Firm Productivity in the Presence of Binding Fiscal Constraints in Africa

Abstract

We examine two key questions in this paper. First, we investigate the implications of fiscal indiscipline or otherwise on firm productivity in Africa. Fiscal policy is known to boost growth by altering work and investment incentives, promoting human capital accumulation, and enhancing total factor productivity at the micro-level (IMF, 2015). Many factors have been studied in explaining total factor productivity in Africa or its sub-regions but the role of fiscal policy in explaining firm productivity remains understudied. Yet fiscal policy is considered a binding constraint in Africa. Fiscal indiscipline is known to crowd-out the private sector and seriously undermines private sector leadership in ensuring all inclusive, broad-based growth. We measure firm-level total factor productivity using a Cobb-Douglas production function, when we regress on firm characteristics and fiscal policy indicators. In estimations with controls for country and year fixed effects, we find results that suggests firms reporting finance as a severe obstacle have relatively lower productivity levels, productivity declined with age, and audited firms are more productive than those not audited. The level of government debt to GDP, we found, had significant implications for the relation between access to finance severity and firm productivity. Fiscal Indiscipline (in its various forms) severely constraints firm productivity. The implications are that fiscal mismanagement has implications for firm-level productivity.