Evaluating the economic well‐being in the context of Africa

Abstract Economists rely on the gross domestic product (GDP) to assess the economic performance of a country. This paper, however, argues that in Africa, the GDP alone cannot be used as a sufficient macroeconomic indicator in accounting for poverty rates and the overall health of the economy. Existing alternatives to GDP also fail to account adequately for relevant factors that are vital in determining the well‐being of individuals in Africa. The current study, therefore, proposes an inclusive macroeconomic performance index (IMPI) computed for 45 African countries with data from 2002 to 2015. Using the dynamic panel system generalised method of moments estimation method, we evaluate the impact of governance (i.e. the quality of institutions), social and growth‐related factors on the IMPI developed. Our results show that growth‐related variables such as trade have a positive impact while FDI had a negative and significant impact on the index. Education also has a positive and significant effect on the index. Social factors such as civil war, ethnic and religious fractionalisations on the other hand significantly impacted the index negatively. This study contributes to the literature by introducing a new economic performance index which combines both poverty and per capita GDP into a single index to assess the well‐being of individuals in Africa.