Fiscal space, governance quality and inclusive growth: evidence from Africa

Abstract

𝗣𝘂𝗿𝗽𝗼𝘀𝗲 This study aims to examine the impact of fiscal space and governance quality on inclusive growth in African countries. 𝗗𝗲𝘀𝗶𝗴𝗻/𝗺𝗲𝘁𝗵𝗼𝗱𝗼𝗹𝗼𝗴𝘆/𝗮𝗽𝗽𝗿𝗼𝗮𝗰𝗵 In total, 28 African countries were analyzed from 2000 to 2020 using the generalized method of moment regression method. An inclusive growth index was developed using the principal component analysis (PCA) method. The PCA-derived index incorporates factors such as poverty, income inequality, economic participation and per capita income. 𝗙𝗶𝗻𝗱𝗶𝗻𝗴𝘀 The main findings suggest that fiscal space availability (de facto fiscal space and fiscal balance) promotes inclusive growth. The study also showed that lagged inclusive growth, digitalization and governance indicators positively influence inclusive growth. The study concludes that fiscal space availability fosters inclusive growth, but this effect is mediated by governance quality in Africa. 𝗢𝗿𝗶𝗴𝗶𝗻𝗮𝗹𝗶𝘁𝘆/𝘃𝗮𝗹𝘂𝗲 Several studies examined the role of fiscal policy on inclusive growth. However, it is crucial to assess the fiscal space, that is, the financial capacity of the government to implement its fiscal policy without harming its financial stability. This paper, therefore, contributes to the existing literature by using de facto fiscal space indicator to comprehend fiscal dynamics contributing to inclusive growth. In addition, the paper uniquely constructs an inclusive growth index by including poverty severity, which considers both the incidence and depth of poverty and inequality in society.