TRENDES AND DETERMINANTES OF INCOME INEQUALITYIN ETHIOPIA

Abstract

Income inequality has been regarded as one of the most serious problem that most countries (both developed and developing countries) face today. Inequality can be signal of lack of income mobility and opportunity reflections of persistent disadvantage for particular segments of the society. The main objective of this study is to analyze the trends and examine the determinants of income inequality in Ethiopia from (1988 to2018). The data collected from World Development Indicator (WDI), the Global Economy, World Data Bank and National Bank of Ethiopia websites. The method of analysis was both descriptive and econometrics analysis. In descriptive analysis, the trend of income inequality, real GDP per capita, unemployment rate, net primary school enrollment rate trade openness and inflation rate have been analyzed. To check the verifiability of the estimated long run model, some diagnostic test is undertaken. This paper used Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) in order to investigate the long-run and short run relationship between the dependent variable (income inequality) and its determinants. To test stationary Augmented Dickey –Fuller (ADF) test and Phillpes Perron (PP) test were used. All the determinants have got with a sign as expected by the paper. The finding of the Bounds test shows that there is a stable long run relationship between income inequality and real GDP per capital, School of enrollment rate, trade openness, unemployment rate and general inflation rate. The study results real GDP per capita, unemployment rate and inflation rate have a positive impact on income inequality. The remaining has negative impact. In the long run analysis, real GDP per capita, net primary school enrollment rate, unemployment rate and constant are statistically significant .The error correction coefficient, estimated at -0.84277 is highly significant, has the correct negative sign, and imply a very high speed of adjustment to equilibrium. According to the econometrics analysis, real GDP per capita and unemployment rate are the main determinants of income inequality for Ethiopia based on ARDL model estimation result. According to the thesis, the paper gives some policy recommendations. Like the government or other responsible body should focus on the countries growth and development, decreasing unemployment rate, Inflation rate the expansion of education access and the development of international trade in order to reduce the income gap of the people. And the policies should consider the poor to participate them from the countries benefit.