The Macroeconomic and Institutional Effects on Income Inequality in Africa

Abstract

This paper attempts to offer an empirical assessment of the main macroeconomic and institutional driver of income inequality in Africa. We use a Kuznets curve framework, which emphasises the role of income per capita in explaining the time path of inequality. In contrast to much of the literature, we explicitly examine the possibility of the existence of multiple income steady states. Using the concept of clubs of convergence, we show that per capita income is divergent and identify four steady states to which groups of economies converge (i.e. high income to low income economies) Using panel data models and a data set encompassing 52 African countries spanning the years 1980-2017, we show that once these multiple steady states are accounted for, the Kuznets’ curve relationship becomes unstable. Our findings suggest that inequality may be increasing in high income countries in Africa, while decreasing in low income or the least developed economies. In addition, the role of macroeconomic and institutional factors in explaining income inequality is limited and differ across convergence clubs. For example, evidence suggest the importance of fiscal, employment and monetary policies and the rule of law to tackle inequality in high income economies, while have no statistically significant role in low income economies’ income inequality.