MICROFINANCE, FINANCIAL DEVELOPMENT, FOREIGN AID, AND INCOME INEQUALITY: EVIDENCE FROM SUB-SAHARAN AFRICA

Mongi Lassoued

doi:10.32479/ijefi.11277

Abstract

This paper examines the effects of microfinance, financial development and foreign aid on income inequality for 43 Sub-Saharan African (SSA) countries. Panel data for the period 1995–2015 is examined using fixed effects, pooled ordinary least square and system generalized method of moments (GMM) estimation techniques. Findings suggest that although foreign aid plays a determining role in explaining the dynamics of inequality in SSA, it does not appear to be pro-poor. Moreover, the results reveal that both microfinance and financial development contribute to narrowing the income gap between the poor and the rich and to reducing inequality. This implies that providing access to loans through microfinance institutions or bank-based financial system offer to the poor the potential for income-generating activities. Furthermore, the empirical evidence suggests that GDP per capita growth and government expenditures appear to be pro-poor. While a rapid population growth, high levels of inflation, FDI and trade openness are correlated, positively and significantly, with greater income inequality. These results have important policy implications for SSA. Enhancing the efficiency of social protection, promoting progressive taxation and distributional effectiveness of fiscal are crucial to address income inequalities.Keywords: Income inequality, Microfinance, Financial development, Foreign aid, Sub-Saharan Africa JEL Classifications: C23; D63; F35; O55DOI: https://doi.org/10.32479/ijefi.11277

Highlights

The issue of inequality in Africa, especially in Sub-Saharan African (SSA) region has received limited attention historically from a research, policy and political perspective
The results show that the effect of financial development is –0.018, which means that 1% increase in the level of financial development decreases by 0.018% income inequality
As evident from the pooled ordinary least square (POLS) and system-generalized method of moments (GMM) estimations, we find confirmation that foreign aid, financial development and microfinance have played a determining role in explaining the dynamics of inequality in SSA countries

Summary

Introduction

The issue of inequality in Africa, especially in Sub-Saharan African (SSA) region has received limited attention historically from a research, policy and political perspective. Africa ranks as one of the regions with the highest level of inequality, following Latin America and the Caribbean (LAC). Together with LAC, SSA stands one of the very few regions that experienced an average drop in the level of inequality when the Gini coefficient ranged from 0.472 in 1990 to 0.445 in 2011. The decline in the average unweighted Gini by around 3.4% points during this period, SSA remains one of the most unequal regions of the world over the last two decades. To achieving the Sustainable Development Goals (SDGs) in SSA countries over the 15 years, “reducing inequality within and among countries” became the overarching goal of the 2030 Agenda for Sustainable Development endorsed by world leaders in September 2015

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