Natural resource rent's effect on Ethiopian inequality and manufacturing's moderating role: evidence from dynamic simulated ARDL model

Abstract

Purpose The purpose of this study is to empirically examine the impact of natural resource rents on income inequality in Ethiopia from 1981 to 2022 and investigate whether investments in manufacturing moderate this relationship. Design/methodology/approach Dynamic autoregressive distributed lag simulation and Kernel-based regularized least squares (KRLS) models are used to analyses short- and long-run relationships, as well as the potential moderating role of manufacturing. Findings The bounds test indicates natural resource rents have a long-run positive effect on inequality but a short-run negative impact. The KRLS model finds manufacturing conditions for this linkage in the short run. In the long run, economic growth decreases inequality following an inverted Kuznets pattern, while government expenditures reduce disparities when directed at priority social services. Research limitations/implications The findings provide mixed support for theories while highlighting nuances not fully captured without local analyses. Strategic sectoral investments may help optimize outcomes from resource dependence. Practical implications The results imply Ethiopia should prudently govern resources, productively invest revenues and prioritize social spending to equitably manage industrialization and uphold stability. Social implications Reducing disparities through inclusive development aligned with empirical evidence could help Ethiopia sustain peace amid transformation and realize its goals of shared prosperity. Originality/value This study applies innovative econometrics to provide novel insights into Ethiopia's experience, resolving inconsistencies in the literature on relationships between key determinants and inequality.