Government Spending, Institutional Quality and Income Inequality in Ecowas

Abstract

The study investigates the effect of government spending and institutional quality on income inequality for the period 1990 to 2019 using unbalanced panel data from 13 selected ECOWAS member countries. The results revealed that the effect of government final consumption expenditure on income inequality is negative and statistically significant suggesting that government final expenditure reduces income inequality in ECOWAS member states. Also, the study found both the coefficients of expenditure on education and health to be negative and significant. However, it was shown that expenditure on health was more effective than expenditure on education in regulating income inequality. Again, institutional quality has a significant positive effect on income inequality for both the fixed effect estimator and the system GMM estimator. In light of these findings, the study recommends allocating a higher share of the budget to health and education, as disaggregated government spending, particularly in these sectors, has proven to be more effective in reducing income inequality. Furthermore, the study recommends prioritizing institutional reforms, focusing on enhancing corruption control and ensuring strict adherence to the rule of law. Additionally, policymakers are urged to implement measures to attract Foreign Direct Investment (FDI) responsibly, ensuring a balance between increasing foreign capital inflows and protecting labour-intensive industries. This approach safeguards against the displacement of local industries by foreign investments, promoting sustained access to productive resources for citizens