Poverty has decreased in many African countries. However, the reduction has been less significant than in other developing nations with similar economic growth. In countries with exceptionally high inequality, such as Mozambique and Zambia, growth has not substantially contributed to poverty reduction.

The Gini coefficient is a measure of income distribution within a country. In most African states, it is calculated based on household expenditures from surveys conducted every ten years.

According to the Gini coefficient, Southern Africa is the most unequal region in the world. Despite relatively high growth in several countries, income disparities remain persistently high, according to Jörgen Levin, a development economist and researcher at NAI.

Income redistribution within a country is usually achieved through various taxes and transfer systems. In African countries, both mechanisms are often inadequate. Tax revenues are too low to expand social protection programmes, while tax system reforms to increase revenues have proved politically challenging.

“For instance, a uniform progressive VAT [value-added tax] intended to boost tax revenues led to riots and a government crisis in Kenya. Progressive income taxes are also relatively ineffective since most workers do not pay income tax due to their employment in the informal sector”, Levin remarks.

Levin argues that tax systems need simplifying External link., both to increase revenues and to ensure citizens understand what they are paying for. In many countries, the complexity of taxes makes compliance costly in terms of time and administration. In some cases, taxation can have unintended consequences External link., disproportionately affecting the poor. According to Levin, property taxes on expensive real estate, combined with an expanded cash transfer system, would be an appropriate strategy to support vulnerable groups External link..

A well-developed social safety net can assist vulnerable populations through cash transfers. However, while such systems can reduce extreme poverty, they have little impact on income distribution in African countries.

“A more equitable income distribution is primarily achieved through structural economic changes. This is a long-term process. However, there are positive signs: the number of African countries with low and moderate income inequality has tripled during the last two decades”, Levin notes.

Economic growth is essential for reducing extreme poverty in African countries. Despite significant progress – the share of the population classified as poor in sub-Saharan Africa declined from 56% in 2000 to 37% in 2019 – more than half of sub-Saharan African countries are unlikely to meet the target of halving poverty between 2015 and 2030.

Poverty and inequality among African nations vary a lot. Between 2000 and 2019, the Gini coefficient decreased in 20 out of the 29 countries that have statistical data, and poverty declined in 27 of them. However, both poverty and inequality remain high in several of these countries. For instance, the Gini coefficient exceeds 50 percent in Angola, Botswana, Eswatini, Mozambique, Namibia and South Africa. Meanwhile, over half the population in Malawi, Mozambique, Niger, Rwanda and Zambia are classified as poor.

Income inequality in many African countries is often linked to dependence on revenues from natural resource extraction. According to Levin, growth generated by natural resource income has not contributed to poverty reduction in Africa to the same extent as in other regions. One reason it that resource-rich countries rarely succeed in diversifying their economies.

“A diversified economy is particularly important in low-income countries, as it creates jobs across multiple sectors as well as enabling labour moving from from low-productivity to high-productivity industries. This fosters stable economic growth, poverty reduction and a more equitable income distribution. However, natural resource revenues hinder diversification and sustain skewed income patterns. Southern African countries should therefore implement economic policies that encourage diversification and job creation outside the natural resource sector”, Levin observes.

Instead, however, natural resource-rich countries often experience what economists call ‘Dutch disease’. When a country’s export of a particular commodity surges, the value of its local currency rises, making other export sectors less competitive while increasing imports. According to Levin, this can lead to domestic industries being outcompeted by imports from other countries.

“Countries facing this dilemma must use natural resource revenues strategically. One approach is to save revenues in a sovereign wealth fund. Botswana, for instance, was able to finance much of its increased public expenditure during the Covid-19 pandemic through such a fund. In contrast, other natural resource-rich African countries accrued significant debt”, Levin notes.

He adds that “high domestic debt leads to high interest rates, making it difficult for small and medium-sized enterprises to grow, invest and create jobs. This stifles economic growth, while perpetuating or worsening income inequality”.

TEXT: Johan Sävström