The distributional effects of fiscal and monetary policies in Africa

Income inequality has been persistent and indeed high in Africa over decades. Accordingly, a lot of empirical drivers have been identified to address it, albeit to the large neglect of fiscal and monetary policies in Africa. This paper provides empirical evidence on the distributional effects of both fiscal and monetary policies in Africa over the period 1990–2017. We employ a two-step dynamic system GMM, a simultaneous quantile regression, and also use variants of fiscal and monetary indicators including fiscal redistribution. Our results show that fiscal redistribution has been quite effective in Africa as reflected in the role played by income taxes and transfers in reducing Gini coefficients albeit to a relatively little extent. In particular, we find that direct tax is progressive and a potent tool in redistributing income in favour of the have-nots. Indirect tax unsurprisingly is regressive and income unequalizing. Similarly, we find property taxes to have income unequalizing effects in Africa. The results of the expenditure indicators reveal that government spending on basic and primary education narrows net income inequality, while government spending on secondary and tertiary education rather widens net income inequality. Lastly, we find that contractionary monetary policy has unintended distributional effects in Africa. We suggest that governments should broaden the tax net, increase the share of direct tax including property tax and spend more on basic education to improve income distribution in Africa.