Impact of Income Inequality on Economic Growth – Evidence from the Ten (10) Biggest Economies in Africa

Eric Inkoom Danso ,Evans Kusi Boateng

doi:10.7176/jesd/10-14-07

Abstract

Contributing to existing literature on the relationship between inequality and economic growth, this paper focused on the top ten biggest economies in Africa. There was positive correlation between income inequality and economic growth in the long term. Mean School Year and Gross Savings also regressed positively because it was established that a 1% increase in the number of years spent in school within these countries will causes the economy to grow about 214.76%, and 1% increase in gross savings pushes economic growth by 3.61% annually. Expectedly, unemployment had negative relationship with economic growth. A 1% decrease in unemployment rate within these countries will boost long term economic growth by 7.72%. Due to low educational standard, inadequate technological advancement, high unemployment rate and low human capital, gross capital formation had inverse relationship with economic growth in these countries. The paper recommended that Governments in these countries adopt strategies and approaches such as increase public spending and create employment opportunities, adopt new educational policy to increase the average school years with accompanying improvement in its quality. Keywords : Economic growth, Income Inequality, African Countries, Gini Coefficient, Unemployment DOI: 10.7176/JESD/10-14-07 Publication date: July 31 st 2020

Highlights

Over six decades, many researchers have attempted to answer the brave questions regarding the effects of inequality on economic growth – what is the relationship between inequality and economic growth? Using both panel and cross-sectional, few, larger and more comprehensive cross-country data from different researchers have all attempted to establish the effect of inequality on economic growth, yet each time, the results are inconclusive, indecisive or contradictory
The Gini coefficient was chosen because it is the common measure of income inequality in a country; unemployment was chosen because this variable directly affects the purchasing power of residents; the mean school year variable was adopted because this contribute to human capital and human resources which directly affect economic growth; gross national savings was used because the level of inflation needed to be controlled – the level of inflation directly affect the level of national savings which contribute to economic growth; and gross capital formulation was used as a variable because it increases the size of national output, income and development which tends to solve the problems of inflation and balance of payment
Implications The paper contributed to the body of literature on the relationship between income inequality and economic growth focusing on the ten biggest economies in Africa

Summary

Introduction

Using both panel and cross-sectional, few, larger and more comprehensive cross-country data from different researchers have all attempted to establish the effect of inequality on economic growth, yet each time, the results are inconclusive, indecisive or contradictory. Work from Deininger and Squire (1996) contributed significantly to the literature on the subject matter Their data set had a panel structure with several consecutive measures of income inequality for each country. This allowed for adoption of more advanced techniques to be used to investigate the effect on economic growth. Despite the various attempts by researchers to establish the effect of income inequality on economic growth, it is in itself is a great concern to the United Nations.

The SDG Goal 8

Methodological Approach and Data

Model Consideration

OLS Regression Results

Conclusion and Policy Implications