Structural transformation—Income inequality nexus in Africa: Does the Developer's dilemma hold?

• Published date: 01 May 2021
• Author: Muazu Ibrahim,Xuan Vinh Vo,Olufemi Adewale Aluko
• Date: 01 May 2021
• DOI: http://doi.org/10.1002/pa.2194

ACADEMIC PAPER

Structural transformation—Income inequality nexus in Africa:

Does the Developer's dilemma hold?

Muazu Ibrahim

1,2

| Xuan Vinh Vo

1,3

| Olufemi Adewale Aluko

4

1

Institute of Business Research, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam

2

School of Business and Law, Department of Banking and Finance, University for Development Studies, Wa, Ghana

3

CFVG, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam

4

Department of Finance, University of Ilorin, Kwara State, Nigeria

Correspondence

Muazu Ibrahim, School of Business and Law,

Department of Banking and Finance,

University for Development Studies, Wa,

Upper West region, Ghana.

Email: imuazu@uds.edu.gh

Funding information

This study was funded by the University of

Economics Ho Chi Minh City, Ho Chi Minh

City, Vietnam

This article examines the developer's dilemma—a seeming quandary emerging from

the fact that developing countries simultaneously pursue two different developmen-

tal goals: (a) seeking economic development through structural transformation and

(b) reducing income inequality. However, the proclivity of increasing income inequal-

ity while pursuing structural transformation is often referred to as the developer's

dilemma. This study investigates for the presence of this dilemma in Africa using sam-

ple splitting and threshold estimation technique. While we find support for the exis-

tence of a developer's dilemma, suggesting that structural transformation induces

income inequality, the income inequality-widening effect is disproportionate.

1|INTRODUCTION

In a groundbreaking research, Kuznets (1973) argues that structural

transformation, which involves the redistribution of resources within

and between sectors, is one of the basic characteristics of modern

economic development. Most countries witness structural transfor-

mation during economic stagnation or recession regimes (Bah, 2011).

Admittedly, structural transformation is germane for economic devel-

opment. However, structural transformation may be inimical, particu-

larly for developing countries. Developing countries simultaneously

pursue economic development via structural transformation and inclu-

sive growth-reduction of income inequality, which causes a distribu-

tional tension known as developer's dilemma (Sumner, 2017).

Kuznets (1955), using a dual economy model, argues that income

inequality rises in the early stages of economic development following

structural transformation. Recently, Baek (2017) states that structural

transformation is not always associated with inclusive growth or pros-

perity for all as it may exacerbate inequalities.

Understanding the developer's dilemma requires a knowledge of

how structural transformation and income inequality are associated

(Sumner, 2017).

1

We provide empirical insight into the developer's

dilemma by examining the impact of structural transformation on

income inequality in Africa. We add novelty to literature in three

ways. First, our article is the first empirical attempt at understanding

the developer's dilemma in Africa. We consider Africa as a good case

to study because it is often characterized by low-economic productiv-

ity and high-income inequality. Second, we adopt a threshold regres-

sion model which allows us to discover whether the developer's

dilemma holds in countries with low and high structural transforma-

tion. Last, we use a novel index of structural transformation along

with three different measures of income inequality and this permits us

to determine whether the developer's dilemma is sensitive to the

measure of income inequality.

2

2|METHODOLOGY

2.1 |Data

We use annual data for 24 African countries for the period spanning

2000–2014 in examining the relationship between structural transforma-

tion and income inequality. These countries are Benin, Botswana,

Burkina Faso, Chad, Congo Republic, Cote d'Ivoire, Egypt, Gabon, The

Gambia, Ghana, Guinea-Bissau, Madagascar, Malawi, Mali, Mauritania,

Received: 14 April 2020 Revised: 11 May 2020 Accepted: 15 May 2020

DOI: 10.1002/pa.2194

J Public Affairs. 2021;21:e2194. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of7

https://doi.org/10.1002/pa.2194