Abstract:
The main objective of this study is to analyses the impact of income inequality on economic
growth in Ethiopia during the period 1991 to 2022. The methodology used in the study was
individual variables were all subjected to both the ADF and PP unit root tests: and that, the
existence of mixed order of integration has been confirmed with both approaches.
Autoregressive Distribution Lag (ARDL) Approach model in order to investigate the long run
and short run relation between the dependent variable (real GDP per capita) and
explanatory variable (income inequality). Thus in applying the Bound test, the result confirm
that there is a stable long run relationship between real GDP per capita, and income
inequality index (GINI). In relation to this, the empirical results reveal that income
inequality, gross capital formation, education, manufacturing and agriculture have a positive
impact on economic growth in long run. Moreover, in the short run error correction model
was statistically significant with negative sign which implies that the error correction
process converges monotonically to the equilibrium path relatively quickly and such high
significance of ECM(-1) is further a proof of the existence of established stable long run
relationship between the variables. In order to determine the shape of the Kuznets curve, a
quadratic function was estimated, and the results depict that the Kuznets inverted –U curve
does not held for Ethiopia. Furthermore, the causality test result recognizes that there is a
short run and long run causality between real GDP per capita and income inequality, and
for the direction of causality, it has confirmed that there is a unidirectional movement which
runs from income inequality to real GDP per capita. To enhance the economic growth of the
country, the government should address the dependence on rain-fed agriculture, improve the
productivity of factors of production, encourage foreign investment, boost manufacturing
industry and generate revenue from different sources that should be improved the welfare of
people in the country.
