Business Environment and Inclusive Growth Nexus: Evidence from African Countries

Abstract

It is increasingly recognized that economic growth alone is not enough to guarantee the well-being of all. This is why the current debates on sustainable development are highlighting the need to promote inclusive growth in the world's countries in general, and in developing countries in particular. And one way to achieve inclusive growth would be an improved business environment through better business regulations. This paper aims to analyze the relationship between business environment and inclusive growth in a sample of African countries over the period 2010-2018. The business environment is measured by the World Bank's Ease of Doing Business index. Inclusive growth is measured by two proxies: 1) GDP per person employed and 2) an inclusive growth index constructed using Principal Component Analysis (PCA) method. In addition, we analyzed the above relationship in a static and dynamic framework. In the static framework, the business environment-inclusive growth relationship was analyzed by estimating a Panel Corrected Standard Error (PCSE) model as the baseline model and several other estimation models such as random-effects, fixed-effect Driscoll-Kraay, and pooled Ordinary Least Squares (pooled OLS). As for the dynamic framework, the study used the Generalized Method of Moments in system (System-GMM) estimation technique. The results show a positive and significant effect of business environment on inclusive growth. This result remains robust to the different estimation techniques used on the one hand and regardless of the measure of inclusive growth used on the other hand and suggests that a regulatory environment conducive to business activities is one way for African countries to achieve inclusive growth. From this result, policy recommendations have been formulated accordingly.