Income inequality and redistribution in Sub-Saharan Africa

Abstract

A strand of the political economy literature emphasizes the effect of income inequality on growth and poverty, which materialises through redistribution. The theoretical expectation postulated by standard economic theory is that high inequality would lead to higher redistribution via the collective action of the median voter. The empirical literature testing the median voter theorem has been conducted in the context of industrialised economies. In this article, we examine the median voter hypothesis with specific reference to SSA, a region characterised by high levels of income inequality and limited redistribution. We adopt an instrumental variable approach to unpack the determinants and plausible mechanisms underpinning this relationship. In the article, we account for the effect of omitted top income earners in income inequality estimates, given their weight in the shape of the income distribution and their influence in redistributive policies. Overall, we find a positive relationship between inequality and redistribution in SSA, especially among middle-income countries. Further examination reveals that the abundance of natural resource rents seems to be the driving force affecting tax policy choices, which in turn exacerbates income inequality and undermines progressive redistribution. Thus, in assessing the relationship between inequality and redistribution, our results do not provide strong evidence to support the propositions of the median voter theorem, but instead, they call for alternative interpretations that seem to align more closely to the existence of multiple steady states.