Analysis of Income Inequality and Economic Growth in Ethiopia: the Autoregressive Distributed Lag (ARDL) Approach

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.