Effects Of Macroeconomic Factors On Income Inequality In East Africa

Abstract

Stable macroeconomic environment enables achievement of the macro-economic objectives and targets. Therefore, governments should continually focus on stabilizing macroeconomic factors such as interest rates, inflation rates, trade openness and unemployment levels while implementing policies that spur fair distributive economic growth. Generally, inequality in the world with the East African region included has got the attention of development organisations, policy makers and governments as well as citizens. The objective of the study was to establish the impact of macroeconomic factors on income inequality levels in East Africa. The specific objectives of the study were to establish the influence of unemployment, interest rates, international trade openness and inflation on income inequality in East Africa. The study applied a descriptive research design. The study focused on Kenya, Uganda and Tanzania. Data that was utilized in the study was data for forty one years (1975-2015). Secondary data was used in this study. This data was sourced from World Trade Organization, World Bank, Kenya National Bureau of Statistics (KNBS), Uganda Bureau of Statistics, Tanzania National Bureau of Statistics and Institute of Economic Affairs (IEA). Vector Error Correction Model (VECM) was applied for analysis using stata statistical software. The results indicated that in Kenya, inflation had a negative and significant effect on income inequality (B = -7.31; p < 0.05). Interest rates on the other hand had a significant positive effect on income inequality (B = 2.8; p < 0.05). Unemployment (B = 4.13; p > 0.05) and international trade openness (B = 0.69; p > 0.05) had long term insignificant effect on income inequality. In Uganda, inflation (B = -.043; p < 0.05), unemployment (B = -4.13; p < 0.05) and international trade openness (B = -.498; p < 0.05) had negative and significant effects on income inequality. Interest rates on the other hand had a significant positive effect on income inequality (B = 0.29; p < 0.05). In Tanzania, inflation (B = 2.33; p < 0.05) and international trade openness (B = 1.16; p < 0.05) had significant positive effects on income inequality while unemployment (B = -13.86; p < 0.05) and interest rates (B = 1.71; p < 0.05) had significant negative effect on income inequality. The following were the recommendations. First, the three east African governments should institute policies to reduce income inequality. Some of the policies that could be considered include reducing interest rates to enhance aggregate demand, developing the human capital to reduce long term structural unemployment and also lowering the minimum wage so as to deal with real wage unemployment. Secondly, the countries should moderately engage in trade openness by balancing exports and imports ensuring that the balance of trade deficit does not grow. Lastly, the monetary policy organs of the country should carefully analyse the inflation, interest rates and macroeconomic factors to ensure that the expansionary or contractionary policies they adopt lead to the desired outcomes of improving income distribution.