A panel data examination of income inequality in 24 African countries

Abstract

Income inequality measures the highlighted gaps between the household disposable income between individuals, groups, etc. Rising concern for financial access to all has greatly influenced this macroeconomic indicator. Africa has majority of countries with worse equality conditions. Though African countries are recipients of external aids from different entities, a high level of corruption directs the benefits to private wealth. The gain of economic growth is disproportionately shared and is skewed. The purpose of the study is to determine the factors responsible for income inequality. We have used unbalanced panel data of 24 African countries for the period 1990–2015 (5‐year averages) of several macroeconomic indicators such as GINI index, literacy, control of corruption, gross domestic product (GDP) growth, household consumption, inflation, etc. We estimated four regression models (OLS fixed effects and random effects) with an increasing number of independent variables. Further, we chose the best model according to Hausman test and conducted a restricted F‐test to check for non‐spurious variables. We concluded one of the models as statistically significant and robust to explain Income Inequality in Africa. Also, we tested for multicollinearity in variables via the correlation matrix and variance inflation index (VIF) and eliminated the population variable, which was significant. We concluded that six factors are non‐spurious and explain the income inequality variable in a statistically significant manner. Implications of this report can be used for making policies and schemes with respect to the underline variables so that the nations will be able to reduce the inequality gap.