Inequality and Economic Growth: An Analysis of 8-Panels

Abstract

Purpose: This paper investigates the effects of inequality on economic growth in the world using continental approach.

Design/methodology: Gini Coefficient and Gross Domestic Products (GDP) per capita were used to measure inequality and economic growth respectively. The study conducted a panel data analysis of the relationship between inequality and economic growth. The data span from 1991-2015. Five countries were selected each from seven continents and were also pooled together to constitute a single panel for 35 countries, thus establishing 8 panels. The Hausman test was conducted to determine whether a random or fixed effect model best fit pooled countries analysis or not.

Findings: Findings revealed that for the developing countries, high income inequality retards economic growth while for the developed countries such as Europe countries; the situation seems to be different. European countries as revealed in the findings showed that developed countries have benefited from inequality which has significantly and positively affected their economic growth. The results for Panel II (Asia countries) and Panel III (Europe countries) are in line with the study of Forbes (2000) and Li and Zou (1998) that documented that inequality boosts economic growth. Importantly, we found that inequality positively affects economic growth for Panels/Continents with fixed effect model while inequality negatively affects economic growth for Panels/Continents with random effect model.

Research Limitation: The study did not control for each continent differences. For African countries, weak institutional settings and environment is a key factor contributing to high inequality.

Originality: The paper was able to know the specific effect of inequality on economic growth in each continent in the World. This documents continents that have benefited from inequality and those that inequality has greatly affected their economies negatively.