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In search of bad inequalities for growth and appropriate policy choices for their reduction in Africa

Authors:
September 2016
In search of bad inequalities for growth
and appropriate policy choices for their
reduction in Africa
Nicholas Ngepah, PhD
All opinions and assertions are those of the
author. The usual disclaimers apply.
Contact
nnnbal@yahoo.fr
© Overseas Development Institute,
Southern Voice on Post-MDG International
Development Goals and Nicholas Ngepah
2016.
Readers are encouraged to quote or
reproduce material for non-commercial
use. As copyright holders, we request
due acknowledgement and a copy of the
publication.
Cover image: Fishermen at work on Lake
Buyo, Côte d’Ivoire. © Ky Chung for the
United Nations.
Contents
Headline ndings 5
Acknowledgement 5
Acronyms 5
Abstract 6
1. Introduction 7
2. Current developmental progress and limitations 9
2.1 Economic growth (SDG 8.1) 9
2.2 Inequality reduction and poverty eradication (SDG 1.1 and 10.1) 11
3. Methodology and approach 14
3.1 Brief overview of related literature 14
3.2 Models 15
3.3 Variables and data 16
3.4 Estimation technique 16
4. Research ndings 18
4.1 Exploratory analyses 18
4.2 Regression results 20
5. Implications for ‘leaving no one behind’ in Africa 27
6. Priority actions for the rst 1000 days 28
6.1 Statistics that leave no one behind 28
6.2 Economic growth and sectoral policies 28
6.3 Educational policy and human capital distribution 29
6.4 Policies to reduce gender inequality 30
6.5 Proposed framework for action 30
8. Concluding remarks 33
References 35
Appendix 37
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 3
List of tables and figures
Tables
Table 1: Composition of Africa’s GDP 10
Table 2: Average asset Gini coefcient in Africa and its determinants 11
Table 3: Pair-wise correlation inequality measures with growth and natural resource rents 18
Table 4: Correlation inequality measures with possible determinants 19
Table 5: Two-stage systems GMM estimates 20
Table 6: Two-stage systems GMM estimates for average inequality and between top and bottom 22
Table 7: Two-stage systems GMM estimates for between middle and bottom, and within bottom 24
Table 8: Two-stage systems GMM estimates for within-middle segment and gender 26
Table 9: A framework for action 31
Table 10: Variables, meaning and source 37
Figures
Figure 1: Comparative economic growth rates in emerging and developing regions 9
Figure 2: Economic growth rate in individual African countries 10
Figure 3: Comparative per capita GDP growth rates in emerging and developing regions 11
Figure 4: Comparative population growth in emerging and developing regions 11
Figure 5: Inequality (Gini) in Africa (2000-2014 average) 13
Figure 6: Income shares accruing to richest and poorest 10% by country 13
Figure 7: Growth-inequality scatter 18
4 Development Progress Research Report
Headline findings
There are good and bad inequalities with respect to
economic growth. Bad inequalities are those that
associate negatively with growth, while good ones are
those that show a positive impact.
All inequalities between the middle and bottom and
between the bottom and top of the income distribution
are bad for economic growth in Africa. Policy efforts
that target the reduction of these types of inequality by
one point each would enhance growth by up to three
percentage points in the next ve years, translating to about
a 0.6 percentage point increase in growth per annum.
The advantages that males have over females in labour
market participation signicantly reduce growth: a one
point reduction in this inequality would lead to a 0.8%
increase in annual growth.
To address skills inequality, policy should emphasise
increasing and extending educational spending beyond
primary education to secondary and higher education.
Measures that address obstacles in the labour market
against the poor, unskilled and women should be
encouraged. Proper management of urbanisation,
governance of natural resource rents and addressing
dependency through social inclusion measures are
equally good for reducing bad types of inequality.
As Africa searches for an industrialisation path, a
strategy that prioritises its agricultural value chain
would reduce bad inequalities and be more inclusive.
In the short term, measures to promote the ow of
external resource such as foreign aid and foreign direct
investment into low skill labour-intensive sectors, and/
or improve skills to move to skill-intensive sectors of the
economy, can complement longer-term educational and
skills development policies.
Acknowledgements
The author wishes to acknowledge Mrs Ruth Ngepah for
valuable assistance with data cleaning and proofreading
of this work. Financial support from the Overseas
Development Institute and efforts of anonymous reviewers
are also acknowledged.
Acronyms
AU African Union
CAR Central African Republic
CSOs Civil Society Organisations
EAP East Asia and Pacic
GDP Gross Domestic Product
GMM Generalised Method of Moments
HDI Human Development Index
IHDI Inequality Adjusted HDI
IMF International Monetary Fund
INGOs International Nongovernmental Organisations
LAC Latin America and the Caribbean
LDC Least Developed Country
LSDVs Least Square Dummy Variable
MDG Millennium Development Goal
ODI Overseas Development Institute
OECD Organisation for Economic Cooperation and
Development
RI Regional Integration
SDG Sustainable Development Goal
SMEs Small and Medium Enterprises
SSA Sub-Saharan Africa
WDI World Development Indicators
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 5
6 Development Progress Research Report
Abstract
This work attempts to inform Sustainable Development
Goal implementation strategies focusing on Goals 1, 5, 8
and 10 in Africa. It starts by exploring the progress and
limitations pertaining to the relevant SDGs in the African
context. It follows by employing a systems Generalised
Methods of Moments (GMM) regression technique to
determine the impact of different inequalities on economic
growth and then examines the underlying causes of those
inequalities that impact economic growth negatively.
Not all inequalities along the income distribution
spectrum have the same impact on growth. There are bad
inequalities with a negative impact on economic growth,
and good inequalities with a positive impact on growth.
The ndings suggest that all inequalities between the
middle and the bottom and between the bottom and top
of the income distribution are bad for economic growth
in Africa, and that the advantages that males have over
females in labour market participation signicantly reduce
growth. Policy efforts that target the reduction of all the
bad types of inequality by one point each would enhance
growth by up to three percentage points in the next ve
years. To address skills inequality, policy considerations
should emphasise increasing and extending educational
spending beyond the primary level. Measures that address
obstacles in the labour market against the poor, unskilled
and women are to be encouraged. The proper management
of urbanisation, governance of natural resource rents and
addressing dependency through social inclusion measures
are equally good for reducing bad types of inequality. As
Africa searches for an industrialisation path, a strategy
that prioritises the agricultural value chain would reduce
bad inequalities and be more inclusive. In the short term,
measures to promote the ow of external resources
such as foreign aid and foreign direct investment into
low skill labour-intensive sectors, and/or improve skills,
can complement longer-term educational and skills
development policies.
The United Nations General Assembly (UN, 2015)
recognises poverty eradication in all its forms and
dimensions as an indispensable precondition for
sustainable development. This recognition has given birth
to an inspiring vision encapsulated in a new agenda of
17 goals known as the Sustainable Development Goals
(SDGs). The SDGs were adopted at the 69th session
of the General Assembly to build on the Millennium
Development Goals (MDGs).
In line with the ‘leave no one behind’ agenda, this paper
focuses on specic types of inequalities in Africa, their
relationship with economic growth and the determinants
of these inequalities in order to suggest policy measures
for leaving no one behind. Consequently, the paper focuses
directly on SDGs 5 (gender inequality), 8 (inclusive
growth) and 10 (reducing inequality). Given the interaction
of inequality and growth in determining poverty outcomes
(Ravallion, 2009), the paper therefore also indirectly
focuses on goal 1 of eradicating poverty.
Within the economic pillar of the SDGs, the choice
of these goals has been encouraged by the report of the
Stakeholders’ Forum of the SDGs (Osborn et al., 2015).
The work ranks SDGs by their ‘transformational challenges
in developing countries’.1 It ranks the inequality reduction
goal as fth among all the SDGs. This implies that a
signicant challenge is expected in inequality reduction
compared to the other goals and hence more careful
attention is needed.
Inequality is a key determinant not only of the ability of
growth to reduce poverty but also of the level of growth itself.
There are three concerns about inequality. First, it may reduce
economic growth. Second, it may hinder the poverty-reducing
power of growth. Third, it may promote the inefcient
use of resources and breed unstable societies, leading to
unsustainable development. There is a general consensus
that reducing inequality will make growth more pro-poor
and development more sustainable (Ravallion, 2009). This
naturally leads us to the consideration of SDG 8, particularly
sub-goal 8.1, which stipulates at least 7% growth in gross
domestic product (GDP) per annum in least developed
countries (LDCs).
The Overseas Development Institute (ODI) agship
report on SDGs (Nicolai et al., 2015) provides an SDG
Scorecard 2030. The report suggests that although LDCs
on average may be moving towards meeting the targets
8.1 (economic growth in LDCs) and 1.1 (ending extreme
poverty) for developing countries, there is deep concern
that the sub-goal 10.1 relating to reduction of income
inequality would need a change of direction in order to
start to record progress on its achievement. Hoy and
Samman (2015) nd that income growth of the bottom
40% of the distribution in 55 of a sample of 100 countries
(housing about 80% of the global population) was below
the mean growth rate of their country on average. A good
number of these countries are in Africa.
The objective of this paper is twofold. First, we aim
to evaluate the growth-inequality relationship along the
income distribution spectrum and gender dimensions in
order to separate good inequalities from bad inequalities.
We consider bad inequalities to be those that have a
negative impact on economic growth and good ones to
be those with a positive effect on growth. Secondly, we
analyse determinants of those inequalities that relate
negatively to economic growth in order to suggest policy
measures to address SDGs 8.1 and 10.1 and consequently
1.1. Our focus on the inequality-growth nexus is based
on the fact that inequality is a key driver of poverty, both
directly through its effects on making growth less pro-poor
and indirectly through growth reduction (Ravallion, 2004).
The importance of disaggregating inequalities with respect
to their differing effects on economic growth is to isolate
targeted policy measures that can, with limited resources,
reduce bad inequalities, enhance growth and ultimately
lead to the eradication of poverty.
African economies have remained resilient in their
economic growth performance despite global nancial
crises and dismal recovery rates in the rest of the
(especially developed) world. On average, African
economies have registered robust economic growth of
5% per annum over the last decade (Martins, 2013), and
about a third of African economies have grown by at least
6% per annum (World Bank, 2013). Although Africa on
average made good progress towards the MDGs, it still
lags behind on the poverty goal – both in absolute terms
and relative to other regions like Latin America. Despite
the robust economic growth of the last decade, the region’s
14% poverty reduction between 1990 and 2010 (UNECA,
2015) is still just half of the regional target of 28%.
Depending on the conceptualisation of pro-poorness
of growth, we know that sustained economic growth
is the key basis for sustained poverty reduction (Dollar
and Kraay, 2002). There is strong concern that the high
economic growth has not been benecial to the majority
of the African population (McKay, 2013). The growth has
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 7
1. Introduction
1 A score combining whether the goal is applicable, implementable and transformative (i.e. whether the achievement of the goal/target will require
signicant new and additional policy action beyond what is currently in place and/or planned).
not translated to poverty reduction at a commensurate
rate, despite marked improvements in human development
indicators in sub-Saharan Africa (SSA).2 The World
Bank (2013) identies persistently high inequality as the
underlying reason for the slow pace of poverty reduction.
Besides persistently high inequality, regional economies
rely heavily on commodities for growth. Falling
commodity prices consequently pose a challenge to future
growth prospects in Africa.
African countries are integrating the SDGs into their
respective development policies. The past decades of
development policy efforts were largely underpinned by
the MDGs, with key national development agendas aligned
to these goals (Scott et al., 2015). It is expected that the
SDGs will now set the pace and be the main basis of future
policy agendas for most, if not all, African countries. There
have also been continental efforts in development policy
initiatives. The most ambitious one is the recent African
Union Agenda 2063,3 which seeks to build a prosperous
and united Africa based on shared values and a common
destiny. The rst of the seven sets of aspirations upon
which the vision stands is based on inclusive growth and
sustainable development, thereby encompassing the four
SDG focus goals for this paper.
The rest of the paper is framed as follows. Section 2
explores current developmental progress and limitations
in Africa, especially in the light of the MDGs and the
forward-looking SDGs, with a focus on growth, poverty
and inequality. Section 3 explains the methodological
approach that is adopted. Section 4 reports the research
ndings, while Section 5 draws implications for leaving no
one behind. Section 6 highlights priority actions for the
rst 1000 days of the SDGs and Section 7 concludes.
8 Development Progress Research Report
2 Up to 70% primary enrolment rates in 2010, 60% adult literacy, falling child mortality from 175/1000 to 125/1000 between 1990 and 2010 (World
Bank, 2012).
3 http://agenda2063.au.int/
This section explores the performance of the African
continent with respect to the selected goals. We rst look at
Africa’s impressive economic growth and its composition
over the past decade and a half, and highlight underlying
challenges. We then contrast the impressive growth picture
with that of inequality before proposing a contextual
denition of ‘leave no one behind’. The section concludes
by elaborating on the implications of growth, inequality
and poverty on leaving no one behind.
2.1 Economic growth (SDG 8.1)
2.1.1 Impressive but uneven growth performance
On average, African economies took a signicant positive
turn in the early 2000s, growing at above 5% per annum
compared to barely 2% in the previous decades. Year on
year, average growth in Africa for the past decade and a
half stood above the world average (4%) and much higher
than the Latin America and the Caribbean (LAC) average
(3%). The growth rates in Africa were only surpassed by
those of emerging and developing Asian countries (8%).
Figure 1 compares decadal average growth in the three key
developing regions of the world – East Asia and Pacic
(EAP), LAC and SSA. Although growth rates after the
2008 crisis appear weaker compared to those prior to the
crisis, SSA’s growth rates nonetheless remain impressive
compared with the rest of the world except Asia.
It is noteworthy that signicant diversities underlie this
impressive African economic performance. Across all the
ve sub-regional groupings in Africa,4 there is a mixed bag
of different growth rates. There are countries with growth
rates of 6% and above, which we consider high for the
purpose of this work, those with growth rates ranging from
3.5% to 5.9% (medium), and those with 3.4% growth
rate and below (low). For the past one and a half decades
(2000-2014), 12 countries recorded average growth
rates in excess of 6% per annum (Figure 2, overleaf); 26
countries are in the medium-growth category (e.g. Burkina
Faso, Burundi, Cameroon and Namibia), and 15 are in
the low-growth category (e.g. Gabon, South Africa, Togo).
Central African Republic and South Sudan5 are the only
countries that have recorded average negative growth rates
for the period.
An examination of the economic structures shows that
the services sector accounts for the largest share of Africa’s
economies, followed by industry (of which extractives is
the most signicant with manufacturing accounting for the
rest) and agriculture (Table 1, overleaf).
The African Economic Outlook 2015 (AfDB, 2015)
identies three key drivers of growth in Africa: political
stability, high commodity demand and consequent soaring
commodity prices, and improved economic policies.
In the 1980s and 1990s, most of the countries that
recorded very low or negative economic growth were
also marked by civil war, military coup and social unrest.
The last one and a half decades of Africa’s economic
performance have been marked by general political
stability. Except for Central African Republic, CÔte
d’Ivoire, Guinea, Guinea Bissau and Madagascar, where
growth has remained low on average, other formerly
politically unstable countries have recorded impressive
growth. Recent political tendencies in high-to-medium
growth countries like Burundi, Democratic Republic of
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 9
2. Current developmental
progress and limitations
4 Eastern Africa Community (EAC), Economic Community of West African States (ECOWAS), Economic Community of Central African States (ECCAS),
Southern Africa Development Community (SADC) and North Africa. These sub-regions are loosely dened here to include other non-aligned countries
falling within each region.
5 Data for South Sudan is from the time it became a nation in 2012.
Figure 1: Comparative economic growth rates in emerging and
developing regions
Source: Author’s computation using data from the World Bank
(2015).
Congo, and Rwanda therefore pose a signicant risk to the
economic gains in these countries.
High commodity demand and consequently high
prices in emerging economies like China also signicantly
drove high growth in Africa. High demand for oil and
minerals has underpinned high growth in Angola, Chad,
Equatorial Guinea, Nigeria and Sierra Leone. The recent
slump in commodity demands and prices has consequently
brought about a slight tampering of the growth in Africa.
Unaccommodating global nancial conditions have added
to the falling commodity prices, leading the International
Monetary Fund (IMF) (2015) to project economic growth
in SSA to be 3.5% in 2015 and 4.5% in 2016, down from
5% in 2014. Following the global crises, external demand
has been weak due to waning export opportunities.
However, improving domestic demand has helped
attenuate the effects of weakening external demand.
In addition, enhanced macroeconomic stability resulting
from low ination, scal prudence and debt relief has led
to growth rates of 8% and above in non-resource rich
countries like Ethiopia and Rwanda. A number of African
countries have also improved their economic policies and
conditions for doing business. Countries like Benin, CÔte
d’Ivoire, Democratic Republic of Congo and Togo top the
list of those in which growth prospects have been enhanced
by business climate improvements (IMF, 2015).
10 Development Progress Research Report
Figure 2: Economic growth rate in individual African countries
Source: Author’s computation using data from the World Bank (2015).
Table 1: Composition of Africa’s GDP
1980-89 1990-99 2000-09 2010-14
Services 45.32 47.68 51.33 57.31
Agriculture 20.55 20.33 17.97 15.01
Industry less manufacturing 18.46 17.65 17.99 16.51
Manufacturing 15.93 14.37 12.66 11.16
Natural resource rents 2.11 0.72 1.08 2.41
GDP growth 1.72 1.94 4.83 4.41
GDP per capita growth -1.12 -0.81 2.06 1.61
Source: Author’s computation using data from the World-Bank (2015) World Development Indicators
2.1.2 Not-so-good comparative outlook for per capita
growth
The impressive story in terms of GDP growth becomes
somewhat different when considered in per capita terms,
taking into account population growth. Although the trend
is similar, the magnitude of growth is low compared to
EAP and similar to LAC (Figure 3). The period 2000-2009
shows some improvements relative to LAC, however, the
situation seems to be deteriorating again since 2010. While
average population growth per decade has remained stable
at closed to 3% for SSA, that of EAP and LAC has been
low and falling to 0.7% and 1.2% respectively (Figure 4).
According to Bloom et al. (2012), SSA has the most
signicant wealth gradient for youth dependency: on
average, the youth dependency ratio is 1.07 for the poorest
households and 0.72 for the richest (the gures are 0.91
and 0.57 respectively for Latin America). In other words,
high fertility rates place a disproportionately higher
burden of dependency on the poor in Africa. This can be a
considerable factor in the persistently high inequality that
accompanies Africa’s impressive economic growth.
2.2 Inequality reduction and poverty
eradication (SDG 1.1 and 10.1)
The biggest challenge to Africa’s sustained growth and
future political stability is perhaps the persistently high
inequality. The fruits of the impressive growth recorded for
the past one and a half decades in Africa have not reached
all sectors of the society, especially the most marginalised
(McKay, 2013). Evidence shows that Africa is the second
most unequal continent in the world after Latin America
(Ravallion and Chen, 2012). Although Latin America’s
Gini coefcient has fallen from a high of 0.541 in the early
2000s to 0.486 in 2010 (Cornia, 2014), there is no sign of
declining inequality in Africa (Bigsten, 2014).
According to Table 2, the average asset6 Gini in Africa
has increased especially in the last ve years. Shimeles and
Nabassaga (2015) identify factors that tend to be specic
to a geographic location or individual country (political
economy, history, linguistic barriers, ethnicity, etc.) as
key contributors (up to 40%). The fact that most African
countries are landlocked and fragmented both across small
national boundaries and across ethno-linguistic and colonial
lines are therefore key factors to consider. Inequality
of opportunities (such as labour markets interventions,
particularly skill acquisitions and migration, and price
distortions affecting the assets acquisition process) account
for about 13%, while other factors (such as economic
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 11
6 Asset inequality is more akin to wealth inequality measurement. In the absence of reliable income and consumption data, some authors use assets to
proxy for welfare.
Figure 3: Comparative per capita GDP growth rates in
emerging and developing regions
Source: Author’s computation using data from the World-Bank (2015)
Figure 4: Comparative population growth in emerging and
developing regions
Source: Author’s computation using data from the World Bank (2015)
Table 2: Average asset Gini coefficient in Africa and its
determinants
Period Average
asset Gini
Coefficient
Contributions of:
Spatial
inequality
Inequality of
opportunities
Other
factors
Pre-1995 0.42 0.37 0.11 0.52
1996-2000 0.43 0.34 0.13 0.53
2001-2005 0.38 0.32 0.13 0.54
2006-2009 0.4 0.34 0.14 0.51
2010-2013 0.44 0.39 0.13 0.47
Source: Shimeles and Nabassaga (2015:15)
structure, FDI, dependency ratio etc., analysed in the next
sections) account for the largest share (up to 47%).
Our calculations of average income/consumption Gini
suggest that Africa’s average Gini is also around 0.44.
The noteworthy fact is the wide variation in country level
inequality. The countries with the highest inequality in the
region are South Africa, Botswana and Namibia (Figure 5,
overleaf).
High inequality in income, heath and inequality has
signicantly attenuated the progress in Africa’s Human
Development Index (HDI). Though average HDI increased
from 0.40 to 0.50 between 1990 and 2013, Africa is still
well below the world average HDI of 0.70. The Inequality
Adjusted HDI (IHDI) shows a loss in value of 33.6% after
adjusting for inequality in income, health and educational
distributions (UNDP, 2014). Gender inequality in human
development is also a signicant challenge as females lag
behind males by 13% in the human development index
(UNDP, 2014).
High-inequality countries such as South Africa,
Botswana and Namibia also have the highest shares of
income accruing to the richest 10% and the lowest share
accruing to the poorest 10% (Figure 6, overleaf). This
suggests that the SDG vision of leaving no one behind
is likely to face a signicant challenge in Africa due
to persistently high inequality, especially in very high-
inequality countries. Africa has made only slow progress in
reducing poverty relative to other developing regions.
According to the MDG Report 2015, SSA recorded
a mere 8% reduction in poverty from 1990 to 2010
(UNECA, 2015). As with the growth and inequality
story, there are signicant variations in specic country
performances in poverty reduction. Poverty declined in 24
of the 30 countries for which data was available, ranging
from a 32% reduction in the Gambia to 1% in Egypt.
Poverty also increased in six of the 30 countries, from
0.4% in Central African Republic (CAR) to 28.4% in
Kenya.
It is noticeable that most of the countries that performed
dismally in terms of poverty reduction are also those
with high inequality and a relatively low share of income
accruing to the poorest 10%. In transitioning from the
MDGs to the SDGs, the focus on growth and inequality
for poverty eradication is of capital importance. The focus
on inequality reduction would have two implications
for poverty. First is that it will free up resources for
redistribution through the markets or government
social welfare systems. Second is that a small amount of
redistribution will be able to bring about much stronger
poverty reduction and eventual elimination (Ortiz and
Cummins, 2011). However, in line with the focus on
leaving no one behind, it is important to examine the
impacts of different types of inequality on growth and their
respective determinants in order to identify which ones are
likely to jeopardise SDGs 8.1 and 10.1, and consequently
1.1.
12 Development Progress Research Report
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 13
Figure 5: Inequality (Gini) in Africa (2000-2014 average)
Source: Author’s computation using data from the World Bank (2015)
Figure 6: Income shares accruing to richest and poorest 10% by country
Source: AfDB (2015), based on WDI 2014 data (World Bank 2014)
In order to isolate the effects of different types of inequality
on economic growth on the one hand and to propose
policy measures for curbing selected bad inequalities on the
other, it is important to analyse two related frameworks.
One is an economic growth framework in which different
inequalities are key determinants of the rate of growth. The
other is the framework for the determinants of inequality,
where a set of factors are tested for their effects on the
different inequalities. We review literature and develop
relevant methods along these lines.
3.1 Brief overview of related literature
The literature regarding the impact of inequality on growth
contains diverging theoretical views and the empirical evidence
is inconclusive. Theoretical predictions suggest that inequality
can have either positive or negative effects on growth.
Three major ways through which inequality can
impact growth are through physical endowments (credit
constraints), human capital endowments and political
economy channels. When credit in the capital market is
too costly to the poor owing to a lack of collateral, then
projects with return rates below the marginal cost of
capital to the poor can only be undertaken by the rich.
But redistribution of wealth from the richer to the poorer
individuals will reduce their need to borrow while allowing
them to undertake projects with lower rates of returns.
As such, redistribution will lead to higher investment and/
or higher return to capital (Bourguignon, 2004). More
formalised models (Galor and Zeira, 1993; Banerjee and
Newman, 1993; Aghion and Bolton, 1997) put information
asymmetry at the centre of credit constraints. In these
models, the evolution of inequality and output is inuenced
by the limited choice of occupation or investment (due
to credit rationing) among poor people and possibly
the middle class too. When the poor are prevented from
making productive investments (that would benet them
and the society), low and inequitable growth can result.
Moreover, in a Keynesian economy where the marginal
rate of savings increases with income, or with a higher
propensity to save from returns to capital than labour,
those at the top end of the distribution may represent the
main source of savings (Voitchovsky, 2005).
Human capital endowment (education, skills and
healthy life) is also important in the growth effect of
inequality. In situations where ability is rewarded, there
is incentive for more effort, risk-taking and higher
productivity, resulting in higher growth but with higher
income inequality. In such cases, talented individuals will
tend to seize higher returns to their skills. The resulting
concentration of talents and skills in the advanced
technology upper-income sector becomes conducive to
further innovation and growth (Hassler and Mora, 2000).
Such incentives can induce greater effort in all parts of the
distribution (Voitchovsky, 2005). However, frustration at
the lower end of the distribution resulting from perceived
unfairness (Akerlof and Yellen, 1990) may counteract the
innovation gains.
A political economy approach would suggest that high
inequality sets the stage for the adoption of distortionary
policies which adversely affect investment and generate
political instability, thereby stiing growth (Persson and
Tabellini, 1994). Alesina and Perotti (1996) have equally
argued that higher political instability can result from high
inequality, with the resulting uncertainty then reducing
investment levels. Rodrik (1996) has conrmed that
divided societies with weak institutions also witnessed the
sharpest fall in post-1975 growth. This situation brought
about a weakness in their capacity to respond effectively to
external shocks.
Empirically, various authors have found a negative
impact of initial inequality on growth in developed
countries (Persson and Tabelini, 1994), developing
countries (Clarke, 1995) and a combination of both
(Deininger and Squire, 1996). Schwambish et al. (2003)
nd that top end inequality (measured by 90/50 percentile
ratio) strongly and negatively impacts social expenditures,
while the bottom end (captured by 50/10 percentile) shows
a small positive effect. They suggest that high top-end
inequality reduces social solidarity, with the rich trying
to pull out of publicly funded programmes such as health
care and education, in preference to private provision.
A neat survey of theoretical and empirical literature has
been presented by Cingano (2014) and Ngepah (2015)
on the effects of inequality on growth. Using a systems
Generalised Methods of Moments (GMM) estimator,
Voitchovsky (2005) nds insignicant impact of aggregate
inequality on growth (with signicant positive effect of
top-end inequalities and negative effect of bottom-end
inequalities on growth) for a sample of 21 developed
countries. Castello (2010) nds a signicant negative
impact of the Gini coefcient on growth for a mixed
sample of rich and poor countries. Castello’s ndings,
however, show a negative impact for poor countries and
a positive one for rich countries. Most recently, Halter et
al. (2014) found a positive impact of Gini coefcient on
growth for a sample of 90 (mostly developed) countries,
with a positive effect for rich and negative effect for
poor countries. Apparently, the nature and strength of
the impact of average inequality on growth depends on
the level of development of the countries included in the
sample.
14 Development Progress Research Report
3. Methodology and approach
Turning to the determinants of inequality, Cornia
(2014) identies a number of factors that theoretically
explain inequality in Latin America. He rst deconstructs
household net disposable income into six income shares,
which are more or less exhaustive. These are labour
income, human capital income, land and mining rent,
capital income, net transfers (pensions, unemployment
subsidies, child allowance, cash transfers and other
targeted subsidies) and remittances income. Inequality
in the distribution of household income (Gini) is then
expressed as a weighted average of the concentration of the
distribution of the six income sources.
As such, changes in inequality would be primarily
accounted for by changes in the distributions of incomes
within and across these income sources, as follows:
Therefore, variation (∆) in inequality (G) is a function
of changes in the after-tax shares of the different income
sources (shit) and changes in the concentrations index (C)
of the respective income sources (i).
The factors that are postulated by Cornia (2014) to
affect changes in income shares are:
Relative remuneration of production factors, due mainly
to the skills premium as a result of the human capital
distribution in the economy, exchange rate policies, and
capital inows that may shift production between high
skill/capital-intensive non-traded and unskilled labour-
intensive traded sectors
Changes in the volume of remittances
Changes in unskilled wages relative to capital returns
due to changes in interest rates and returns on capital
Changes in activity rates, especially among unskilled
workers due to fast economic growth, labour market
policies and occupational choices
Changes in transfers received or taxes paid by
households as a result of changes in scal policies.
Possible factors that can inuence the concentration
coefcient of each income source can be:
Changes in social policies affecting the incidence of
social transfers
Changes in the household distribution of production factors
Changes in the tax volume or incidence, due to scal policy
Changes in the activity rate.
Various external and domestic factors can interact
to determine inequality. First, although gains in terms
of trade would normally be expected to be equalising,
the concentration of natural assets like lands and mines
particularly by multinationals tends to make terms
of trade dis-equalising. The second factor is migrant
remittances. Theory suggests (at least for Latin America)
that because only the middle class can nance the high
cost of migration, remittances do not reduce inequality
in the short to medium term. The third is the inow of
foreign capital, which may rather benet large capital and
skill-intensive rms, while small and medium enterprises
(SMEs) may be left with no formal access to bank nance,
contributing to enhancing inequality.
Among domestic factors, the key factor is a decline in
dependency ratio, which can result in an increased supply
of labour at low wages and high domestic demand. Of all
the domestic factors, the spread of human capital (share of
people with no education and primary education relative
to those with secondary and tertiary education) is critical.
Governance is also a possible factor as a social democratic
dummy has inequality-reducing effects in Latin America
(Cornia, 2014). These are some of the key variables we will
consider in the analysis of determinants of inequality.
3.2 Models
To model the impact of inequality on growth, we use
a growth model for panel data following Voitchovsky
(2005). Specically, the ve-year growth model is based on
the following form:
where y is GDP per capita, t and t-1 are time periods
corresponding to observations that are ve years apart,
X is a vector of control variables, i is a country index, w’
is a vector of coefcients, G is a measure of inequality, a
are coefcients and uit is a composite term including an
unobserved country-specic effect, time-specic effect and
an error term.
According to (Barro, 2000), the neoclassical model
underlying equation (2) explains a long-term steady-state
level of income. As such, an enduring change in inequality
(and other determinants of growth) will affect growth rates
only in the short run – that is, while the economy is still
on the path of convergence to a new equilibrium. Because
economies generally take a long time to reach a new steady
state following a change in any of the determinants, the short-
term inequality effect on growth can in fact last a good while.
All the variables in the growth model are ve-year
averages. Although the specication of Cornia (2014)
in the inequality determinant function is a good basis
for consideration of our variables, we opt for a similar
estimation technique to the growth model due mainly to
limited sample size. Cornia (2014) uses a dataset of 18
Latin American countries consisting of 292 observations.
Our dataset, though covering 44 African countries,
comprises only 128 observations, due to limited time
dimensions and the fact that we take a ve-year average to
be consistent with previous work (Voitchovsky, 2005) and
to obtain a more balanced panel.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 15
3.3 Variables and data
Income and income growth: Our measure of growth rate
(yit–yit-1) is the growth in real per capita GDP taken from
the World Development indicators (WDI) database of the
World Bank (2015).
Inequality measures: we consider various indicators of
inequality included in the WDI dataset. The dataset also
presents distributional data grouped in quintiles (Q1 to
Q5). We therefore consider a division of the distribution
into the poor (Q1), the middle class (Q3) and the rich
(Q5). We look at inequality within and between these
three groups in the income distribution spectrum. We also
consider an index of inequality between the middle class
and the poor, as Q3/Q1. Our measure of inequality among
the poor is Q2/Q1. We also consider inequality amongst
the middle class as Q4/Q3. Next, we look at inequality
amongst the rich and consider Q5/Q4. Inequality between
the rich and the middle class is captured by Q5/Q3. Finally,
extreme inequality is captured by Q5/Q1.
For gender inequality, we used the ratio of male-female
labour force participation rate to proxy for gender inequality
in the labour market. These are sourced from WDI statistics.
Other control variables: Apart from the lagged income
variable in the model in (1), a number of other control
variables were introduced including investments, human
capital, labour market conditions, scal policy, governance
and a number of external conditions (see appendix for
other variables).
The investment variable is measured by the average
share of gross xed capital formation in GDP. It is the ve-
year average from the year of inequality measure observed.
The data is from the WDI database.
Human capital variables, generally measured in terms
of education, have two possible candidates. The rst is the
use of enrolment ratios and average years of schooling in
the population. Both are obtained from the computations
of Barro and Lee (2000). We opt instead to use lower
secondary school completion rates. This measure is the one
that has the most number of year-on-year observations
to be able to match the inequality data and to allow for
ve-year averaging in this work.
Determinants of inequality variables: for the list of
determinants, we use the same factors suggested by the
theoretical model in Cornia (2014) for which data is
available, and also add some factors that may be more
relevant for the African continent. We group the variables
into internal and external factors. Among the internal
factors, we look at the structure of the economy, captured
by growth of value added in the different sectors of the
economy. Second is government social spending. In the
absence of data on all social spending, we only consider
educational and health spending. Health spending had a lot
of missing values for a number of countries, and therefore
we do not pay much attention to its coefcient. We focus
instead on the coefcient of educational spending. Next,
we consider human capital distribution, which is the
ratio of people with primary and no education to those
with secondary and tertiary schooling. We also took
into account the impact of natural resource rents (share
of natural resources in GDP), which captures resource
dependence. Rate of urbanisation can be a driver of
inequality as shown in Behrens and Robert-Nicoud (2014).
Besides the production dynamism in city growth, when
rural unskilled and less educated farm-workers migrate
to the urban areas, they end up poorer, occupying the
urban slums and hence exacerbating inequality. For this
reason, we considered urbanisation as a determinant too.
Lastly, we looked at an element of governance, captured
by whether a country is an institutional democracy or
autocracy. For a detailed description of variables and the
sources of data, see Table 10 of appendix.
3.4 Estimation technique
In estimating the impact of inequality on growth, we use
the Generalised Method of Moments (GMM) approach.7
There are two variants of the GMM estimator. One is the
rst difference GMM of Arellano and Bond (1991), which
operates by taking the rst difference of all the variables
in the model and then uses lag values of the right-hand
side variables to control for endogeneity. This approach
is suitable in dealing with two common problems in
econometrics: omitted variables and endogeneity biases.
However, differencing creates another problem in that it
takes away much of the information in the data that is
due to cross-sectional variations. Given that the data we
used here spans 44 countries with a maximum of four
time periods after taking ve-year averages, much of the
variation in the data is therefore spatial. Added to the high
contribution of spatial inequality to overall inequality in
Africa (Table 2), the simple rst difference GMM will yield
imprecise estimates and therefore not be the best option here.
The other variant of GMM is the systems GMM. It
combines the rst difference GMM estimator with a set of
level (non-difference) equations to bring back the missing
cross-sectional information in the former, and uses the
lag rst difference of variables in the right-hand side of
the equation as instruments (Arellano and Bover, 1995).
The systems GMM has been used in most recent studies
examining the impact of inequality on growth (Cingano,
2014; Halter et al., 2014 and Ostry et al., 2014), and is
likewise used here. In order to ensure that we are indeed
16 Development Progress Research Report
7 Applying the standard Least Square Dummy Variable (LSDV) approach in estimating growth models yields biased estimates, especially of inequality
coefcients. The bias comes from the fact that the estimation of growth models requires rst differencing of income or GDP. This differencing creates
a correlation between the lag values of GDP and the error term. Since the LSDV estimation makes use of individual country x effects, and these are
correlated with the lag GDP, the model yields biased estimates of our coefcients of interest.
dealing with causality, we have taken inequality at the
beginning of the ve-year period, while we take ve-year
averages of GDP indicators.
We also use the systems GMM to estimate the inequality
models. Due to a limited number of observations (128),8
the many possible determinants of inequality are not
all introduced in a single equation for each inequality
measure. Consequently, for each measure, we estimate four
models. The rst two models alternatively use government
expenditures on education and human capital distribution,
respectively. We made this separation because in a ve-year
average dataset, government expenditures on education
are likely to strongly affect human capital spread. The
third model introduces the growth in value added of the
different sectors of the economy, in place of GDP growth.
Finally, for each inequality measure we introduce external
conditions, while keeping only growth in the models. In
doing this, we try to introduce all internal factors in the
same model and external factors in their own model to
ensure that the respective variables are comparable. The
two sub-models for internal and external factors also
have the main variables (the key variable in inequality is
growth or GDP, either sector-wise or average GDP) so as
not to lend the models to omitted variables bias. We also
attempted to estimate the models using the LSDV approach
as used in Cornia (2014). Clearly, the LSDV approach did
not perform satisfactorily, due perhaps to limited sample
size and to the fact that the LSDV approach introduces x
effects for each country. This would naturally require a
reasonably large sample size.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 17
8 Introducing many right-hand side variables in an equation for small sample data will result in reduced degrees of freedom to manoeuvre the data, and
consequently, imprecise estimates.
We begin our research ndings with some exploratory
statistics, before following with more sophisticated
econometrics.
4.1 Exploratory analyses
Inequality and economic growth are negatively related
to one another (Figure 7). Very high-growth countries
like Ethiopia, Sierra Leone, Chad, Nigeria and Tanzania
are clustered on the low-inequality quadrant, while
countries with medium to high inequality like South
Africa, Swaziland and Central African Republic also have
negative, low to medium growth rates.
The Gini coefcient correlates negatively with GDP
growth, and with the growth of value added in agriculture
and services (Table 3). From Table 1 we observed that
the services sector is dominant in Africa’s economies, and
its share has been increasing. This is also the sector that
absorbs medium-skill workers. One of the factors that
contribute to inequality is human capital distribution. The
more medium-to-high-skilled people are employed in an
economy relative to low-skilled individuals, the higher the
level of inequality. Hence it may not be surprising that it
correlates negatively, though not signicantly, with all the
measures of inequality except gender inequality. Inequality
measures at the lower tail of the distribution spectrum
correlate negatively with growth, but only inequality
among the poor is (very weakly) signicant.
Although most of the correlation coefcients are not
signicant, the signs show that inequality at the higher
end of the distribution (Q3 to Q5) is associated positively
with economic growth. Growth in agricultural value
18 Development Progress Research Report
4. Research findings
Figure 7: Growth-inequality scatter
Source: Author’s computation using data from the World Bank (2015)
Table 3: Pair-wise correlation inequality measures with growth and natural resource rents
Growth Natural
resource share
of GDP
Inequality type GDP GDP per capita Agriculture Manufacturing Industry Services
Average (Gini) -0.019 0.033 -0.044 0.055 0.005 -0.049 0.250**
Within poor (Q2/
Q1)
-0.158*-0.130 -0.062 0.088 0.024 -0.149 0.047
Within middle
class (Q4/Q3)
-0.079 -0.039 -0.059 0.028 -0.046 -0.109 -0.206**
Within rich (Q5/
Q4)
0.041 0.091 -0.017 0.032 0.006 -0.013 -0.276***
Between rich and
poor (Q5/Q1)
-0.051 -0.014 -0.030 0.056 -0.004 -0.109 0.203**
Poor and middle
class (Q3/Q1)
-0.146 -0.114 -0.085 0.079 0.010 -0.153 0.032
Middle class and
rich (Q5/Q3)
0.008 0.051 -0.010 0.029 -0.016 -0.049 -0.260**
Gender -0.117 0.008 -0.082 0.220** 0.147 0.064 0.028
Note: *, **, *** denote signicance at 10%, 5% and 1% levels respectively
added correlates negatively with gender inequality, but
not signicantly. This may be driven by the fact that most
African female workers are absorbed along the agricultural
value chain. The manufacturing sector correlates negatively
and signicantly with gender inequality, suggesting that
labour force participation in the manufacturing sector may
be biased against female workers. Natural resource rents
tend to positively associate with average and lower end
inequality, possibly suggesting that resource rents accrue to
the richer segments of the society.
The signicant correlates of different inequality
measures are the human capital distribution, government
spending on education and health, urbanisation, the
dependency rate, remittances and exchange rates (Table 4).
The human capital distribution9 associates positively and
signicantly with all inequality measures except gender
inequality. It correlates negatively with gender inequality,
though not signicantly. Government expenditures on
education and health also correlate positively with all
inequality measures except gender. This may point to the
possible existence of other factors such as societal norms,
limiting female access to these benets. Government
educational expenditure is negatively associated with
gender inequality, though the relationship is only weakly
signicant. This may mean that government educational
spending has some impact in encouraging female labour
force participation. Urbanisation and the dependency ratio
seem to be the strongest in terms of positive association
with gender inequality, due perhaps to the high wealth
gradient that places more dependency burden on the
women and the poor (Bloom et al. 2012). They also relate
positively, though relatively weakly, with all measures
along the distribution spectrum, though the relationships
are not statistically signicant except in the case of the
correlation between the dependency ratio and inequality
between the rich and the poor. Being an institutional
democracy is consistently associated with less inequality,
whereas institutional autocracy associates with inequality
positively, but both associations are not statistically
signicant. Remittances have signicant positive
association with average inequality, inequality between
rich and poor, and inequality between the middle class
and the poor. This is possibly due to the fact that migrant-
sending households are those that can afford the cost of
migration and hence the poor may not really benet from
remittances (Cornia, 2014).
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 19
9 Measures as the ratio of population with primary schooling and no education to population with secondary education and higher.
Table 4: Correlation inequality measures with possible determinants
Gini Q5/Q1 Q3/Q1 Q5/Q3 Q2/Q1 Q4/Q3 Q5/Q4 Gender
Human capital
distribution
0.393*** 0.436*** 0.271** 0.472*** 0.137 0.511*** 0.425*** -0.108
Public
expenditure on
education
0.228** 0.280** 0.246** 0.245** 0.212 0.262** 0.210*-0.192*
Public
expenditure on
health
0.333** 0.350*** 0.185 0.361*** 0.109*0.312** 0.348*** 0.113
Dependency
rate
0.029 0.061*0.052 0.109 0.114 -0.128 -0.074 0.498***
FDI 0.080 0.049 0.076 0.050 0.078 0.058 0.054 -0.082
POLITY 0.120 0.114 -0.002 0.154 -0.055 0.116 0.161*0.137
Institutional
Autocracy
0.067 0.072 -0.022 0.101 -0.066 0.065 0.108 0.058
Institutional
democracy
-0.061 -0.041 -0.075 -0.036 -0.086 -0.071 -0.025 -0.081
Remittances 0.203*0.273** 0.463*** 0.119 0.459 0.257 0.081 -0.016
REER -0.160 -0.116 -0.094 -0.145 0.067*** -0.135** -0.156 0.149
Terms of Trade 0.023 0.034 0.120 -0.015 0.091 0.111 -0.058 -0.165
Urbanisation 0.087 0.050 0.046 0.081 0.019 0.142 0.057 0.528***
Note: *, **, *** denote signicance at 10%, 5% and 1% levels respectively
4.2 Regression results
In sub-section 4.2.1 we report the results of the models,
assessing the impacts of inequality on growth. Based on
these, we select those with negative impacts on growth and
analyse their determinants in sub-section 4.2.2.
4.2.1 Estimations of the impacts of different inequalities
on growth
The sample of the dataset from which the estimation
was carried covers 44 African countries with at least two
consecutive ve-year average observations each, to be
able to allow for dynamic panel analyses. Our sample
consists of 128 observations of ve-year averages between
1980 and 2012. Cingano (2014) and Voitchovsky (2005)
use 127 and 81 observations respectively in a similar
econometric framework for OECD countries.
The empirical results reported in Table 5 are obtained
by way of a two-stage systems GMM. The Sargan test
for over-identifying restrictions did not conclude that our
instruments were valid for the one-step GMM but conrms
validity for two-stage GMM (see Sargan’s P-values). A
Wald test for joint signicance of the inequality measures
show that all the inequality measures are jointly signicant
at 1% for all the models. We estimated six models. Model
one is Gini only. Model two divides the distribution into
three (bottom, middle and top) and considers inequality
between the three groups as dened in the description of
variables plus Gini coefcient. Given that all the other
measures of inequality are only within or between parts
20 Development Progress Research Report
Table 5: Two-stage systems GMM estimates
Gini Gini and between Gini and within Gini and all spectrum Gini and gender
12346
Lagged GDP per capita -0.198***
(0.002)
-0.118*** (0.004) -0.216***
(0.050)
-0.266***
(0.064)
-0.157**
(0.073)
Investment 0.978***
(0.078)
0.954***
(0.025)
0.921***
(0.045)
0.948***
(0.061)
0.704***
(0.088)
Human capital 0.721**
(0.189)
0.664***
(0.016)
0.654***
(0.024)
0.518***
(0.044)
0.640***
(0.038)
Gini -0.911***
(0.035)
-0.743***
(0.066)
-0.676**
(0.111)
-0.476**
(0.080)
-0.337*
(0.183)
Between rich and poor
(Q5/Q1)
-0.998***
(0.007)
-0.795***
(0.084)
Poor and middle class
(Q3/Q1)
-0.375**
(0.101)
-0.789**
(0.267)
Middle class and rich
(Q5/Q3)
0.864***
(0.088)
0.754***
(0.049)
Within-bottom (Q2/Q1) -0.557**
(0.094)
-0.462***
(0.044)
Within-middle (Q4/Q3) -0.225**
(0.019)
-0.343**
(0.101)
Within-top (Q5/Q4) 0.856***
(0.031)
0.392***
(0.035)
Gender -0.823***
(0.074)
Gender square 0.563***
(0.091)
Constant
p-value (joint inequality) 0.0000 0.0000 0.0000 0.0000 0.0000
p-value (Sargan) 0.3395 0.3257 0.3004 0.2916 0.5444
Note: the dependent variable is ve-year average of GDP per capita growth. All regressions include country and period dummies. Sargan denote
p-values of Sargan test for over identifying restrictions. *, **, *** denote signicance at 10%, 5% and 1% levels respectively; standard errors in
parentheses.
of the distribution spectrum, and therefore do not cover
the entire spectrum, it becomes important to keep the
Gini (average measure covering the entire distribution)
in subsequent models. Model three considers inequality
within the three groups plus Gini. Model four estimates
the entire spectrum using both the within, between and
Gini coefcients. Model ve gives the estimates of gender
inequality. We also introduce the square of the gender
inequality measure and show that there is a non-linear
effect in the way gender inequality affects growth.
The control variables (investment and human
capital) have the expected positive signs and are all
signicant across all the models. The Gini coefcient has
a signicantly negative effect on growth across all the
models. Estimates in model one suggest that a one Gini
point reduction in average inequality will increase growth
by up to 0.9 percentage points over the next ve years or
about 0.2 percentage points per year. Considering model
four, average inequality, inequality between the bottom
and the top segments, inequality between the bottom and
the middle segments, and inequality within the bottom and
the top segments of the distribution all reduce economic
growth. Inequality between the top and the middle, and
within the top segments of the distribution signicantly
enhance growth. These growth-enhancing inequalities are
what we term good inequalities in this work.
A one-point reduction in extreme inequality (between
the rich and the poor) would increase growth within the
next ve years by 0.8 percentage points, or 0.12 percentage
points per year. A one-point reduction in inequality among
the poor would translate into a 0.5 percentage point
increase in the next ve-year average growth. The same
reduction in inequality among the middle-income earners
would enhance growth by 0.34 percentage points. The
advantages that males have over females in labour market
participation signicantly reduce growth, and a one-point
reduction in this inequality leads to 0.8% increase in
growth.
Policy efforts that target the reduction of all the bad
types of inequality (those that have a negative impact on
growth) by one point each would enhance growth by up
to three percentage point in the next ve years, translating
to about a 0.6 percentage point increase in growth per
annum. If policy efforts were to target these inequalities
in a way that would lead to a one-point reduction in each
type of inequality immediately, within the 1000 days of
the SDGs, Africa would achieve on average an extra 1.58
percentage points in economic growth. This would also
translate into stronger poverty reduction than before, given
lower inequality.
However, the major question is what kinds of policies
should be implemented to achieve the reductions in the
bad types of inequality. Given data challenges for African
countries (mainly relating to limited time dimensions,
limited country coverage and gaps in the data) we could
not examine all possible key policies, however we consider
a few important factors as far as the data allow. Over and
above the variables from the work of Cornia (2014) for
which we had some data (see Table 10 in appendix), we
also consider the effects of sectoral growth, urbanisation
and natural resource rents on these inequalities. In place of
social spending for which we lack adequate data, we use
government educational and health expenditures.
4.2.2 Estimating the determinants of bad inequalities
The models we estimated in search of the determinants
of inequality also relied on the same dataset as in models
analysing the inequality impacts of growth. The data has
128 observations of ve-year averages in 44 countries.
The results are divided into average inequality (Gini),
between rich and poor (the ratio of income shares of
quintile 5 to that of quintile 1) and are reported in Table
6. The next results in Table 7 are for inequality between
the middle and the bottom segments of the distribution
(the ratio of quintile 3 and 1), and inequality within
the bottom of the distribution (ratio of quintile 2 and
1). Finally, Table 8 reports inequality within the middle
segment of the distribution (ratio of quintiles 4 and 3) and
gender inequality (the ratio of male to female labour force
participation).
Each inequality type consists of four sub-models. Sub-
models (1) and (2) focus on GDP growth and key internal
factors (the dependency ratio, government educational
expenditure, human capital distribution, urbanisation,
natural resource rents and a governance indicator).
Sub-model (3) focuses on the role of economic structure
and economic growth in different sectors while sub-model
(4) pays attention to external factors as possible inequality
determinants. The results are interpreted following the
different inequality types in the respective tables.
Average inequality
The estimations of the models of average inequality suggest
that the lag values of Gini contribute to about 0.4 points in
lowering average inequality for the period. After controlling
for the main determinants, GDP growth signicantly
tends to reduce inequality over time. The major factor
contributing to rising average inequality in Africa is human
capital distribution as measured by the ratio of people
with primary education and lower to those with secondary
education and above. This variable suggests that the
distribution of educational human capital accounts for up
to 12 points in the Gini over the ve-year period, or about
2.5 points per year. Government expenditure in education
appears to lower average inequality, with 1% extra spending
of GDP in education reducing the Gini by 2 points.
The dependency rate also contributes to fuelling average
inequality. An increase of a 1% share of dependants in
the population is associated with an increase in the Gini
of 0.2 points. However, when we control for educational
spending, the coefcients of growth and the dependency
ratio both become insignicant. This suggests two things.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 21
22 Development Progress Research Report
Table 6: Two-stage systems GMM estimates for average inequality and between top and bottom
Gini Between top-bottom
1 2 3 4 1 2 3 4
Lagged Inequality -0.332***
(0.057)
-0.352***
(0.112)
-0.443***
(0.093)
-0.224
(0.237)
-0.360***
(0.054)
-0.284***
(0.080)
-0.437***
(0.076)
-0.444
(0.986)
Value added in
agriculture
-0.011
(0.072)
-0.177**
(0.106)
Value added in
industry
0.066
(0.070)
0.180
(0.236)
Value added in
manufacturing
-0.243**
(0.104)
-0.254*
(0.139)
Value added in
Services
-0.179
(0.111)
-0.254***
(0.047)
GDP growth -0.437***
(0.146)
-0.532
(0.390)
-2.597***
(0.906)
-0.234***
(0.073)
-0.109
(0.097)
-1.463***
(0.369)
Dependency rate 0.274***
(0.071)
0.046
(0.124)
0.111**
(0.063)
0.163***
(0.032)
0.008
(0.078)
0.064*
(0.034)
Government
educational
spending
-2.217**
(1.089)
-0.784**
(0.280)
Gov. health
spending
1.617
(1.047)
0.592
(0.672)
0.318
(0.563)
Human capital
distribution
14.305***
(1.340)
11.914***
(3.091)
9.888***
(1.344)
8.686*
(4.395)
Share of urban
population
0.176
(0.170)
0.368*
(0.223)
0.222*
(0.120)
0.276**
(0.101)
Natural resource
rent
0.125***
(0.025)
0.113**
(0.043)
0.069***
(0.020)
0.025
(0.025)
-0.089
(0.111)
Institutionalised
democracy
-0.002
(0.031)
-0.001
(0.040)
-0.026**
(0.013)
-0.053***
(0.013)
-0.086*
(0.054)
Foreign direct
investment
4.800***
(1.508)
1.614**
(0.612)
Remittances -0.107
(0.210)
-0.103
(0.350)
Terms of rrade 0.216**
(0.090)
0.239*
(0.124)
Real effective
exchange rates
0.097***
(0.030)
0.067
(0.059)
Constant 23.019***
(8.035)
50.690**
(19.610)
53.647***
(10.627)
22.351
(16.944)
-11.255**
(5.019)
5.821
(9.761)
10.009***
(3.197)
-22.674
(20.302)
p-value Sargan 0.2510 0.2194 0.3477 0.9867 0.2467 0.2512 0.4418 0.9931
Note: the dependent variable is ve-year average of inequality within the respective inequality category. All regressions include country and
period dummies. Sargan denote p-values of Sargan test for over identifying restrictions. *, **, *** denote signicance at 10%, 5% and 1% levels
respectively; standard errors in parentheses.
First, the major source of resources for government
spending on education (and other social spending not
controlled for) is GDP growth.
Second, government educational spending may target
most dependants, perhaps through subsidised education.
This nding is consistent with the progress Africa has
made on MDG2 relating to universal primary education.
UNECA (2015) reports that between 2000 and 2012,
the average amount of resources allocated to education
increased from 4.2% to 4.9%. Besides GDP resources,
more development assistance to education could reduce
inequality signicantly. However, in line with the MDG,
most governments have focused on primary education. The
resulting signicant gains in primary enrolment rates have
also been marked by very low completion rates. Only 67%
of children enrolled in the rst grade reach the last grade
in Africa (UNECA, 2015). Given the contribution of the
educational human capital distribution, actions need to be
focused on getting many more people through secondary
and tertiary education. Other internal factors that raise
average inequality are urbanisation and natural resource
rents. A percentage point increase in the share of urban
population raises the Gini by 0.37 points. A percentage
point increase in the share of natural resources in GDP
raises the Gini by 0.13 points. On the external front, FDI,
terms of trade and real effective exchange rate are all
contributing to raising Gini in Africa. FDI contribution is
the strongest, with a percentage point increase in the ve-
year average stock of FDI in GDP increasing Gini by 4.8
points over the ve-year period. The African Development
Bank (AfDB, 2015) projects that private external nancial
ows will play a major role in nancing the post-2015
Development Agenda in Africa. Africa’s share of global FDI
now stands at 5.7%. However, while FDI has traditionally
been attracted by the extractive sector, it is now
increasingly shifting to consumer-oriented industries (IMF,
2014). This is also congruent with the increasing share
of services in Africa’s economic structure. FDI therefore
ows to more skills- and capital-intensive sectors that
may contribute to raising the skills premium and therefore
signicantly increasing inequality. If policy efforts cannot
attract FDI in labour-intensive sectors like agriculture, they
can partly focus on preparing the poor to participate more
in the sectors that attract FDI by addressing the human
capital spread, with the support and consequent supply of
medium- to higher-skill workers in order to reduce skills
premium, and also spread educational human capital more
evenly across the economy.
Equally, improving the terms of trade, especially
following the commodity price boom of the last decade,
has rather been disequalising. A similar situation is
observed with real effective exchange rates. The inference
is that all the factors that facilitate the ow of external
resources into Africa (except for remittances, which have
a negative but insignicant effect on inequality) also
contribute in raising inequality. This is primarily due to the
fact that external resources like FDI go to sectors that do
not benet those at the bottom of the distribution. Dealing
with this requires policy to take measures to incentivise
external resource ows into low-skill labour-intensive
sectors and/or to improve skills to move labour to skill-
intensive sectors of the economy.
Inequality between the top and the bottom segments
The lag values of extreme inequality also contribute to
inequality reduction. The result of the values for the
ve-year period is about 0.4 percentage points lower
extreme inequality. GDP growth also signicantly tends
to reduce this kind of inequality over time. The human
capital distribution remains the key factor behind high
extreme inequality, accounting for up to 10 points over the
ve-year period, or about 2 points per year. Government
expenditure in education also remains a signicant
inequality-reducing agent, with 1% extra spending of GDP
in education reducing the gap between the top and bottom
segments of income distribution by 0.78 points.
The dependency rate contributes to 0.16 points higher
extreme inequality in the ve-year period. However, as
with the Gini, when we control for educational spending,
both coefcients of growth and the dependency ratio
become insignicant. The arguments about government
expenditures on education in the case of Gini coefcients
also apply here.
Urbanisation and natural resources help fuel extreme
inequality. Growth of value added in services, manufacturing
and agriculture all contribute in curbing extreme inequality,
by 0.25, 0.25 and 0.18 points, respectively. This suggests
that efforts to improve the distribution of human capital
should be accompanied by economic structural changes
that give weight to high-value manufacturing sectors with
linkages to agriculture and services.
An additional internal factor that contributes is
institutionalised democracy. This variable measures the
extent of the presence of institutions that facilitate the
expression of preferences of citizens, of constraints to
the exercise of executive power, and of guaranteed civil
liberties. It is measured on a scale of 0 to 10 points and a
1-point improvement reduces the gap between the top and
bottom segments of the distribution by 0.05 points.
FDI and terms of trade contribute signicantly in raising
extreme inequality in Africa. A percentage point increase
in the ve-year average stock of FDI in GDP increases
extreme inequality by 1.6 points over the ve-year
period. Equally, improvements in Africa’s terms of trade
have enhanced extreme inequality, contributing by 0.24
points. Remittances have the potential to reduce extreme
inequality, but not signicantly.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 23
24 Development Progress Research Report
Table 7: Two-stage systems GMM estimates for between middle and bottom, and within bottom
Between middle-bottom Within bottom
1 2 3 4 1 2 3 4
Lagged inequality -0.258***
(0.079)
-0.143**
(0.063)
-0.375***
(0.046)
-0.370**
(0.080)
-0.164
(0.159)
-0.170
(0.159)
-0.491***
(0.040)
0.613
(0.565)
Value added in
agriculture
0.010
(0.007)
0.004
(0.003)
Value added in
industry
-0.029***
(0.009)
-0.023***
(0.0020
Value added in
manufacturing
0.002
(0.0050
0.008***
(0.001)
Value added in
Services
-0.038***
(0.009)
-0.022***
(0.003)
GDP growth -0.041**
(0.016)
-0.025**
(0.011)
-0.022
(0.021)
-0.018***
(0.006)
-0.009
(0.009)
-0.023*
(0.012)
Dependency rate 0.011**
(0.007)
0.002
(0.005)
0.001
(0.003)
0.003
(0.003)
0.001
(0.004)
0.000
(0.001)
Government
educational
spending
-0.089***
(0.025)
-0.029
(0.026)
Gov. health
spending
-0.022
(0.057)
0.002
(0.021)
Human capital
distribution
-0.416
(0.386)
-0.653***
(0.111)
-0.398**
(0.146)
-0.361***
(0.022)
Share of urban
population
0.032
(0.019)
0.010
(0.009)
0.011*
(0.007)
0.003
(0.006)
Natural resource
rent
0.008**
(0.003)
0.005***
(0.002)
0.008*
(0.005)
0.004***
(0.001)
0.002
(0.001)
0.005***
(0.001)
Institutionalised
democracy
-0.001
(0.002)
-0.003**
(0.0010
-0.002
(0.449)
-0.002***
(0.001)
-0.002***
(0.001)
-0.001
(0.001)
Foreign direct
investment
0.034
(0.0760
0.053
(0.033)
Remittances 0.043***
(0.011)
0.008*
(0.005)
Terms of trade 0.000
(0.001)
0.001
(0.002)
Real effective
exchange rates
0.002
(0.002)
0.001
(0.001)
Constant 1.300
(1.016)
2.884***
(0.620)
3.765***
(0.487)
2.688***
(0.445)
1.504***
(0.444)
1.940***
(0.617)
2.881***
(o.157)
0.235
(1.107)
p-value Sargan 0.1417 0.9690 0.5886 0.8749 0.4847 0.5908 0.5661 0.9970
Note: the dependent variable is ve-year average of inequality within the respective inequality category. All regressions include country and
period dummies. Sargan denote p-values of Sargan test for over identifying restrictions. *, **, *** denote signicance at 10%, 5% and 1% levels
respectively; standard errors in parentheses.
Inequality between the bottom and middle segments
The lag values remain a signicant contributor to reducing
future inequality in the bottom-middle segment, accounting
for about 0.3 points. GDP growth reduces the gap
between the poor and the middle class. Here, the sign of
the coefcient of human capital distribution reverses such
that unequal distribution of educational human capital
tends to reduce the inequality between the bottom and
middle segments of the income distribution. This could
be explained by the possible special relationship that may
exist between the poor and the middle class. In developing
countries, the middle class is the driver of small and
medium enterprises, new patterns of demand and effective
reforms. They are therefore also likely to be the greatest
employers of the poor (Ngepah, 2015). As such, a higher
proportion of people with primary and no education might
mean more labour for middle-class investment and small
and medium-size enterprises.
Government expenditure in education nonetheless
remains a signicant agent in reducing inequality in
this category. The dependency rate contributes to 0.01
points higher inequality in the ve-year period. Natural
resource rents also weakly enhance inequality, while
institutionalised democracy weakly reduces this type of
inequality. The growth of value added in services and
industry contributes in curbing extreme inequality, by
0.038 and 0.029 points respectively.
Among the external factors, only remittances play a
signicant role, and it is to enhance inequality. An increase
by a percentage point in the share of remittances in GDP
increases the gap between the poor and the middle class
by 0.043 points. Cornia (2014) suggests that only the
middle class are able to nance the high cost of migration,
hence the ow of remittances accrue to middle-income
groups. This seems to be the case also in African countries
as the inequality-reducing effects of remittances are not
signicant in models of within-bottom segments and the
gap between the rich and the poor.
Within-middle and bottom segments of the
distribution
Apart from the lag values of inequality and the coefcients
of growth, the magnitudes of the determinants of
inequality within the middle and poor segments of income
distribution are weak. Lag values of inequality tends to
reduce current ve-year average inequality by about 0.6
for within-middle-class inequality and 0.5 for within-poor
inequality. The human capital distribution tends to reduce
inequality within the poor, but enhances inequality within
middle class. A point increase in the ratio of those with
primary-to-no education relative to those with secondary-
to-tertiary education would reduce inequality among the
poor by 0.4 points, and increase inequality among the
middle class by 0.3 points. Other factors that weakly
enhance within-poor inequality are natural resource rents,
and urbanisation. Institutional democracy and growth in
industry and services tend to reduce inequality within poor.
Growth in agricultural value added enhances middle-class
inequality while manufacturing and services sectors reduce
it, but the magnitudes of the coefcients are very close to
zero. Urbanisation and institutional democracy have weak
inequality-enhancing effects among the middle class. No
external factor signicantly affects inequality within poor.
Remittances tend to play an equalising role among the
middle class, a role that is consistent with the fact that the
middle class are the main beneciary of remittances.
Gender inequality
Gender inequality here is measured as the gap between
male and female labour force participation. The lag values
of gender inequality tend to strongly and signicantly
reinforce current inequality. One point of higher inequality
in the current ve-year period would translate into 1.09
more gender inequality in the next ve years. This may
suggest a strong culture of gender discrimination in
the labour market in African societies, suggesting more
advocacy around gender inequality.
The channel of transmission seems to be human
capital distribution and the dependency ratio. In models
with lagged values of gender inequality, the dependency
rate is weak and hardly signicant, while human capital
distribution shows a signicant and negative effect. When
we estimate models without lag values of gender inequality,
the coefcients of dependency rate become stronger
and more signicantly positive, and the coefcients of
human capital distribution also become strongly positive.
It can therefore be said that a high dependency rate
places a higher burden on women, which in turn affects
their labour force participation. The results of human
capital distribution may suggest that high inequality in
human capital may favour males and hence lead to less
participation of females in the labour market relative to
males.
Africa’s drive to achieve MDG2 of universal primary
education and other gender-informed policies have helped
to close the gender gap in primary education and literacy
rates of women and girls. Female participation in political
and societal processes has also improved with a higher
share of women in the legislature. However, the MDG
Report 2015 (UNECA, 2015) highlights the very modest
advances in the share of women in non-agricultural sector
wage employment since 1990. Consequently, growth in
manufacturing signicantly enhances gender inequality,
while growth in agriculture and industry reduces such
inequality. Services sector growth shows some very weak
inequality-reducing impacts. Although terms of trade seem
to drive gender inequality signicantly, its coefcient is
very weak. None of the other external conditions seem to
have any signicant effects on gender inequality. Gender
inequality is therefore driven by internal factors, which are
mainly structural and cultural.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 25
26 Development Progress Research Report
Table 8: Two-stage systems GMM estimates for within-middle segment and gender
Within middle class Gender
12341234
Lagged
inequality
-0.441***
(0.094)
-0.254***
(0.070)
-0.590***
(0.133)
0.458***
(0.107)
1.093***
(0.021)
1.010***
(0.042)
0.738***
(0.134)
0.838***
(0.141)
Value added in
agriculture
0.004***
(0.001)
-0.004***
(0.001)
Value added in
industry
0.000
(0.004)
-0.004***
(0.001)
Value added in
manufacturing
-0.005*
(0.003)
0.002***
(0.001)
Value added in
Services
-0.006**
(0.003)
-0.002*
(0.001)
GDP growth -0.005***
(0.002)
-0.007**
(0.003)
-0.020**
(0.009)
-0.002***
(0.000)
-0.004**
(0.001)
-0.010*
(0.006)
Dependency
rate
0.003***
(0.000)
0.000
(0.001)
0.001
(0.001)
0.001*
(0.000)
0.001*
(0.001)
-0.001*
(0.001)
Government
educational
spending
-0.008
(0.013)
-0.014**
(0.005)
Gov. health
spending
0.017
(0.015)
0.004
(0.004)
Human capital
distribution
0.157**
(0.058)
0.308***
(0.031)
-0.043***
(0.006)
-0.053*
(0.034)
-0.179**
(0.082)
Share of urban
population
0.008**
(0.003)
0.003*
(0.001)
0.002***
(0.000)
0.001*
(0.001)
-0.002**
(0.001)
Natural
resource rent
0.001**
(0.000)
0.001
(0.004)
0.000
(0.001)
0.001***
(0.000)
0.001**
(0.000)
0.002***
(0.000)
Institutionalised
democracy
0.002**
(0.001)
0.000
(0.000)
0.004***
(0.001)
0.001***
(0.000)
0.001***
(0.000)
0.001*
(0.001)
Foreign direct
investment
0.024
(0.024)
0.017
(0.015)
Remittances -0.035**
(0.012)
0.004
(0.012)
Terms of trade 0.003**
(0.001)
0.001*
(0.001)
Real effective
exchange rates
0.002
(0.002)
-0.004
(0.006)
Constant 0.000
(0.000)
Government
educational
spending
1.608***
(0.192)
1.721***
(0.209)
2.295***
(0.252)
0.716
(0.783)
-0.123***
(0.034)
0.111
(0.086)
0.389*
(0.214)
0.914***
(0.267)
p-value Sargan 0.2742 0.6154 0.1458 0.9929 0.3219 0.6699 0.8585 0.9912
Note: the dependent variable is ve-year average of inequality within the respective inequality category. All regressions include country and
period dummies. Sargan denote p-values of Sargan test for over identifying restrictions. *, **, *** denote signicance at 10%, 5% and 1% levels
respectively; standard errors in parentheses.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 27
The signature idea that makes the SDG agenda
theoretically more inclusive than its predecessor is that of
‘leaving no one behind’. Its nobility lies in the commitment
that no goal should be considered achieved unless it is
achieved for everyone. However, the exact meaning of
leave no one behind has to be established together with
the development of approaches for achieving the respective
goals. We therefore briey examine what leaving no
one behind would mean for Africa and in the context
of the goals of poverty eradication, economic growth
enhancement and inequality reduction examined in this
research. For this purpose, we rst draw a number of
corollaries based on the ndings of this work.
First, the socio-economic distance between individuals at
the bottom quintile of welfare distribution and the rest of
the society matters greatly in whether or not development
will leave many behind in Africa. Economic growth that
leads to more people at the bottom of the distribution is
neither sustainable nor inclusive. Polarisation between the
bottom and the other segments of the welfare distribution
is bad for both growth and poverty reduction, which
means that if anyone is left behind in this context, then the
SDGs will not be achieved in the rst place. Therefore, the
goals are either inclusive or not achievable.
The second element of leave no one behind is the gender
dimension. Tackling the structural and cultural impediments
that continue to leave women behind from participation
in gainful employment, especially in the non-agricultural
sector, is a key factor in ensuring that no woman is left
behind in the post-2015 development process.
Third, spatial disparities mean that progress in the SDGs
in Africa would be uneven. The signicant differences
in experience with the MDGs and in terms of growth,
inequality and poverty suggest that some geographic areas
of Africa risk being left behind. These areas, in the context of
the goals in focus, are those that experience high inequality,
medium to low and negative growth, and high poverty.
The fourth aspect of leaving no one behind in this
context is with respect to data. Currently, there are still data
challenges for robust study of the marginalised population,
mainly because they are not included sufciently in
data compared to those in the developed world and the
developing world of other regions like Latin America.
Overall, the key segments of the African population that
are most at risk of being left behind are those at the very
bottom of the income distribution spectrum. These are
mainly women, children and other vulnerable groups such
as internally and externally displaced people, especially
the increasing share of stateless people in the African
population. A key challenge is state fragility, where there is
weak capacity to account for and include these groups of
people in the mainstream production processes.
5. Implications for ‘leaving
no one behind’ in Africa
28 Development Progress Research Report
Our ndings have implications for policies that could
address growth and poverty eradication foregone due
to high inequality. Most of the countries that performed
dismally in terms of poverty reduction also had high
inequality and a relatively low share of income accruing to
the poorest 10%. In line with leaving no one behind, the
research classied different inequalities along the income
distribution spectrum and by gender according to their
impacts on economic growth.
There are good and bad inequalities with respect to
their effects on economic growth. All inequalities between
the middle and bottom and between the bottom and top
of the income distribution spectrum are bad for economic
growth in Africa. Gender inequality (favouring males) in
labour market participation signicantly reduces growth.
Policy efforts that target the reduction of all the bad types
of inequality by one point each would enhance growth
by up to three percentage points in the next ve years.
If policy efforts were to target these inequalities in a
way that the fruits begin to be reaped immediately, then
within the rst 1000 days of the SDGs implementation,
Africa would achieve on average an extra 1.58 percentage
points in economic growth. This would also translate into
stronger poverty reduction than before, given the role that
inequality plays in determining how pro-poor growth is.
The main factor contributing to high inequality in
Africa (especially the kinds of inequality that reduce
growth) is human capital distribution, or the proportion
of people with primary education and less, to those
with secondary education and above. Human capital
distribution accounts for up to 2.5 Gini points per year
in Africa and contributes 2 points to inequality between
the rich and the poor per year. Government education
spending helps to curb the bad types of inequality, but does
not go far enough, perhaps because of the small size and
structure of the spending, which is more skewed towards
primary enrolment. Other factors are the dependency rate,
urbanisation and natural resource rents, which all help to
fuel extreme inequality. FDI and terms of trade contribute
signicantly in raising extreme inequality in Africa. The
structure of the economy matters for inequality. Growth of
value added in services, manufacturing and agriculture all
contribute in curbing extreme inequality. Institutionalised
democracy, which measures the extent of the presence of
institutions that facilitate the expression of preferences
of citizens, constraints to the exercise of executive power
and guaranteed civil liberties show some effect in reducing
inequality. Remittances have the potential to reduce
extreme inequality, but not signicantly.
In proposing policy actions based on the ndings in this
work, we make a distinction between immediate actions (within
1000 days) and other gradual, incremental and longer-term
actions. We also explore and propose windows of opportunity.
6.1 Statistics that leave no one behind
Immediate action must involve setting an agenda for
reliable statistical development in Africa, to include
above all the most marginalised and those at greatest risk
of being left behind. Robust studies of this category of
population in Africa are still a major challenge due to a
lack of data. Such an agenda should build on the African
Data Consensus by following up with concrete action
plans in line with its vision. The main recommendation
here is that the quest for statistics production should be
driven by the needs reected in the long-term development
agenda, including the SDGs. Moreover, a partnership
between the users of data and the producers of statistics
in most African countries is needed to ensure effective
access to and productive use of data. Finally, other data-
generating institutions, such as the taxation departments,
should develop relevant frameworks with which to give
researchers access to data that could usefully complement
existing household surveys.
6.2 Economic growth and sectoral policies
Domestic policy choices that have led to both socio-
political stability and improvements in the business climate
in a number of the African countries in the past decade and
a half have underpinned signicant growth. For a number
of countries, growth was based on commodity exports
following high demand and high prices in emerging
economies like China.
High inequality has prevented growth from reaching
the poorest segments of African population. The FDI
increases following the improvements in business climate
and the gains in terms of trade due to favourable external
commodity demand and prices have rather exacerbated
the bad types of inequality identied in this work. Because
high trade costs might not allow small businesses (that
support the middle class and the poor) to trade with
the usual trading partners of Africa, such as Europe and
China, the alternative is cross-border and intra-African
6. Priority actions for the
first 1000 days
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 29
trade. However, high trade barriers, which are mostly
policy-related, hinder this development and contribute to
spatial inequality in Africa. Reducing cross-border and
inter-regional tariff and non-tariff trade costs is a matter
of political will and should be subject to immediate action
through high-level lobbying. Short-term policies could aim
to reduce man-made barriers, while following through
with cross-border and inter-regional infrastructure linkages
in the medium to long terms. Policies in this line can also
aim at opening enclave regions and countries particularly
through infrastructure networks. This will help curb the
contribution of spatial inequality in Africa’s inequality.
Although Africa’s share of global FDI is on the rise,
increasing by 9% between 2012 and 2013 (AfDB, 2015),
the sectors that increasingly attract the FDI are extractives,
infrastructure and consumer-oriented industries. Coupled
with the effects of terms of trade, production in these
sectors is generally capital-intensive and labour is skilled.
Sectoral policies geared towards developing value
chains in the sectors that tend to reduce lower-end and
extreme inequalities should be the priority, alongside
complementary medium- to long-term skills development
policies. Policies for investment attraction have to be
targeted in terms of incentivising investments that do
not crowd out small businesses in the manufacturing,
agriculture and services. The quest for improving the ease
of doing business should emphasise local and regional
investment as much as the attraction of FDI. Given the
current search for an industrialisation path and the
crafting of industrial policies in Africa, this is an opportune
moment for industrial policies to be based on value chains
in the sectors that reduce the bad types of inequality.
Therefore, this research calls for the development of
industrial policies that hinge heavily on agricultural value
chains with strong linkages to the services sector. Good
governance of natural resources (especially ensuring
transparency and accountability) has to be ensured for
equitable access to its benets as natural resource rents
appear to raise inequality. Only then will an extractive-
based industrial strategy prove benecial.
Migrant remittances being another source of nancial
resources for Africa, it is worth examining here also.
Although migrant remittances do not benet those at the
bottom of the distribution signicantly, it nevertheless
remains a signicant source of resources for development.
Currently, remittances tend to favour the middle class,
due to the fact that the poor cannot bear the related cost
of migration and remittances ows. Continuous efforts to
lobby for signicant reduction of the cost and barriers to
the ow of remittances in migrant-receiving countries have
to be intensied.
6.3 Educational policy and human capital
distribution
Human capital distribution policies (especially educational) are
most important, according to the ndings here. Well-targeted
government educational spending seems to help in reducing
the bad types of inequality. However, inequality in human
capital distribution causes far more harm, with effects far
outweighing the positive impacts of government expenditure.
A complementary policy for attracting FDI into more
low-skill labour-absorbing sectors would address the
problem of a human capital distribution in which there
are far more people with primary and no education in
the economy compared to those with secondary and
higher education. There is evidence that the past efforts
of African countries in achieving MDG 2, universal
primary education, have put a lot of emphasis on basic
education. At the same time, the structural progression in
many countries that underpins investment and growth is
mainly in the medium- to high-skilled sectors. The services
sectors are increasingly becoming the target of FDI in
many African countries. This mismatch has contributed
in exacerbating mid- to lower-end inequality, average
inequality and extreme inequality, which have been proven
to be bad for growth in Africa.
Immediate policies have to target spending beyond
primary education to encompass secondary and post-
secondary education. A systematic investigation and
addressing of very low primary completion rates will
also ensure that there are enough pupils to progress to
secondary and higher education. This points to addressing
issues of quality of education. There is a cycle that has to
be reinforced here in the sense that economic growth has to
be high enough to generate resources for government social
spending, including education. Well-targeted spending that
increases basic educational attainment but also goes far
enough to curb skills concentration will also reduce lower-
to mid-end inequality and extreme inequality, leading to
higher growth for more resources.
Well-targeted educational spending can reduce the
skills imbalance but also, if it focuses on the dependent
youths, partly address the issue of high dependency rate
(which also has signicant bad-inequality-raising effects).
Because of the signicant wealth gradient for the youth
dependency ratio in Africa, high dependency rates place
a disproportionately higher burden on the poor. While
this can be partly addressed with government social, and
especially educational, spending, labour market policies in
the short term that help absorb the unskilled and low-skilled
population are important. These can be linked to public
works and infrastructure development programmes, which
have proven what they can do in countries like South Africa.
30 Development Progress Research Report
6.4 Policies to reduce gender inequality
Gender inequality is somewhat distinctive in that it tends
to reinforce itself over time. This implies that immediate
policies will have to start at the root of the structural and
cultural causes of gender discrimination in the labour
market in most African societies. Without a big shift
in mind-sets concerning female participation in wage
employment in the non-agricultural sector, other efforts
may not be sustainable. Advocacy and laws on equal
opportunity in the labour market should accompany the
progress made so far in including women in the political
processes in most African countries.
Other major policies concern human capital
distribution and the dependency ratio. The burden that a
high dependency rate places on the poor may be higher
for women. This in turn affects female labour force
participation. Educational human capital distribution in
Africa still largely favours males and hence leads to less
participation of females in the labour market relative to
men. Removing the constraints on female access to the
levels of education linked to higher future wages, such as
technical and vocational education, is to be encouraged.
This is evidenced in the fact that manufacturing growth
reinforces the gap in labour force participation of males
and females. Africa’s drive to achieve universal primary
education and other gender-informed policies has helped
to close the gender gap in primary education and improve
literacy rates of women and girls. However, the fact that
women’s participation in non-agricultural-sector wage
employment since 1990 has remained lower implies that
the gains in gender parity in basic education may not curb
gender inequality in the labour market. The government
spending policy shifts proposed above should be
particularly skewed in favour of female skills development.
External resources targeting the SDGs should also
contribute in reducing the gender skills gap.
6.5 Proposed framework for action
Following the ndings of the analyses above, we now try to
identify key partnership levels, possible stakeholders, policy
focal points and key objectives to pursue in addressing the
issues related to SDG goals 1, 5, 8 and 10. The proposed
framework is outlined in Table 9.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 31
Table 9: A framework for action
Partnership level Possible stakeholders Key policy aspects to focus on Main objectives
National Government
Academia
Grassroots civil society
organisations (CSOs)
Other CSOs
Business
Addressing the problem of
human capital distribution
Harmonisation of local FDI
attraction incentives to include small,
medium and micro-sized enterprises
(SMMEs)
Access to labour market
Identification and inclusion of
the excluded population
Develop a framework with
effective inclusion of the most
vulnerable in national surveys
Develop an action plan to ensure
that the key dimensions of the SDG
indicators and factors that influence
them are adequately covered in
statistics
Develop a targeting criteria for
beneficiaries of social assistance and
educational spending
Review FDI attraction incentives
in comparison with SME development
incentives
Governments should tailor FDI
incentive packages into the pro-poor
value chains of the local economy
Build multi-stakeholder
coalitions to help identify key
constraints of women’s access to
labour markets and put in place a
solution framework to address them
in the medium to long term
Businesses should lead and
develop a framework for addressing
labour demand-side hindrances to
effective women’s participation in the
labour market
Enshrine the key SDGs into the
national institutional framework
Regional and continental Regional integration entities
African Union (AU) organs
Member states
Emerging economies
Academia
Issues of regional integration (RI)
Refugees and stateless person
Resource mobilisation
Educational collaboration at
primary and secondary levels
Enshrine the key SDGs into
regional and continental agreements
and frameworks
Agree on a framework for
identification and inclusion of
refugees and stateless persons into
the continental development process
Escalate the educational
and human capacity development
burden of such categories of people
beyond individual states to effective
continental and regional bodies
Enter into a statistical pact
to measure and include the SDG
attributes of these categories of
people in the broader developmental
discussion and agenda
Identify constraints and develop
a framework to address issues of RI
and especially cross-border trade by
women and smallholder businesses
Mobilise resources and
collaborate in education to support
fragile states, refugees and stateless
persons
32 Development Progress Research Report
Partnership level Possible stakeholders Key policy aspects to focus on Main objectives
Global UN organs
International nongovernmental
organisations (INGOs)
International development
partners
Global multinationals
Developed countries
Academia
Resource mobilisation
Tackling the issues of refugees
and stateless persons
Cooperation for quality
improvement in primary and
secondary education
Deal decisively with the status of
stateless persons
Multinationals be brought to
the table in staking resources for
development of the most vulnerable
groups and fragile states
Multinationals should play a
bigger role in enabling female access
to the labour market
INGO activities in education and
gender should extend significantly to
secondary education
International cooperation in
primary and secondary school training
and resourcing
Build statistical capacity for
weak and fragile states
Table 9: A framework for action (continued)
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 33
This paper has sought to help in the search for
implementation strategies for the SDGs. It focuses directly
on goal 10.1 (relating to reduction of income inequality)
and goal 8.1 (relating to economic growth in the LDCs). It
also focuses partly on goal 5 of achieving gender equality
and indirectly on goal 1.1 of poverty eradication.
The research rst explored progress and limitations in
the MDGs relating to the focus goals. It followed up with
rigorous data analysis to rst determine the impact of
different inequalities on economic growth and then examine
the underlying causes of those inequalities that impact
economic growth negatively. The geographic area of focus is
Africa. The following are key policy outcomes for the SDGs.
Policy efforts will yield more fruit in terms of economic
growth if they focus on the following types of inequalities:
inequalities from the middle to the bottom of the income
distribution spectrum; inequality between the bottom and
the top segments of the income distribution spectrum;
average inequality; and gender inequality. It will be useful
to create a dashboard in each African country to monitor
the evolution of each of these inequalities.
Policy efforts that target the reduction of these
inequalities by one point each would enhance growth by up
to three percentage point in the next ve years. Key policy
proposals are to:
Develop and strengthen the statistical capacity of
African countries to include the most marginalised and
those at greatest risk of being left behind by taking
concrete actions as a follow-up to the recently adopted
Africa Data Consensus.
Lobby for action to reduce cross-border and inter-
regional trade barriers in Africa.
Encourage policies for attracting investment that does
not crowd out small businesses in manufacturing,
agriculture and services. Policies should target segments
of value chains in industries that complement rather
than compete with small businesses. They should seek
to enhance the capacity of small, local players to exploit
synergies that arise from FDI inows.
Given the current search for an industrialisation path
and the crafting of industrial policies in Africa, this
is an opportune moment for industrial policies to be
based on value chains in the sectors that reduce the bad
types of inequalities. Industrialisation that builds on
the agricultural value chain, with strong linkages to the
services sector – encouraging value addition in agricultural
products and linking them to supermarket retail services,
for example – would be useful in this regard.
Good governance of natural resources (ensuring
transparency and accountability) has to be ensured
for equitable access to its benets. Only then will an
extractive-based industrial strategy prove benecial.
Government educational spending that targets the
poor and females will help in reducing the bad types
of inequality. Such policies have to particularly target
spending beyond primary education to encompass
secondary and post-secondary. This will ensure that it
both increases basic educational attainment but also
goes far enough to curb skills concentration, which will
help to reduce lower-to-mid-end inequality and extreme
inequality, leading to higher growth for more resources.
Well-targeted educational spending may reduce the skills
imbalance but also, if it focuses on the dependent youths,
partly address the issue of a high dependency rate.
A systematic investigation of very low primary completion
rates should seek to ensure that there are enough pupils to
progress to secondary and higher education.
While dependency can be partly addressed with
government social, and particularly educational
spending, labour market policies in the short term that
help in absorbing the unskilled and low-skill population
are important. These can be linked to public works
and infrastructure development programmes that have
shown they can work in countries like South Africa.
A complementary policy should be developed to attract
FDI into more low-skill labour-absorbing sectors to
address the problem of human capital distribution. This
is the case with investment attraction in agriculture, but
careful management of land tenure and the problems
of land grabbing will ensure that inequality is not
exacerbated.
Immediate policies to reduce gender inequality will have
to start from the root, by tackling the structural and
cultural causes of gender discrimination in the labour
market in most African societies. For instance, gender-
based job restrictions, the removal of impediments to
access to credits and subsequent review and removal of all
legal obstacles that hinder women’s progress, such as those
relating to property rights (and especially land rights).
Without a big shift in mind-sets concerning
women’s participation in wage employment in
the non-agricultural sector, other efforts may not
be sustainable. This mind-set shift has to be done
through a combination of lobbying and advocacy,
and enforcement of equality laws regarding access to
the labour market (such as employment equity laws).
Advocacy and laws for equal opportunity in the labour
market should accompany the progress made so far
in including women in the political processes in most
African countries.
7. Concluding remarks
34 Development Progress Research Report
The government spending policy shifts proposed
above should be particularly skewed in favour of
female skills development. Allocation of quotas for
certain categories of the particularly vulnerable female
population may be accompanied by the removal of non-
monetary constraints to access to education by girls.
Such non-monetary constraints include addressing the
disproportionate burden of household responsibilities
on girls (e.g. water and fuel-wood collection, the
care burden); addressing teenage pregnancy through
advocacy and appropriate reproductive health
assistance; the development and enforcement of legal
measures against child marriages and child sex abuse.
External resources targeting the SDGs should also
contribute in reducing the gender skills gap. The allocation
of development resources specically towards the
education of females and assistance with easing other non-
monetary constraints would be ways to tackle the skills
gap.
In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 35
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In search of bad inequalities for grow th and appropriate policy choices for their reduct ion in Africa 37
Appendix
Table 10: Variables, meaning and source
Variable Meaning Source
Between-group inequality
Rich-poor Ratio of incomes accruing to 5th and 1st quintiles and 10th decile and 1st quintile WDI
Rich-middleclass Ratio of 10th decile to 3rd quintile incomes WDI
Middleclass-poor Ratio of 3rd to 1st quintiles and 3rd quintile to 1st decile incomes WDI
Within-group inequality
Poor Ratio of 2nd quintile to 1st decile incomes WDI
Middleclass Ratio of 4th quintile to 3rd quintile incomes WDI
Rich Ratio of 5th quintile to 10th decile and 5th to 4th quintiles incomes WDI
Other variables
Initial income Real per capita GDP at the beginning of the period WDI
Growth Per capita GDP growth WDI
Human capital Lower secondary completion rate WDI
Investment Share of gross fixed capital formation in GDP WDI
Terms of trade International terms of trade, goods and services WDI
Remittances/GDP Workers remittances/GDP UNCTAD
FDI/GDP Net FDI flow/GDP UNCTAD
GDPPC growth Growth rate of GDP per capita WDI
Man. value-added growth Growth in manufacturing value added (VA)
Services VA growth Growth in services VA
Agricultural VA growth Growth in agricultural VA
Industry VA growth Growth in industry VA, net manufacturing
Resource rents Share of natural resources in GDP
Dependency ratio Ratio of dependents to working population
Labour force participation Labour force participation as a % of total population WDI
Human capital spread People with tertiary and secondary education /people with primary and no
education
Barro and Lee (WDI)
REER Real Effective Exchange rate WDI
Institutionalise democracy Captures the presence of institutions and procedures through which citizens
can express effective preferences about alternative policies and leaders;
the existence of institutionalised constraints on the exercise of power by the
executive; and the guarantee of civil liberties to all citizens in their daily lives
and in acts of political participation.
ADI
Urbanisation Urban population as a % of total population ADI
Gov. soc. spending Total government spending on education, health and social programmes ADI
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This research paper, part of the series ‘Starting Strong:
the first 1000 days of the SDGs’, identifies key actions
toward addressing the unfinished business of the MDGs
and how to reach those who are furthest behind in
relation to the new SDGs.
The ‘Starting Strong’ series is a collaborative partnership
to initiate a wider conversation around priority actions for
the first three years of the SDGs – just over 1000 days –
with relevant stakeholders with a regional focus.
Professor Nicholas Ngepah (PhD) is affiliated with the
University of Johannesburg.
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... One of the main channels through which inequality poses a drag on poverty reduction is its growth-reducing effects. Although various mechanisms through which inequality affects growth have been extensively studied both globally and regionally (Bourguignon 2004;Voitchovsky 2005;Cingano 2014;Ngepah 2016), research on its effect through total factor productivity is still wanting. ...
... Government policies aimed at wealth redistribution from the rich to the abjectly poor may reduce the necessity to borrow and allow the poor to undertake projects that have affordable rates of returns. Under this option, redistribution may lead to higher investment, including higher returns on capital (Bourguignon 2004;Ngepah 2016). However, several acknowledged theoretical models (Galor and Zeira 1993;Banerjee and Newman 1993;Galor and Moav 2004) point to information asymmetry as being at the epicentre of credit market constraints. ...
... Controversially, other theories based on 'fairness' considerations indicate that earnings compression improves worker relations, encourages cohesiveness, and is thus beneficial to productivity (Akerlof and Yellen 1990). Ngepah (2016) concurs, by indicating that the extra rewards given for skills and talent may offset innovation gains and productivity due to frustration created in the lower echelons, resulting from perceived unfairness. ...
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... It is estimated that over 40% of the population in the region is poor accounting for half of the world's extreme poor (Ngepah, 2016) 1. Despite robust growth in Gross Domestic Product (GDP), averaging 5% over the last decade, poverty in Sub-Saharan Africa has remained unacceptably high at above 40%. ...
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Technical Report
Executive Summary This work investigates the link between formal markets such as supermarkets, and smallholder farmers especially females, across the horticultural value chain in Malawi. The data used was obtained through a survey of farmers, and other players in the value chain. The data was analyzed, and the results revealed significant women marginalization across all dimensions within the horticultural value chain. This study discloses that smallholder women farmers are undermined in decisions involving the choice of crops; what land sizes to own; where to sell their produce; and the use of money. Inequality between men and women was also established by their different capacity endowments. Women of the same status as men, in most instances were disadvantaged regarding value access. In general, smallholder farmers face constraints of various kinds, one of them being market access. One of such markets identified were supermarkets, which were flagged out in this study. Among farmers, there was a general recognition of the benefits associated with supplying to supermarkets. Their desires were however limited by various challenges, which partly, were stringent rules set by supermarkets. Smallholder farmers are of the view that actions by government bodies, NGOs, and supermarkets could help enhance their value generation. The results from this work underscore the importance of policy intervention to correct these existing inequalities. Based on the results, a number of policy proposals are suggested, which can be the basis of designing intervention strategies. This policy levers are as follows: • Policies should include procedures to assist uneducated women attain the level of value generation, similar to those of uneducated men. This could be done by providing technical and managerial assistance where necessary. • Since women with high school education are able to create more value, policies focusing on the education of the girl child need to be reinforced around smallholder farmers. • Although the recent bills have addressed land issue, actions still need to be taken to put the government on its toes to fast tract implementation. Secondly, the recent bills mostly address equality issues, with equity issues being ignored. Government therefore needs to give more advantages to women, due to past discrimination, which will in the long-run resolve issues of equity. • Identify and strengthen existing groups that enhance value, particularly sellers’ group in the case of males and farmers group for women • Autonomy should be given to women with regards to decisions concerning crop selection, land sizes, where to sell crops, and money use. • Given that not so long ago, the government had recognized the need for a shift towards the cultivation of fruits and vegetables, including leafy vegetables (Chadha et al., 2003), It is therefore essential to assist smallholders with measures necessary for the optimum preservation of these crops; and also recommend markets for the quick sales of such produce. • There is need for farmers to be educated on existing markets, their access, and prevailing conditions. • The constraints faced by smallholder farmers with regards to supermarket access should be made known to supermarkets. These constraints include: high transport costs, high supermarket standards, unfavourable methods of payments, and capacity. • Supermarket requirements come from two sources: governments imposed requirements for taxes, and regulatory purposes. Action should target governments so as to exonerate women smallholder framers. The second Source is requirement imposed by supermarkets for their own convenience. Supermarkets have the means to get the right kind of transportation and storage facilities, they can meet the farmers at the point of delivery just as the traders and wholesalers do. • Smallholder farmers need to be made aware of supermarkets’ concerns, which include: transportation conditions, consistency of supply, and the quality of produce. • The government is called upon to fast track the establishment of the agricultural bank, and also consider specific horticulture credit • High wastage cost, incurred by females is an indication of inappropriate farm to market infrastructure. Proper support such as transportation storage and value addition can assist in improving value.
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