The Effects Of Trade Openness And Foreign Direct Investment On Income Inequality In Sub-Saharan Africa

Abstract

Trade openness and foreign direct investment (FDI) has played a key role in the development and growth of many developing countries in the world. As such, most of the countries in the sub- Saharan Africa (SSA) region has promoted globalisation since the mid-1980s to increase economic growth, income, welfare and decrease inequality. According to the Heckscher-Ohlin- Stolper-Samuelson (HOSS) trade models, developed countries export capital-intensive goods in which they have a comparative advantage while developing countries export labour-intensive products in which they have a comparative advantage; as a result, demand for low-skilled labour increases and decrease income inequality in developing countries and inequality instead increases in the developed countries. While some theoretical and empirical studies agree with the basic HOSS trade model, opponents argue that globalisation deteriorates income inequality in developing countries including those in the SSA region. However, few research has examined the relationship between globalisation (trade openness and FDI) and income inequality in the SSA region. This study therefore sought to examine the effect of trade openness and foreign direct investment on income inequality in some selected countries in SSA. The study used the system generalized methods of moments technique to analyse secondary data for 37 SSA countries from 2000 to 2019. The study revealed that foreign direct investment, education, and GDP per capita have a negative and significant effect on income inequality. However, trade openness and population growth have a positive and significant effect on income inequality. The study recommends the adoption of policies to promote globalisation and investment in high-quality education and training facilities which helps to create more employment opportunities and increase the supply of skilled labour in the SSA region.