken place-matters for economic growth. Institutions matter because they provide the framework within which people and firms participate in the economy. Thus, they contribute to the incentives for investment and the efficiency with which resources are allocated.

Two basic sets of institutions can be distinguished. First, there are institutions that support the efficient functioning of the market. These include a clearly delineated system of property rights that protects the assets of investors and the returns on these assets; a regulatory system that limits fraud and anticompetitive behavior; social and political institutions that mitigate risk and manage social conflicts; and, finally, the rule of law and "clean" government (Rodrik, 1999). Second, there are institutions that provide a stable economic environment through sound economic and financial policies. These institutions, such as the ministry of finance and the central bank, are responsible for economic and financial management.

Several recent studies provide support for the importance of institutions. It is striking to recall that Africa's growth potential in the 1960s was sometimes ranked ahead of East Asia's. Easterly and Levine (1997) provide empirical results suggesting that the failure of this potential to materialize has been closely related to a number of social and political factors, including insufficient schooling, political instability, and inadequate infrastructure. This is consistent with a study by Rodrik (1997) that shows that an index of institutional quality performs extremely well in explaining growth differentials across East Asian countries-differentials that cannot be attributed to classical economic variables such as capital accumulation, technical progress, and increases in the supply of labor. A World Bank study (1998) suggests that significant improvements in the quality of management in developing countries could add a full percentage point to their growth rates. In a comprehensive study of 133 countries, Hall and Jones (1999) find that institutions that favor production and some form of private ownership will foster the accumulation of human and physical capital, eventually increasing total factor productivity and thereby expanding domestic output. These studies, among others, underscore an important fact-namely, that capital accumulation is not enough to ensure growth. Recognizing that the quality of institutions and capital accumulation are complementary is essential to the success of countries' efforts to achieve long-lasting growth.

What, then, is the evidence on the quality of institutions in Africa?

A survey of 23 African countries (Sievers, forthcoming) gives Africa's governmental and judicial institutions a mixed review: they are "better than conventional wisdom assumes, but lower than needed for sustained high growth." Questioned about such issues as corruption, the quality of the rule of law, and the effectiveness of the national legal system in enforcing contracts, African companies responded with scores that, on average, were equal to, or slightly lower than, those in other developing countries. These scores suggest that institutions in Africa have not yet progressed sufficiently to make a significant contribution to development.

The institutions responsible for economic management in Africa have been developing, in terms of...