Effects of external financial flows on income inequality in selected Southern African Development Community member states

Abstract

Background: The developmental goals of various emerging markets are quantitative targets set to reduce income inequality, alleviate poverty, reduce unemployment and achieve continuous inclusive economic growth amongst other key economic performance indicators. The interest is mainly on what can be done on economic performance to fight escalating inequality, increase economic growth and maintain low inflation amongst other economic indicators.

Aim: The study investigates the effects of external financial flows on income inequality in the Southern African Development Community (SADC) region.

Setting: The study shows the long-run stable relationship between the set of variables.

Methods: The study have used the panel cointegration, autoregressive distributed lag and causality techniques.

Results: The findings are that in the long run, remittances can strongly reduce income inequality, foreign direct investment (FDI) and cross border bank lending have an increasing effect and foreign aid can weakly reduce inequality. In the short run, FDI and cross border bank lending can strongly explain income inequality, and negative remittances and foreign aid are insignificantly explaining income inequality. Furthermore, the evidence from panel causality confirms the bidirectional causality amongst remittances, cross border bank lending and income inequality, and unidirectional causality in other sets of variables.

Conclusion: It can be concluded that external financial flows can play a vital role to reduce persistent income inequality in the SADC region. It is recommended that the SADC governments need to formulate policies on remittances as they have positive returns on human capital, strengthen foreign aid institutions and create conducive environment to attract FDI.