The Moderating Effect of Income Inequality on the Relationship between Economic growth and Political Economy, Human capital, Innovation, and Saving Channels in Ethiopia

Abstract

Background This research focuses on examining the relationship between income inequality and economic growth in Ethiopia over the period from 1981 to 2020. The study aims to understand the various channels through which income inequality affects economic growth and explores the role of different factors such as political economy, innovation, human capital, and saving channels. Method To analyze the relationship between income inequality and economic growth in Ethiopia, the researchers employ the Autoregressive Distributed Lag (ARDL) model. They also conduct the Bayer Hanck (BH) Cointegration Test using four different methods: Engle-Granger, Johansen, Banerjee, and Boswijk. These techniques help determine whether there is a long-term connection, or cointegration, between the variables under investigation. Results The findings of this study indicate strong evidence of cointegration between income inequality and economic growth in Ethiopia, except in the Engle-Granger test. This suggests a long-term relationship between these variables. The researchers analyze various channels through which income inequality affects economic growth. They discover that income inequality significantly hampers economic growth in Ethiopia. On the other hand, the development of human capital, as measured by school enrollment, has a positive and significant impact on economic growth. However, other channel variables such as gross domestic saving, gross fixed capital formation, high-technology exports, general government revenue, and general government total expenditure do not exert a significant influence on economic growth. Conclusions Based on the research findings, the study emphasizes the role of government expenditure as a moderating factor that can mitigate the adverse effects of income inequality on economic growth in Ethiopia. It also highlights the importance of savings channels, particularly gross fixed capital formation, in fostering economic growth. Moreover, the study suggests that innovation, represented by high-technology exports, may indirectly influence economic growth by promoting the development of human capital. Overall, this research provides valuable insights into the intricate relationships between income inequality and economic growth in Ethiopia, exploring both direct and moderating effects through various transmission channels.