Inflation and Income Inequality in Kenya

By Siringi, E. M.; Manaseh, Oiro | Indian Journal of Economics and Business, December 2010 | Go to article overview

Inflation and Income Inequality in Kenya


Siringi, E. M., Manaseh, Oiro, Indian Journal of Economics and Business


Abstract

Kenya is ranked among the top ten most unequal countries in the world and the fifth in Africa. This study investigates this phenomenon by attempting to establish the relationship of inflation on income inequality in Kenya. Analysis Tests for correlation, unit root tests, dynamic and static regression analysis were carried out to determine the long run effect of inflation on income. Study results for the original sample n (1964-2008) at 0.05 were found insignificant. Both inflation and economic growth were negative with coefficients of 0.01 and 0.02 respectively. The [R.sup.2] was low at 13.6%, meaning no long run relationship was established between inflation and income inequality. However, stability tests conducted for the two subset sample periods n1 (1964-1992) and n2 (1993-2008; the coefficients were found to be sensitive to different time periods. Inflation and economic growth had coefficients of (0.471, 0.127) and (0.763, 0.621) in the 1st and 2nd sub samples respectively. This relationship underscores the fact that inflation only has a direct impact on income inequality in the immediate time period after it occurs but its impact is not notable as time elapses.

Key words: Income Inequality, Inflation

Mathematics Subject Classification Number: 91B84

Journal of Economic Literature Classification (JEL):D63

I. INTRODUCTION

Income inequality phenomenon and inflationary problems are critical issues of concern in Kenya today. Kenya is ranked among the top ten most unequal countries (with regards to income distribution) in the world with the gini index ranging between 0.45 to 0.57 (SID 2004). Information available indicates that inflationary problems were at the peak in Kenya's history in 1990s. However, the economy performed fairly well in early 1970s with an average growth rate of about 6.6% whereas, the rate of inflation remained at a single digit level. During this period Kenya could not experience any evidence of a reduction in poverty, instead income inequality continued to increase. The evolution of income inequality and poverty as reflected in national policies has so far been pursued by the government of Kenya since independence in 1964. Kenya at independence decided to follow a mixed development strategy. In other wards, the adopted development ideology was that of managed capitalism in which the achievement of social justice could be through reduction in unemployment, income inequalities and poverty among the people of Kenya without jeopardizing economic growth. (GOK, 1965).

Despite the fact that the distributional effects of inflation on income inequality are important issues in public policy, empirical literature on these issues is surprisingly little particularly in developing countries and Kenya in particular. Inflation causes redistribution of real income and arbitrary social injustice. Ali and Elbadawi (1999) in their study points out that Kenya would require 23 years (1992-2015) to reach the turning point (where economic growth would improve the distribution of income) with the requirement growth per capita consumption of about 6.8%. This means Kenya as a country requires exceptionally high and sustained growth in order to achieve the desired economic objectives. In the years 2003-2007, the Kenyan economy grew steadily from 2.9 to 7.1% of GDP. This achievement was however, not sufficient to reverse income inequality. The impact of the post-election violence and damage of vital infrastructure in late 2007 and early 2008 plus the global food, fuel and financial crises as well as climate change that followed later in the year 2008/2009 slowed down the economic recovery of Kenya's economy by registering economic growth rate of 1.7% of GDP for the year 2008. This is the lowest economic growth rate recorded so far since 2004. During this period Kenya experienced the worst scenario of food shortages due to bad weather while the average annual inflation increased throughout the year, rising from 11. …

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