The effects of fragility and financial inequalities on inclusive growth in African countries

• Published date: 01 August 2019
• Date: 01 August 2019
• DOI: http://doi.org/10.1111/rode.12594
• Author: Emmanuel Oludele Folarin,Babajide Fowowe

Rev Dev Econ. 2019;23:1141–1176. wileyonlinelibrary.com/journal/rode

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© 2019 John Wiley & Sons Ltd

DOI: 10.1111/rode.12594

SPECIAL ISSUE ARTICLE

The effects of fragility and financial inequalities on

inclusive growth in African countries

BabajideFowowe

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Emmanuel OludeleFolarin

Department of Economics,University of

Ibadan, Nigeria

Correspondence

Babajide Fowowe, Department of

Economics, University of Ibadan, Ibadan,

Oyo State, Nigeria.

Email: babafowowe@hotmail.com

Funding information

African economic research consortium

Abstract

Africa has the largest number and proportion of fragile

states in the world. Fragile states are characterized by slower

economic growth, higher incidences of poverty, and persis-

tent inequality. Thus, there is a circular relationship between

fragility, inequality, and slow economic growth. This study

examines the relationship between fragility, financial ine-

qualities, and inclusive growth in African countries. We in-

troduce a novel way of examining inclusive growth in

African countries by developing a unified measure of inclu-

sive growth that captures the two dimensions of inclusive

growth: income growth and income distribution. This ena-

bles us to adequately assess not just increased opportunities

arising from economic growth, but also see how those new

opportunities are distributed across all segments of the pop-

ulation. We captured the fragile status of African countries

by using an index of fragility. We measured financial ine-

qualities using new data on financial inclusion. The data

analysis suggested negative relationships between fragility

and inclusive growth in African countries. In addition, the

results suggest positive relationships between financial in-

clusion and inclusive growth. Thus, inclusive growth can be

fostered through policies that reduce financial inequalities.

Therefore, a less fragile environment is conducive to inclu-

sive growth both directly and indirectly through financial

inclusion.

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INTRODUCTION

Africa has the largest proportion and number of fragile states in the world, with four out of every five

fragile states around the world found in Africa. Seventeen of Africa's 54 countries are classified as

fragile, implying that about a third of African countries are fragile (Jones, 2013). When compared with

other low- income countries, the group of fragile states are characterized by slower economic growth,

higher incidences of poverty, and persistent inequality (Jones, 2013). Such countries are caught in the

fragility trap of low growth and poor governance, which is brought about by political instability and

violence, insecure property rights, and corruption (Andrimihaja, Cinyabuguma, & Devarajan, 2011).

Thus, there is a circular relationship between fragility, inequality and slow economic growth.

In 2015, the United Nations General Assembly adopted the Sustainable Development Goals

(SGDs), a collection of 17 global goals targeted at social and economic development issues. While

the SDGs broadly aim to reduce harsh social and economic conditions, four goals are targeted at al-

leviating fragility, inequality and poverty. Goals 1, 8, 10, and 16 respectively seek to reduce poverty;

promote inclusive and sustainable economic growth; reduce inequality; and promote peaceful and in-

clusive societies for sustainable development. Thus, these goals directly address the issues of fragility,

inequality and economic growth.

The positive effects of economic growth on poverty has been well documented (Dollar, Kleineberg

& Kraay, 2016; Dollar & Kraay, 2002). The general conclusion arising from such studies seems to be

that all citizens will be better off as long as the economy experiences faster growth rates. However,

this is not necessarily the case. If the increase in national income is shared disproportionally in favor

of richer segments of the population, then, economic growth can lead to a widening of inequality. This

could exacerbate civil unrest and fragility, as inequality has been identified as an important cause of

violent conflict and fragility (Stewart, 2010). Thus, while economic growth is good, it is more de-

sirable for such growth to benefit all segments of the society, that is, the growth should be inclusive.

Growth needs to be inclusive before it can be sustainable and effective in reducing poverty (Berg

& Ostry, 2013). Inclusive growth is growth that not only creates new economic opportunities but

also one that ensures equal access to the opportunities created for all segments of society, partic-

ularly for the poor (Ali & Son, 2007). There have been only few cases where inclusive growth has

been achieved (Anand, Mishra, & Peiris, 2013b). This has been compounded by the fact that a num-

ber of important growth determinants (education, openness, financial depth) have been associated

with higher inequality (Anand et al., 2013b, p. 4). Consequently, sustainable growth strategies must

necessarily comprise equity and equality of opportunity (Commission on Growth and Development,

2008).

Therefore, inclusive growth needs to be stimulated in fragile countries and in order to do this,

inequalities have to be reduced. One important dimension of inequality in African countries is fi-

nancial inequality, which is unequal access to and ownership of financial assets. The ability of poor

households, which constitute a high proportion of the population in fragile states, to access and use

JEL CLASSIFICATION

D3, O16, G2

KEYWORDS

financial inclusion, fragile states, inclusive growth

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FOWOWE and FOLaRIn

financial services goes a long way in stimulating economic growth and reducing income inequality

and poverty (Global Financial Development Report, 2014). Thus, reducing or eliminating financial

inequality through inclusive finance can play a big role in the drive to stimulate inclusive growth in

Africa's fragile states.

Following from the above, this study examines the relationship between fragility, financial in-

equality and inclusive growth in African countries. We make three contributions to existing research.

First, rather than considering economic growth, we examine inclusive growth. We develop a unified

measure of inclusive growth that integrates income growth and income distribution into one single

measure. Thus, we are able to adequately assess not just increased opportunities arising from eco-

nomic growth, but we are also able to see how those new opportunities are distributed across all seg-

ments of the population. Second, by focusing on Africa's fragile states, this study examines possible

ways in which two of Africa's biggest challenges—inequality and fragility—can be addressed. Third,

rather than focusing on financial development, we measure financial inequality using new user- based

individual- level data on financial inclusion. The results will provide insight to, and prove useful in

designing policies aimed at promoting inclusive growth in Africa's fragile states.

This paper is organized into five sections. Section 2 reviews fragility and inclusive growth.

Section 3 discusses the measurement and data of inclusive growth, fragility, and financial inequality.

Section 4 presents data analysis while Section 5 presents conclusions and policy implications.

2

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FRAGILITY AND INCLUSIVE GROWTH

There is no universally agreed definition of fragility. Indeed, the very idea of classifying countries as

failing or fragile has often been queried, and has been seen as politically sensitive, suspicious, and

capable of damaging relationships with governments (Stewart & Brown, 2010). Patrick (2006) identi-

fies four realms for assessing state fragility: security, political, economic, and social welfare realms.

Fragility implies failure, or high risk of failing along three dimensions: authority failures, socioeco-

nomic entitlement failures, and legitimacy failures (Stewart & Brown, 2010).

Fragility or fragile situations can be said to be periods when states or institutions lack the capacity,

accountability, or legitimacy to mediate relations between citizen groups and between citizens and

the state, making them vulnerable to violence (World Bank, 2011, p. xvi). Fragility refers to the situ-

ation where a state has weak capacity to carry out basic governance functions and lacks the ability to

develop mutually constructive relations with society (Jones, 2013, p. 1). A state is fragile when it is

unable to provide for basic human security or create the public goods and conditions needed for gains

in human development. Fragility is low capacity and poor state performance with respect to security

and development (Cilliers & Sisk, 2013, p. 7).

When compared with other low- income countries, the group of fragile states are characterized

by slower economic growth, higher incidences of poverty, and persistent inequality (Jones, 2013).

Citizens of weak and failing states will experience higher levels of poverty, malnourishment, lower

life expectancy, higher gender discrimination, lower access to basic infrastructural, and social wel-

fare facilities (Patrick, 2006). Their failure to generate economic growth and their high inequality

means that fragile states have not been able to achieve inclusive growth, and such a situation leads to

increased unemployment and marginalization of many groups in society. This inability to achieve in-

clusive growth in fragile states has adverse consequences for social and political stability, and ensures

a vicious cycle of poverty, inequality and slow growth (Jones, 2013, p. 2). Fragile states have a higher

probability of violence and humanitarian crises, and are 15 times more prone to civil war than OECD

countries (Collier & Hoeffler, 2004).