Financial development, government expenditure and income inequality in Sub-Saharan Africa

Abstract

The main purpose of this study is to assess the effects of financial development and government expenditure on income inequality in Sub-Saharan Africa. It specifically assesses the interactive effect of financial development and government expenditure on income inequality. The study compares the effects of financial development, government expenditure on income inequality across sub-regional groups in the region. It covers 25 African countries and analyses panel data spanning between the period 2000 to 2016 by employing two different estimation techniques namely Fixed and Random Effects Models. The findings reveal that an increase in financial development increases income inequality. On the contrary, an increase in government expenditure lowers income inequality. The interactive effect indicates that given government expenditure, an increase in financial development highly increases income inequality as compared to the individual effect of financial development. Finally, financial development shows a positive and significant relationship with income inequality across sub-regions, except for Central Africa that has an insignificant relationship. On the other hand, government expenditure also shows a negative relationship with income inequality across sub-regions except for Eastern Africa. The study recommends that governments of sub-Saharan Africa should complement financial development reforms that yield disproportionately greater gains for the rich than the poor with redistributive policies. Again, governments of these economies, financial institutions and development partners should steer the development of the financial system in a pro-poor direction.