Do trade liberalization and external debt offset income inequality? New evidence from selected African countries

Abstract

Abstract Data from the World Bank indicates that in the 21st century over 100 million Africans have become poor and about 43% of the African population are extremely poor. At the same time, African governments have over the years liberalized their economies through low tariffs regime, in addition to external debt financing of major projects and social intervention programs. However, no known study has explored the nexus between trade liberalization, external debt and income inequality in the context of Africa. Therefore, this study examines the impact of trade liberalization and external debt on income inequality using the Pool Mean Group version of the Panel Autoregressive Distributed Lagged (PMG-PARDL) model on data from 2000–2018 for 30 African countries. The findings reveal trade that liberalization initially worsens income inequality and later acts as a catalyst for long-run poverty alleviation and income inequality reduction in Africa. The findings further show that external debt and growth in per capita income have long-run widening effects and short-run limiting effects on income inequality in Africa. Based on these findings, appropriate recommendations are made for policy purposes.