Income Inequality and Economic Complexity in Africa: Interaction Effect of Governance Quality

Abstract

This study examines the effect of economic complexity on income inequality through the interaction role of governance factors. The study used data obtained from 24 African countries from 2000 to 2018. The systems GMM method of estimation was employed to predict the effect of variables of interest on income inequality. The findings show that economic complexity has a positive significant effect on income inequality. However, the coefficient of the interaction term is negative and significant implying that while economic complexity increases income inequality, that increase in inequality was significantly offset by the governance factor. The estimated results for disaggregated governance factors suggest similar findings except for political stability. Unlike other dimensions of governance, political stability further deteriorates the effect of economic complexity on income inequality. The overall result entails important policy implications in that for economic complexity to have a weaker deteriorating effect on income inequality, it should be accompanied by an improvement in the governance factors.