“Macroeconomic Determinants of Income Inequality in Ethiopia: Times Series Analysis’’

Abstract

Although the government adopted policy that geared toward mitigating Inequality, and poverty, still income inequality remains a major challenging issue in the Ethiopia. There are limited empirical research that shows how institutional quality influence income inequality in Ethiopia. Therefore, this study aimed at filling this the gap which exist in the current state of research. To this effect, the time serious data over 1980 to 2023 were sourced from IM, WB, and WIID. Using ARDL model, this study shows that lagged income inequality, population growth, inflation, civil liberties, political corruption, good governance quality, and investments have short-run influence on income inequality. Income inequality shown to have self-perpetuation behavior, which indicated by significant and positive (coefficient= 0.551) in its lagged time. At the same time, the institutional quality like civil liberties and political corruption played significant role in determining income inequality, both in the short and long run. In the short run, civil liberties increased inequality, as it indicated by its first lagged effect (estimated coefficient = 0 .85) and second lagged effect (estimated coefficient =1.52), while in the effect is persistence in the long run (estimated coefficient =5.58). The implication is that civil liberty institutions are being poor and weak fail to reduce inequality. Political corruption increased inequality in short run by 8.280482 units, in its lagged form and in the long run by 71.59032 units. Quality of governance reduced inequality in the short run, in its first lagged form by 8.91 units and its second lag by 15.71 units. The effect is also persistence in long where it reduces inequality by 33. units. However, the ECM results show existence of complex effect of institutional quality variables on income equality, reversing the result of short and long effect while the variables adjust itself toward long equilibrium. Therefore, this study argues that institutional quality matter for income inequality than standard macroeconomic variables. In the long run, institutional factors dominate macroeconomic variables in creating effects with investment emerging as an important factor through which inequality would be reduced. In addition, institutional quality found to have adverse effect on income distribution and therefore recommends improving institutional quality in way that it ensures equitable income distributions is important in Ethiopia.