The income inequality virus in Africa: good or bad for growth?

If you are reading this article now, yes, I mean You! then you will have to agree with me, just right now that numbers don’t lie. Later you can disagree.

Supported by facts and figures, you and I will see how calamitous the current wealth creation and distribution construct of the African continent is, but most importantly the way forward to address the challenges which come with it.

I am still a student of economics which is my first love and I subscribe to the new norm of what’s now known as the New Economic Thinking; where economists challenge conventional wisdom and advance ideas to better serve society.

So, in today’s conversation about income equality in the global south, with a particular focus on our dear continent Africa, we will explore some of these new economic thinking approaches to dealing with the negative outcome of this phenomenon.

Economic inequality sometimes referred to as income inequality, is the unequal distribution of a country’s wealth. Let me put it this way, it’s the level of the divide between the rich and the poor in society, where at the current state of wealth creation and distribution, the gap keeps widening at an alarming rate.

While a small but growing number of people are becoming super-rich, the vast majority are denied the most essential elements of a dignified life, such as quality education, healthcare, and decent jobs, despite remarkable economic growth experienced in Africa over the last few decades.

Good or bad for growth?

The debate around rising income inequality has focused increasing attention on whether inequality is helping or hurting economic growth.

It is probably fair for one school of thought to argue that inequality is justifiably good for growth.

Perhaps, we could understand why. To them, entrepreneurs get rewarded and incentivize for taking the risks and creating jobs. At the same time, wealthy and High Net-worth Individuals could become a source of investments which ultimately will lead to economic growth.

Unfortunately, that narrative currently doesn’t hold as more recent studies have shown the opposite; inequality is bad for sustainable growth.

How big is the inequality gap?

Maybe, a little bit of the numbers will help you to put the inequality conundrum and definition into proper graphical perspective and context.

Let’s start from the rest of the world and thereafter, drill it down to Africa.

  • The world’s 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 percent of the planet’s population.
  • Here’s the scary number, the 22 richest men in the world have more wealth than all the women in Africa.
  • The world’s richest 1% have more than twice as much wealth as 6.9 billion people
  • Meanwhile, almost half of humanity is living on less than $5.50 a day and 753 million people are still living in extreme poverty. (Oxfam, Inequality Virus Report, January 2021)

Africa is estimated to have the highest gap between average incomes of the top 10% and incomes of the bottom 50%: average incomes of the top 10% are about 30 times higher than those of the bottom 50%

  • About $2.3 trillion of individual wealth is held on the African continent as a whole, of which $920bn – or roughly 40% – is held by high net worth individuals (HNWIs) i.e. those who own $1m or more in net assets.
  • In 2017 there were 148,000 HNWIs living in Africa, of whom 7,100 were multi-millionaires and 24 billionaires. With a continent-wide population of more than 1.2 billion people, this implies that the HNWI group makes up approximately 0.012% of Africa’s total population. (World Inequality Database, September 2019)

In West Africa, the rise of income inequality is alarmingly high. Oxfam’s Commitment to Reducing Inequality (CRI) Index shows that governments in West Africa are the least committed to reducing inequality of any on the continent.

Just in 2018, six of the 10 fastest-growing economies in Africa were in West Africa (Côte d’Ivoire, Senegal, Ghana, Burkina Faso, Benin, and Guinea), and Côte d’Ivoire, Ghana, and Senegal were among the 10 fastest-growing economies in the world.

However, in comparison with other regions of the continent, West Africa has the highest number of countries where more than 30% of the population are living on less than $1.90 a day. The region also has the lowest level of public healthcare coverage and the lowest proportions of the population with access to water and decent education.

Why does inequality matters matter?

I am sure you are wondering how and why a few people getting rich faster than the rest of the population should be of major concern.

The question that goes to the heart of income inequality is: If a few people get wealthy, does that hurt – or help – the economic prospects of everyone else, and does it make our societies worse places to live?

Until recently, many schools of thought shared the common assumption that income inequality in sub-Saharan Africa is comparatively low and therefore does not pose an obstacle to poverty reduction.

That is not the case anymore. Subsequent research has shown that inequality here – when measured by differences in income and other socio-economic entitlements – is among the highest in the world.

After Latin America, sub-Saharan Africa has the highest average economic inequality in in the world.

The relationship between growth and inequality has long been an important question for economists and over the past decades, different theories have emerged tied to solving the conundrum.

Let me tell you how and why the issues of inequality should concern you as well. Here, I will just hit on two critical areas of importance. These are education and healthcare.

There is ample evidence from all over the world showing the harmful effects of high levels of inequality on everything from economic growth to poverty reduction, social unity and public health, the case of Africa is even more critical.

  • Every day, 10,000 people die because of a lack of access to affordable healthcare
  • Each year, 100 million people are forced into extreme poverty due to healthcare costs
  • Today, 258 million children – 1 out of every 5 – will not be able to go to school
  • For every 100 boys of primary school age who are out of school, 121 girls are denied the right to education.

Reducing inequality is not only helpful but essential. High inequality is ‘divisive and socially corrosive’, Wilkinson and Pickett (2010, p. 195)

If a particular point in time, like we are experiencing now, we have a large swathe of the population unable to invest in its skills and have access to basic healthcare, that’s bad news for the economy.

This definitely hurts growth by reducing the number of skilled – and healthier and highly productive –workers available for hire in the economy.

Lets’ take action now!

Inequality has a corrosive effect on societies, and its impact is felt not just by the poor but also by the rich.

While growth is important for reducing inequality and poverty, sub-Saharan Africa’s experience with growth fueled by the commodity super-cycle shows that growth alone is not enough to reduce poverty.

The growing gap between rich and poor is undermining the fight against poverty reduction and the creation of sustainable growth in Africa.

It’s therefore essential that we build an economy that works for everyone, not just a fortunate few.

Education can play a pivotal role in providing opportunities for people from all sorts of backgrounds within society and thereby bridging the gap between income divisions.

A higher level of investment and broader participation in education can lead to a much higher level of social mobility in the long term.

Unless public authorities actively promote and fund education, wealth inequalities and spatial location will continue to shape inequalities in education. The direct and indirect costs of education often discourage or prevent poor households from investing in the education of their children.

It’s time we all work together, to help solve the inequality gap. This will certainly give us a chance against kicking out poverty.

 

About Author
Paul Frimpong, CGIA, FCCE
Paul is an economist and award-winning entrepreneur.
He’s currently the Global Head of Strategy & Membership at the Institute of Certified Chartered Economists (ICCE)

www.charteredeconomist.org   ||   paul.frimpong@charteredeconomist.org