The African Financial Review July-August 2014 | Page 61

economy on the basis of endogenous factors as against exogenous
factors of the neoclassical growth theory. This theory is of the view
that the growth in gross domestic product (GDP) is a natural
consequence of long-run equilibrium. The theory explains both
growth rate differentials across countries and a greater proportion
of the growth observed. Endogenous growth theory discards the
neoclassical assumption of diminishing marginal returns to capital
investments, permitting increasing returns to scale in aggregate
production and frequently focusing on the role of externalities
in determining the rate of return on capital investments. By
assuming that public and private investments in human capital
generate external economies and productivity improvements that
offset the natural tendency for diminishing returns, endogenous
growth theory explains the existence of increasing returns to scale
and the divergent long-term growth patterns among countries.
Thus, the theory emphasises technical progress resulting from
the rate of investment, the size of the capital stock and the stock
of human capital (Todaro and Smith, 2011).

This study is also based on the LaPorta et al. (1999)’s
theories of institutional development which centres on factors that
can lead to the formation and persistence of a given institutional
framework in a society. The theories of institutional development
can be classified into three based on their structural composition
namely: economic, political and cultural institutional theories.
The economic theory of institutional framework believes that

institutions are essentially crafted when it is efficient to create
them. The connotation of this is that institutions are mostly
created by economic actors when the perceived social benefits
of such creation significantly exceed the perceived transaction
costs that are associated with their creation. The political theory of
institutional development hinges fundamentally on redistribution
of societal resources much more than economic efficiency. The
basic maxim of the political institutional development is that
institutions are fashioned by those that have political powers in
such a way that they can stay in power with a view to extracting
economic rents (Persson, et al. 2003; Adewole and Osabuohien,
2007). While the cultural theory of institutional development
postulates that a given society will usually hold beliefs that can
shape collective actions of the constituting human agents.

Methodology

The model specified in this study was analyzed using two
econometric techniques of estimation namely; least square
dummy variable (LSDV) and the Generalized Method of
Moments (GMM) techniques. The choice of these econometric
techniques stem from the fact that in the LSDV, all observations
are pooled together but each cross-sectional observation ha 2