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Archives of Business Research – Vol. 10, No. 3

Publication Date: March 25, 2022

DOI:10.14738/abr.103.11641. Nazirou, S. C. M., Mousa, D. S. M., & Afolabi, T. A. (2022). The impact of Economic Freedom and Democracy on Income Inequality:

Empirical Evidence from Sub-Saharan African Countries. Archives of Business Research, 10(03). 217-234.

Services for Science and Education – United Kingdom

The impact of Economic Freedom and Democracy on Income

Inequality: Empirical Evidence from Sub-Saharan African

Countries

Sabi Couscous Mouhamadou Nazirou

PhD Candidate at School of Economics

Zhongnan University of Economics and Law

Dalal Subhi Mousa Mousa

PhD Candidate at School of Economics

Zhongnan University of Economics and Law

Dr AFOLABI Tunde Ahmed

Associate Researcher at Economic Association of Namibia/

Consultant at ATA Consultancy

ABSTRACT

Throughout our study entitled the impact of economic freedom and democracy on

Income Inequality: empirical evidence from Sub-Saharan African countries. We

have demonstrated that the economic freedom which is defined as the elementary

right of all humans to have control on his or her own labor and property and an

important impact on the economic growth. Individuals have the freedom to work,

to produce, to consume and to save or invest the way they want in an economically

free society. We use the measure of Fraser Institute's economic freedom from the

world summary index (EF). A composite of five major sub-indices: Access to sound

money index (SM), Freedom to trade internationally index (FT), Government size

index (GV), legal structure and security of property rights index (PR), and

regulation of credit, labor and business index (RG). The results show that the

Freedom to trade internationally index (FT), the Government size index (GV), the

regulation of credit, labor and business index (RG) have negative impact on the

income inequality. Concerning the Governance, Government Effectiveness, Rule of

Law, and Regulatory Quality is negatively related to Income Inequality.

Nevertheless, the Control of Corruption and the coefficient of Political Stability and

Absence of Violence have a positive impact on Income Inequality. The stability

promotes the income inequality and through the protest and demonstration by the

least privileged leads the government to reconsider the system of ruling. Our

control variables such as economic growth and population throughout the four

estimations they show none significance with the Income Inequality. So basically

the economic growth doesn’t affect the income inequality in Sub-Saharan Africa. As

Africa financial institutions,the Banks have a clear mandate to support the Regional

Communities, to strengthen strategies and to lower the income inequalities across

countries and within countries. The inclusive growth plans and agenda of the Banks

and their new Long Term Strategy will position the Bank as a leading institution to

promote activities that foster economic growth in an inclusive

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Archives of Business Research (ABR) Vol. 10, Issue 3, March-2022

Services for Science and Education – United Kingdom

INTRODUCTION

Significance of the study

Nowadays there are multitude of literatures on the variables affecting subjective well-being

measures (Frey and Stutzer 2001; Dolan et al. 2008; Blanch flower and Oswald 2011). One of

the study subjects are at a standstill in its infancy, nevertheless, is the link between economic

freedom and subjective well-being. The Economic freedom is defined as the elementary right

of all humans to have control on his or her own labor and property. Individuals have the

freedom to work, to produce, to consume and to save or invest the way they want in an

economically free society. Governments permit for this reason the free movement of labor,

capital, and goods. According to Gwatney et al (2004), the Economic freedom is related to the

degree of personal choice, freedom of competition, voluntary exchange, and protection of

privately owned property afforded by society. Prior to that, research has demonstrated that

economic freedom stimulates life satisfaction (Veenhoven 2000; Ovaskaand Takashima 2006;

Gropperetal.2011). Graafland and Compen in 2015 have shown that the positive association

between economic freedom and life satisfaction is mediated by income per capita and

generalized trust. Definitely, as many studies have shown, economic freedom stimulates

income per capita or economic growth (Dawson 1998; De Haan and Sturm 2000; Gwartney et

al. 2004; De Haan et al. 2006; Justesen 2008; Altman 2008).

Coming to the well-being, even though this concept is broadly used, there is no universally

agreed definition of just what it is. Furthermore, the expressions well-being, quality of life,

happiness and life satisfaction are frequently employed interchangeably. We can think of a

person’s well-being as increasing from a combination of material (possession) and relational

(being able to make use of possession), and the level of fulfillment or subjective quality of life

that they obtain from what they possess and can do (McGregor, 2007). The increasing day by

day of income and wealth inequality has been issue of division of many modern societies and

becomes a threat to the growth and freedom of the global economy. Piketty in 2014 has

addressed the danger of rising wealth inequality in the twenty-first century and has called for

a progressive annual tax on wealth. He showed that both income and wealth inequality have

been rising endlessly since the 1980s. 60% of GDP growth since the 1960s has gone to the top

1% (Piketty and Saez 2013). He related the cause of the risen to the combination of market

forces and economic policy. The wealth inequality keeps extending which not only hinders

sustainable growth but also raises ambiguity in the free-market institutions that defend

property rights and support voluntary exchange and freedom of choice across nations (OECD,

2015).

One of the most challenging questions of government is to build up policies with objectives of

raising the standard of living in a society avoiding the creation of large income gaps between

the rich and poor. Nevertheless to a great extent, raising living standards and income

redistribution are mutually exclusive goals. The existential debates on wealth and income

inequality as result of instabilities today can’t be ignored. Should something be done about it,

and if so, what? These contemporary concerns are closely related to two research questions.

What is the effect of the emergence of economic freedom on Income inequality? What is

the impact of democratic government on Income inequality? If one were asked to sum up

the received wisdom about these questions, it would be first that the income inequality is awful

for democracy, and secondary the democracies are also likely to implement policies that reduce

income inequality. The simple ground for this is that people with no or modest income occupied

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Nazirou, S. C. M., Mousa, D. S. M., & Afolabi, T. A. (2022). The impact of Economic Freedom and Democracy on Income Inequality: Empirical Evidence

from Sub-Saharan African Countries. Archives of Business Research, 10(03). 217-234.

URL: http://dx.doi.org/10.14738/abr.103.11641

a big proportion of the population and therefore have more votes than the wealthy. This same

model has already been noted for democratic politics and income inequality; Acemoglu &

Robinson (2000, 2006) and Boix (2003) are the most heavily cited proponents of the idea that

democracy involves equalizing policies, although these authors have been challenged on

multiple fronts, and some of their own recent empirical work suggests a different conclusion.

The democracy can be apprehended by a system in which we have government by the people;

a form of administration in which the ultimate power is vested in the people and exercised

directly by them or by their selected agents under a free and open electoral system.

The general objective of this paper is to empirically examine the impact of Economic Freedom

and Democracy on wealth inequality of Sub-Saharan African countries.

LITERATURE REVIEW

Theoretical Literature Review

Democracy and Income Inequality

The theoretical awareness of the literature are mostly all conducive to the universal statement

that democracy lessens income inequality. This theoretical argument has its foundations on the

median voter theorem.

The median voter theorem states that the democratic rules and regulations will result in

redistribution from the rich to the poor at the moment the mean income is more than the

median income (Meltzer and Richard, 1981). The democratic governments are known to

increase political competition and consequently have important effect on income distribution

in the sense in which according to Key (1999), the political opponents will get the opportunity

to act and their actions in return will bring political outcomes and benefits to them. More to the

point, under democratic systems, opportunities can be given to the most disadvantaged clan or

group to be empowered since there is existential of the elections and the right to organize

political opposition, and the underprivileged groups can push towards a more equal

distribution of goods. In the absence or lack of democratic right, it is obvious that there will be

a concentration of power in the hands of a minority who will use their influence to implement

narrowly targeted policies and rent-seeking activities (Keefer and Khemani, 2000). On the

contrary, we refer to the work of Simpson in 1990, he found that when there is a wide

participation of population in democratic systems, the power of the elites or the privileged

minority is weakened and redistribution more likely to occur.

The democratic regimes are connected with a greater influence of strong labor unions which

likely use their bargaining power in a way to prevent the real wage from falling (Rodrik, 1999).

Nevertheless, it is quite difficult to prove the evidence for the above theoretical predictions in

the empirical literature. The couple of papers investigated by Sirowy and Inkeles (1990), to be

exact in total twelve, He found that seven papers affirm that democracy reduces income

inequality, whilst five affirm the existence of no relationship. The authors as Stack (1979),

followed by Weede (1982), Muller (1988), Rodrik (1999), and Feng (2003) are amongst the few

supportive studies. Another groups of researchers namely Crenshaw (1992, 1993), Muller

(1989b) and Weede (1990) from their studies got a positive impact of democracy on income

inequality. The findings support the claim of Hayek (1976, 1983) that comparing two regimes

autocratic and democratic, the autocratic governments dispose a strong capacity to implement