Human capital and institutional quality as parallel pathways to structural transformation in Sub-Saharan Africa

Despite the emphasis placed on human capital and strong institutions in the development literature and Sustainable Development Goals (SDGs 3, 4, and 16), their role in achieving structural transformation in Sub-Saharan Africa remains empirically underexplored. Therefore, this study addresses this gap by investigating the influence of human capital on structural transformation, considering institutional quality as a moderating factor. We analyzed a panel dataset from 43 Sub-Saharan African countries, spanning from 2000 to 2022. The data was obtained from the World Bank, UNCTAD, UNSTAT, and UNDP. To address spatial dependence and dynamic endogeneity, we employed the Panel Spatial Correlation Consistent Fixed Effects (PSCC-FE) approach and the Dynamic Panel Quasi-Maximum Likelihood (QML) estimator. The findings reveal that both composite and disaggregated human capital indicators have a positive, statistically significant impact on structural transformation, consistent with endogenous growth theory. However, institutional quality does not moderate the effect of human capital, despite being an independent driver of structural change. This suggests institutional quality is not a strict prerequisite for human capital to contribute to structural transformation. Consequently, a parallel-track strategy is crucial, simultaneously pursuing human capital enhancement and institutional reforms. The human capital enhancement strategy may combine a short-term targeted “skill for growth” vocational training programs and long-term expansion of STEM (Science, Technology, Engineering, and Mathematics) education. The institutional reform could include an immediate governance reform, such as digitized services and simplified regulations, alongside long-term judicial reforms, the professionalization of civil services, and the establishment of independent regulatory bodies to foster a stable environment for investment and innovation.