ABSTRACT
Considering the level of inequality (GINI) and its importance in economic performance and the attainments of human development (HD), this paper examines the role of inequality in the translation of economic growth (GDPG) to HD. The study was conducted using 39 African countries from the period of 1980 to 2015. A change in non-income HD measure (△HD) comprising life expectancy at birth and education with a five-year difference was computed. An average for every five-year period corresponding to the various five-year intervals for the △HD was obtained for GINI and GDPG. The study employed panel data techniques such as random effect (RE), fixed effect (FE) and system generalized method of moments (GMM) in addressing its objectives with emphasis on the system GMM results due to potential endogeneity between the HD measure and economic growth. These estimations were carried out for the human development index (HDI) for comparison purposes. Based on Model 5— which is the main model of the study as it features the interaction between GINI and GDPG, GINIGDPG — RE, FE and system GMM results for the △HD measure find that inequality negatively influenced the translation of economic growth to HD over the period of study. Model 5 of the △HDI result, on the other hand, showed only a significant negative coefficient for the interactive variable, GINIGDPG, under the system GMM results, supporting the results of the △HD measure. Furthermore, given the finding in Africa that inequality inhibits economic growth, coupled with the finding here that economic growth positively influences HD, the study finds a significant adverse impact of inequality on HD.
CHAPTER ONE INTRODUCTION
Africa, after Latin America, is the second most unequal region in the world (Milanovic, 2003; ADB, 2012; Fosu, 2017), as out of the 10 most inequitable countries in the world, 6 of them were from Africa. Specifically, Milanovic (2003) compared Africa with Asia and Latin America in relation to inequality and found an average Gini of 47% for Africa, 35.6% and 50.5% for Asia and Latin America, respectively, supporting the aforementioned statement. Fosu (2010, Social Science Quarterly) finds similar statistics for these regions in relation to inequality. The marked inequality in Africa is also complemented by some geographic differences between urban and rural areas where the poor and the deprived are clustered together (AfDB Market Brief ,2012).
The role that income inequality plays in an economy has received quite a bit of attention, especially in policy circles at the international front. For example, the World Bank Group has accentuated the eradication of extreme poverty and increasing the incomes of the bottom 40% of developing countries as part of their key objectives. The International Monetary Fund (IMF) has also weighed in on the role of inequality as a cause and consequence of economic growth (see, Ostry et al., 2014).
Inequality affects opportunity, education as well as health outcomes and thus the socio- political environment which themselves have an impact on people’s behavior that ultimately affects
economic performance. Evidence worldwide has shown the deleterious effect of high levels of inequality over the past two decades. This effect is shown to influence economic growth, poverty reduction, social unity and public health (Adesina, 2016). With respect to economic growth, Barro (2000) advanced the view that inequality negatively affects economic growth in developing countries. Huang et al (2009) also found that higher inequality is detrimental to growth in non- OECD countries. In the case of poverty, Ali and Thorbecke (2000) found that poverty reduction is more sensitive to inequality than to economic growth in Africa. Thus, reducing inequality has a higher impact on poverty reduction compared to economic growth. Further, it has been estimated that a 1% increment in income levels could result in a 4.3% reduction in poverty in countries with very low levels of inequality or as little as 0.6% reduction in poverty in countries with very high levels of inequality (Ravallion, 2007). In the case of social unity, Wilkinson and Pickett (2010, p. 195) advanced the view that high inequality is “divisive and socially corrosive”, which invariably weakens social cohesion. In the case of public health, Wilkinson (1996) advanced the view that the degree of income inequality in society determines its average health status. That is, the health status of citizens worsens, the wider the gap between the incomes of the rich and poor. All these findings presuppose that reducing inequality is not only helpful toward improving economic performance but also imperative.
Human development (HD) as defined by Amartya Sen— a Nobel laureate who played a very instrumental role in conceptualizing its framework— “is the process of expanding the real freedoms that people enjoy” (Sen, 1999). Similarly, the United Nations Development Program (UNDP) defines HD as the process of widening people’s choices by expanding their capabilities (HDR, 1990, p10). HD’s intellectual precursors could be dated back to the basic needs approach
by the International Labor Organization (ILO), the World Bank and Sen’s Capabilities approach. HD by the UNDP is measured using the composite index, the Human Development Index (HDI). The calculation of the HDI by the UNDP makes use of three basic indicators which are literacy, life expectancy at birth and the standard of living.
High economic growth rate is a desired objective as it comes with benefits which in due course lead to an enhancement in HD (see, Sen, 2000; Ranis, 2004). Specifically, Sen (1999) describes economic growth as a means for improving and expanding the substantive freedoms valued by people. These freedoms, he intimated, are strongly associated with enhancement in the quality of life, such as greater chances for people to be in good health, eat healthier and have longer life span. Fosu (2004) further stresses the importance of economic growth in the enhancement of HD in the long run. However, this link is not automatic in the short and medium run as found in the studies of Baster (1972); Adelman (1975); Hicks & Streeten (1979); Morris (1979); Ramirez et al (1998).
Although strong economic growth can promote development, not every economic growth amounts to increasing levels of development as posited by the HD report (HDR, 1996). Similar rates of growth can have disparate effects on poverty, employment opportunities of the poor and extensive indicators of HD. The extent to which economic growth reduces poverty and to a large extent enhances the social indicators of HD depends on the degree to which the poor partake in the growth process and share in its proceeds — inclusivity of growth. Thus, both the pace and the pattern of growth are vital in reducing poverty and improving the social indicators of HD.
