Bridging Africa’s income inequality gap: How relevant is China’s outward FDI to Africa?

Abstract

• This study examines whether Africa’s institutional fabric propels Chinese FDI to reduce income inequality in Africa. • The focus is on 48 African countries for the period 1996–2020. • The empirical evidence is based on the dynamic Generalised Method of Moments. • Although Chinese FDI contributes to equitable income distribution in Africa, the effect is weak • Political stability, corruption control and voice and accountability are key for propelling Chinese FDI to reduce income inequality. This study examines whether: (i) the remarkable inflow of Chinese FDI to Africa matters for bridging the continent’s marked income inequality gap, (ii) Africa’s institutional fabric is effective in propelling Chinese FDI towards the equalisation of incomes in Africa and (iii) there exist relevant thresholds required for the various governance dynamics to cause Chinese FDI to equalise incomes in Africa. Our results, which are based on the dynamic GMM estimator and macrodata for 48 African countries, reveal the following. First, although Chinese FDI contributes to fairer income distribution in Africa, the effect is weak. Second, although Africa’s institutional fabric matters for propelling Chinese FDI towards the equalisation of incomes across the continent, governance mechanisms for ensuring political stability, low corruption, and voice and accountability are critical. Finally, the critical masses required for these three key governance dynamics to cause Chinese FDI and other income inequality-reducing modules to reduce income inequality are 0.8, 0.5 and 0.1, respectively. These critical masses are thresholds at which governance is necessary but no longer sufficient to complement Chinese FDI to mitigate income inequality. Hence, at the attendant thresholds, complementary policies are worthwhile. Policy recommendations are provided in the conclusion.