Income inequality, economic growth, and political instability in sub-Saharan Africa

Abstract

There is much disagreement about the effect that income distribution has on economic growth. This study uses high-quality household-expenditure-based data to estimate this effect for a sample of sub-Saharan African states. It uses an ordinary least squares (OLS) technique to estimate the effects of income inequality in a standard reduced-form growth regression for a set of cross-section data for the period 1986–97. It finds that higher levels of inequality seem to impinge negatively on growth prospects over the medium term, but that this effect is weak and that the finding of a negative relationship is not robust. It then tests whether this negative consequence of inequality for growth is attributable to inequality's effect on political instability, as the literature suggests. The evidence indicates that high levels of inequality do not affect political instability in any statistically significant manner for the countries in the sample, but that they do negatively affect the risk perceptions of potential investors, and so may contribute to lower growth prospects.