In its preamble, the pending Global Sustainable Development Goals (SDGs)—the successor to the Millennium Development Goals—states that it represents humanity’s crystallizing of its “plan of action for people, planet and prosperity.” This plan of action, as is now well known, contains 17 different goals, ranging from poverty reduction and food security to the management of natural resources and building of effective institutions—all simultaneously in the pursuit of being sustainable. The breadth and depth of the goals and over 150 associated targets reflects the complexity of forces at play in our understanding of human progress and development.
Nowhere are these complex relationships more evident than in the one between economic development and income inequality. Indeed, in sub-Saharan Africa, the region where on average the SDGs are arguably most pertinent—this inequality and economic development nexus is particularly important to understand.
Goal 10 in the proposed SDGs states: “Reduce Inequality Within and Among Countries,” with its key relevant target: “By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average.” Importantly, income growth is not the only important measure for this goal. The roles of fiscal, wage, and social protection policies are noted as key contributors to this goal of increased equality. The World Bank’s notion of inequality of “opportunities” is also recognized as critical.
In the pursuit of reducing income inequality (setting aside inequality of opportunities for the purposes of this blog) on the assumption of reaching the 7 percent economic growth target in Goal 8 of the SDGs, we must remember the three vital results from the relevant developing country literature relevant for our understanding of growth, poverty, and inequality dynamics in a society. First, economic growth accompanied by a rise in income inequality will reduce the growth-poverty elasticity (defined as the sensivity of poverty reduction to a rise in economic growth) of a country. Put simply, income inequality is the thief of the poverty-reducing effect of growth. Hence, economies that yield to a highly unequal growth path will produce lower income-poverty-reduction outcomes. Second, higher initial levels of income inequality will reduce the impact that economic growth has on poverty. In the jargon of economics, the higher initial levels of income inequality, the lower the growth-poverty elasticity of an economy is likely to be. Third, income inequality-growth elasticities are inertial over time, suggesting that it takes a much longer period of time to reduce income inequality amid growth, when compared to reducing poverty.
Sub-Saharan Africa faces particular challenges when it comes to tackling growth and inequality together, but for our current evidence on income inequality in the region suggests some fascinating and surprising trends. First, sub-Saharan Africa, when measured by the Gini, reports a higher mean and median level of inequality (0.43 and 0.41) when compared with economies in the rest of the developing world (0.39 and 0.38). However closer examination of the data reveals the presence of seven high inequality “African Outliers.” These seven economies—Angola, the Central African Republic, Botswana, Zambia, Namibia, Comoros, and South Africa—exhibit extremely high levels of inequality reporting a Gini of above 0.55. Noticeably when excluding these African outliers, Africa’s level of inequality actually approximates those of other developing economies. Third, inequality levels, since the mid-1990s (and for countries where we have data) have on average declined in Africa, driven by economies not highly unequal. Finally, and this is a crucial link back to the growth targets contained in Goal 8, our evidence suggests that African economies with high inequality exhibit a stronger relationship between economic growth and inequality. Put differently, initially high-income inequality economies are be more likely to remain on a path characterized by unequal growth.
However, within the above context, at least four immediate areas of policy are obvious, in a bid to aspire towards a growth and development trajectory for Africa, which induces lower levels of inequality.
The first of these is to pursue a growth trajectory that is far more intensive in the use of low-wage employment. A more labor-intensive manufacturing-centered growth trajectory is thus essential for a more inclusive growth agenda. Data shows that for all regions of sub-Saharan Africa, manufacturing as a share of GDP has in fact declined in the period 2000-2012. Ultimately, the fact that manufacturing has contracted during one of Africa’s most sustained periods of economic growth must serve as a threat to a more inequality-reducing growth trajectory for the continent.
Second, Africa’s growth boon has been predominantly resource-driven, especially amid China-fuelled global commodity super-prices. However, resource-dependent economies present a number of potential channels through which inequality may increase, such as the political capture of rents; ineffective and unprogressive tax systems; and the overly complicated ownership structures of global extractive industry companies. The capital-intensive nature of the resources sector also means that its growth contribution will not realize huge employment (and potentially inequality-reducing) gains. At a minimum then, ensuring that corruption and governance transgressions are eradicated in these economies together with a more carefully constructed tax regime—will ensure that gains from resources are more evenly distributed.
Third, in the midst of commodity booms, governments (as Shanta Devarajan and other colleagues from the World Bank have suggested) should be considering well-targeted anti-poverty and anti-inequality cash transfer programs. Such resource-based social transfer funds, can be a key intervention in the pursuit of a more inclusive growth trajectory.
Finally, it is obvious that the long-run solution to reducing income inequality (much in the spirit of Piketty’s r>g notion) is through improving both the supply and quality of graduates coming through the schooling and higher education system. In many ways then, Goal 8 and Goal 10 are inextricably linked. Current evidence for the continent shows that, apart from very poor performance outcomes on all standardized test scores, progression is a huge challenge. Hence, for every 100 African children entering the schooling system, only four will make to a tertiary institution—the lowest outcome in the world.
The above suggests that any global agenda focused on monitoring and evaluating progress towards the inequality-specific targets within Goal 10 of the SDGs must be mindful of the specifics of the region’s patterns and trends in income inequality. Furthermore, any attempt to understand inequality outcomes within the African (and indeed developing-country) context must be mindful of the established relationships in the literature between growth, poverty, and income inequality—and these must be used as a starting point for measuring our progress towards the achievement of the inequality targets of Goal 10.