Relationship Between Governance and Trade: Evidence From Sub-Saharan African Countries

Abstract

This paper investigates the effect of governance in Sub-Saharan African towards trade. This study utilized panel data from 1996-2017. This employed Pooled Mean Group approach by categorizing the Sub-Sharan African (SSA) countries into Low Governance Index (LGI) and Very Low Governance Index (VLGI) countries, considering its abundant resources. The results of the findings indicate that corruption does not affect trade in LGI countries but increases that of VLGI countries, signifying that corruption “greases the wheels” of trade in countries with a high rate of corruption. However, political instability reduces trade for LGI countries, whereas, in VLGI countries, it does not affect trade, indicating that political instability only impacts in countries with relatively better governance. Government expenditure, income, and population growth increase trade in LGI countries but does not show any evidence of impacting trade in the VLGI countries. The study concludes that governance (corruption and political instability) is a significant determinant of trade in the SSA; hence, the importance of dealing with corruption and ensuring a stable political environment.