Abstract
There is wide-ranging literature on income inequality and economic growth, however, a significant debate remains on the influence of income inequality on economic growth. Income inequality is usually associated with lower economic growth, but departures from this relationship have also been noted in the literature. The main aim of this minor dissertation is to study the effect of income inequality on growth in low-, lower-middle- and upper-middle-income countries in the Sub-Saharan African (SSA) region. To have a better understanding of the inequality-growth nexus, this study accounts for nonlinearity and heterogeneity. In addition, this study aims at finding the threshold of income inequality beyond which the correlation between income inequality and economic growth shifts from positive to negative. Lastly, this study intends to find which channel of transmission is dominant in explaining the impact of income inequality on economic growth. To do this, the study employs system GMM which was developed by Arellano and Bover (1995) and Blundell and Bond (1998) on a sample of 23 African countries from 1980 to 2019. The results reveal that income inequality has a negative and statistically-significant effect on economic growth in the full sample of SSA countries. Income inequality has an adverse effect on economic growth through the credit-market imperfections channel. The inequality-growth nexus is found to be nonlinear but with a normal U-shape. When inequality has a Gini coefficient of 41 and above, income inequality begins to have positive effects on economic growth. However, when considering income factor heterogeneity and subdividing the countries into three income groups, the results change. In low-, lower-middle- and upper-middle-income countries, it is discovered that inequality has a positive effect on growth, however when income inequality reaches a threshold of 52 in low-income countries, 54 in lower-middle-income countries and 43 in upper-middle-income countries, rising inequality has adverse effects on economic growth. The results of the three income groups show that the relationship between income inequality and economic growth is nonlinear and follows an inverted U-shape. Moreover, we find that in low-income countries, income inequality adversely influences economic growth through the credit-market imperfections channel. Whereas in lower-middle-income countries, income inequality is found to have positive effects on economic growth through the savings channel. In upper-middle-income countries, evidence shows that inequality has a negative effect on economic growth through the channels of credit-market imperfections and socio-political unrest. When it comes to policy formulation, these results can help present policy makers with a more targeted approach to reduce high inequality and increase economic growth...