Effect of Inequality and Capital Investments on Economic Growth in East Africa
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Date
2023
Authors
Sitati, Henry Sichangi
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The more recent research indicates that the relationship between inequality and economic growth depends on, and is mediated by, the extent and nature of the inequality itself, the country’s stage of development, as well as structural and institutional factors; such that this relationship may vary broadly across countries/regions. Kenya, Uganda and Tanzania posted intrinsically contradictory growth experiences in respect to the human capital, physical capital, and inequality trends over the period of analysis. This necessitated further research to ascertain inequality’s effect on economic growth is realised through the theoretically expressed transmission mechanisms, as well as to determine the precise direction, magnitude, and significance of the causation between inequality and gross domestic product growth. The aim of this study is to determine the effect of inequality, human capital, and physical capital investments on gross domestic product growth in East Africa. The study draws on the augmented Solow Growth Model and panel data from 1990-2016. It estimates gross domestic product growth rate as a function of human capital development, and inequality. Data for private and government capital stock, gross domestic product, income inequality, and educational attainment were extracted from the International Monetary Fund Investment and Capital Dataset, the World Bank Development Indicators database, the Standardized World Income Inequality database, and the UNDP’s Human Development Reports, respectively. Data were analysed using appropriate panel diagnostic techniques and estimated by way of the Autoregressive Distributed Lag technique. The results show that inequality is detrimental to long-run and short-term growth, while private physical capital investments spur long-run growth, even though their coefficients in the immediate term are not statistically significant. The coefficients of both government capital and human capital stock are statistically insignificant at five percent level. Consequently, the pursuit for rapid and sustainable economic growth is not inconsistent with the alleviation of income inequality and private capital accumulation. To achieve faster and equitable growth in East Africa, this study’s findings lend credence to intensifying income redistribution or economic justice polices, and cultivating macroeconomic conditions to incentivise private capital investments.
Description
A Research Project Submitted to the School of Business, Economics and Tourism, in Partial Fulfillment of the Requirements for the Award of Master of Economics (Policy and Management) Degree of Kenyatta University, July 2023
Keywords
Effect of Inequality, Capital Investments, Economic Growth, East Africa