Reverse Causal Nexus between Pro‐Poor Policies and Income Inequality in Kenya

Abstract

AbstractDifferent developing economies are encountering various regional challenges associated with income inequality. However, several contributing factors to inequality and access to opportunities, such as a quality education system, have been identified as the key factors. Thus, the study sought to determine the reverse causal nexus between pro‐poor policies (government spending on education) and income inequality in Kenya and the spatial linking relationship with the case of Uganda’s and Tanzania’s economies. The autoregressive distributed lag (ARDL) model, Johansen cointegration test, and Granger Causality approach were used to model the relationship between pro‐poor policies and income inequality using time‐series data from 1982 to 2018. The findings indicate positive short‐ and long‐term relationships between government spending on education and income inequality in the three economies. Furthermore, the results show a significant long‐term relationship between human capital measures (average years of schooling, secondary school education attainment, and tertiary level education attainment) and income inequality in the three economies. However, the results indicate no reverse causal nexus between the study variables in Kenya and Uganda but unidirectional causal nexus exists in the case of the Tanzanian economy. The study recommends that government stakeholders implement pro‐poor policy initiatives that result in the structural change of social infrastructures and enhanced quality of life.