Relationship between Income Inequality and Economic Growth in Ethiopia

Abstract

The objective of this study is to investigate the relationship between income inequality and economic growth in Ethiopia. The study hypothesized the existence of long -run and short -run relationship between income inequality and economic growth. It used time series data for 2002 to 2017 and employed Auto Regressive Distributed Lag Model (ARDL) in a time series econometric framework. In the long-run co-integration analysis economic growth is found to be statistically significant, and if income inequality is increased by one percent, real GDP will grow by 13.8 percent. In the short-run, the error correction model was found to be statistically significant at  5% significance level with a negative sign implying that the error correction procedure converged monotonically to the equilibrium path relatively quickly and high significance of ECM (-1) is evidence to the existence of established stable long-run relationship between the variables. The positive relationship between income inequality and economic growth indicates that high income inequality followed the Kuznets hypothesis since Ethiopia is a low income country.