Does Income Inequality Hamper or Foster Economic Growth in Sub-Saharan Africa?
Abstract
POLICY QUESTION
“What is the relationship between inequality and economic growth? Specifically, does
income inequality hamper or foster economic growth in developing countries?”
BACKGROUND
As the global economy experienced rapid economic growth after World War II, an intense
debate arose as to whether such growth benefited poor people and reduced income inequality
or vice versa. In the 1950s, Kuznets explained that there is a trade-off between income
inequality and economic growth. He proposed that income inequality initially rises
but then declines as per capita income increases. If this hypothesis is true, the
income inequality that developing nations are experiencing is not something that they
should be concerned about, as it would eventually decline over the course of their
economic growth. Many scholars have attempted to confirm as well as rebut this relationship;
however, it remains ambiguous.
In contrast, studies of this relationship for sub-Saharan African countries have not
been conducted thoroughly. African regions were struggling with extreme poverty and,
as a result, dealing with poverty issues was the main concern of the governments and
researchers. And sub-Saharan Africa countries had desperate health issues to deal
with, such as high HIV prevalence rates. Finally, and most importantly, sufficient
data for sub-Saharan African countries were lacking.
Recently, academic research on income inequality in sub-Saharan African countries
became available as several countries started household surveys, which allowed the
collection of more empirical data in this region. The increasing attention of international
organizations further accelerated the research. Thus, the purpose of this master’s
project is to examine the relationship between income inequality and economic growth
in sub-Saharan African countries using these newly-available data.
METHODS AND MEASUREMENTS
The measure of income inequality used in the current study is the Gini coefficient.
The main data source for income inequality is PovcalNet, an online poverty analysis
tool provided by World Bank. The constructed data set is an unbalanced panel with
data from 40 sub-Saharan African countries from 1980 to 2009. This paper examines
the relationship between income inequality and economic growth with country-fixed
effects to exclude time-invariant omitted variable bias.
RESULTS AND INTERPRETATION
This paper finds that income inequality is positively correlated to annual changes
in economic growth, controlling for changes in other explanatory variables. As a non-linear
relationship was tested, this paper expects that the positive correlation will not
continue for long for sub-Saharan African countries and that income inequality will
eventually slow and decrease economic growth. This does not support other previous
research in which only linear relationships were tested.
DISCUSSION AND CONCLUSION
The results of this paper cannot guarantee that income inequality will eventually
be detrimental to economic growth in the longer term. The measurement error and the
possibility of reverse-causality remain as limitations. This paper, however, does
address the fact that income equality is related to economic growth, suggesting that
policy-makers in both the sub-Saharan African countries and international organizations
should be more concerned about income inequality. Finally, this paper suggests that
future researches consider the importance of instrumental variables to delineate the
causal relationship between income inequality and economic growth.
Type
Master's projectDepartment
The Sanford School of Public PolicyPermalink
https://hdl.handle.net/10161/5191Citation
Lee, KyuSeon (2012). Does Income Inequality Hamper or Foster Economic Growth in Sub-Saharan Africa?. Master's project, Duke University. Retrieved from https://hdl.handle.net/10161/5191.More Info
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