Regional income divergence and economic development in Africa: is Kuznets right?

Abstract

ABSTRACT This paper studies the relationship between economic development and within-country income inequality using satellite night-light data for a panel of 49 African countries. We highlight three worrisome facts describing regional income disparities in Africa, which rank among the highest in the world, they are persistent, and they have increased 2.16% annually over the period 1992–2012. Our instrumental variable (IV) results confirm the existence of a regional Kuznets curve characterized by an inverted U curve, implying that although economic progress increases regional income inequalities at first, this positive link eventually flats out at a certain level of GDP per capita (2200 constant USD) and turns to reduce income inequality as further as GDP per capita still increases. We also find that the positive impact of total trade on regional income inequalities disappears once we account for potential endogeneity issues. Aid flows, FDI, industry, oil rents, government share, and institutions present positive correlations and reinforce our main results. Our conclusions should raise the concern for policymakers and economists to enhance policies towards a more prosperous, inclusive, and sustainable economic future in Africa, especially in the least developed countries.