This study investigates the determinants of income inequality among urban households in Nekemte Town of Oromia Regional States in Ethiopia. The Gini coefficient of the study area is 0.42955. OLS and Quintile Regression Models applied on cross sectional data obtained from 275 households using stratified sampling method. The results estimated through OLS could be misleading. In contrast, QRM preserves the signs of coefficients across quintiles. The QRM result confirmed that age of household head, household family size, dependency, education level, marital status, occupation of household,housing condition and remittances are the major determinants of income inequality in the study area. The implication is that government and development actors need to intervene to address the causes in the study area.
There is no doubt that, in ancient and today’s world, there are variations in economic, social, political or other wellbeing between or within a subgroup of population, a region, a country or at global level. This variation is referred as inequality. Inequality is multidimensional in nature(AMckay, 2002; Todarro, 2012).Likewise, income inequality is a broader concept, concerns distribution over entire population, hence defined as disproportionate distribution of total income among individuals or households (Todarro, 2012). Measures of inequality are calculated for distributions of income, expenditure, asset, land, and other continuous, cardinal variablesat individual or household level (Barro, 2000; Haughton and Khandker, 2009).
However, the problem of income inequality received great attention recently from government, policy makers and scholars. Due to the fact that, higher income inequality dampens investment, impedes poverty reduction, can lead to policies that hurt growth and growth drivers by fueling economic, financial, and political instability, makes poor institutions very difficult to improve (Ostry et al 2014, IMF, 2015; Todarro, 2012). Other scholars also argue that large income disparity within a society raise issue of social justice; undermine progress in health and education, and other social and economic hardship, which leads to dependence on international aid(Canberra Group, 2011).
Recent studies and reports indicate that in Sub Saharan Africa income inequality is rising. Although becoming successful in reducing poverty and recording fast economic growth, Sub Saharan African countries are experiencing rising gap between the rich and poor. In 2016, the Gini coefficient of Sub-Saharan Countries was high 0.55 (IMF, 2017; World Inequality Report, 2018).
Likewise, studies done in Ethiopia also shows that the country is experiencing growing income inequalities (Lie and Berouk, 2018). The Gini measure of income inequality indicates that high inequality was observed in urban areas than the rural areas of the country. In urban areas the overall trend of Gini coefficient is rising. In 1995/96 the Gini was 0.29%, in 2010/11 it increased to 0.33% and this further increased to 0.38% in 2015/16 (MoFED, 2014; Ethiopian National Planning Commission Report, 2017). Other scholarly studies, by Alemayehu et al, 2014; Solomon 2104 and Asefa 2014, at national level concluded income inequality is rising in urban areas than rural areas.
Thus, the country had undergone various policy reforms to reduce overall income inequality at national level (MoFED, 2014). However, the measures undertaken to reduce inequality mostly focused on inequality among regionsethno linguistic groups than in the urban areas (Dr. Kedir, 2014; Tesfaye and Malmberg, 2014). Hence, if the reason of rising inequality in urban areas is not properly investigated government, policy makers and/or politicians may fail to design appropriate development strategy for the country.
In supporting the above reality in recent years, Ethiopia witnessed political instability in different parts of the country followed by demonstrations in many major urban areas. According to Lie and Berouk, 2018the motive behind the cause of the demonstrations were that wealth and resources are unevenly distributed and certain regions and groups receive preferential economic treatment and resources. However, Ethiopian economy is among the fastest growing with GDP growth of 9.3 percent in average annual growth 2013/14 – 2017/18 (NBE, 2018).
Therefore, in working to make Ethiopia a middle-income country by 2025, it will be crucial to ensure that the progress undertaken are not limited to favored few, the urban areas or to indicators focused solely on macro-economic issues. In addition, the problem is not only how to make GNI grow but also who would make it grow, the few or the many. If it where the rich, it would most likely to be appropriated by them, and progress against poverty would worsen. Because many developing countries that had experienced relatively high rates of economic growth by historical standards discovered that such growth often brought little in the way of benefits to the poor (Todarro, 2012; IMF 2015).
Moreover, monitoring income growth, sources of income inequality and distribution for particular subgroups of population is important for the inclusive economic growth and economic wellbeing of the society (Canberra Group, 2011; Todarro, 2012). Studying income inequality serves to ensure the effectiveness of income distribution policies whether they are successful or not; the extent of income inequality whether increasing or decreasing; and to understand factors that cause income inequality.
Generally, we can conclude that pattern of income inequality is rising in Ethiopia, specifically in the urban areas. Given the consequences of rising income inequality andthe importance of studying income inequality at micro level, in particular motivates this study. Thus, this study were undertaken in one medium town of the country, Nekemte Town in order to provide empirical evidences on income inequality among urban household and its determinants using inequality indices and econometric evidence from various data sets on a variety of economic, social and demographic` dimensions.
Income inequality are multidimensional and complex that make development more complex (Ayodele, 2018). According to Todarro, 2012 and Sudip, 2017 income inequality is an obstacle to inclusive economic growth, social development and environmental sustainability. With high rate of poverty in developing countries, high-income inequality challenges the efforts made through inclusive economic growth to reduce poverty.
More unequal society in terms of wealth could limit the productive capacity and the potential of the poor and vulnerable groups to contribute inclusive economic growth. High inequalities weakens social cohesion, trust and bonds of solidarity in societies and are often a factor behind rising levels of crime and social unrest. Additionally inequality hampers environmental sustainability. With the presence of high inequality, collective actions undermined by the pursuit of individual or vested group interest. This may results in less public support for policies designed to protect the environment. Due to this, income inequality needs further consideration.
In Ethiopia, the increasing number of urban households survives on meager income, which challenges them even to satisfy their basic needs. Two thirds of urban households still experience depravation along one dimension of poverty (World Bank 2015; Lie and Berouk, 2018). Income inequality is much worse in urban areas as it stood above the national average. The Gini coefficient for urban areas increased from 0.29% in 1995/1996 further to 0.38% in 2015/2016 (MoFED, 2014; Ethiopian National Planning Commission Report, 2017).
In urban areas the gap between the rich and the poor are widening. According to Lie and Berouk, 2018 social aspirations are built in the context of new high rises that is the gap between the haves and haves not. The riches live in luxuries apartments, fenced mansions and flashy cars owned by the richest while other sections of the society are leading a meager life in the towns. This could be threatening sign that not much of the wealth being accumulated is trickling down. Such inequality runs counter to the prevailing narrative provided by the government, which has been seeking to achieve lower poverty levels through faster economic growth.Even may also expose the county again to the political instability like in the past years if wealth and resources are unevenly distributed and that certain regions and groups receive preferential economic treatment and resources.
Studies done on Ethiopia have covered income inequality at national,generally focusing on disparity between urban and rural areas at national level.They used nationwide secondary data organized by CSA of Ethiopia or WMS or HICES data to analyze income inequality in the country (Solomon, 2014; Asefa, 2014, Alemayehu,et al 2014; MoFED, 2014; Ethiopian National Planning Commission Report, 2017). Specifically, not much has been done on the determinants of income inequalities among urban households at micro level at specific urban area. However,few studies for example, Abebe (2016) conducted at household level in South Wollo Administrative Zone, Amhara National Regional State.
However, the use of nationwide data for the determinants may not make it possible to capture effects that observed at the micro level. Hence, they lack focus relevant relationship between the determinants of income inequality at the household level at any specific big, medium and small urban areas. Micro level data particularly helps to analyze income inequality according to household socio-economic characteristics. Therefore, helps to understand the effect of different socio-economic characteristics of households and to consider the difference between and within difference of the sup groups of the population within society on income inequality at disaggregate level than the at aggregate level (Canberra Group, 2011). Therefore, this study intended to fill the gap by focusing on one medium town of the country.
In addition, we can also infer that the conducted studies used different models and estimation techniques, which may not be effective in analyzing income inequality at different distributions. Therefore, this shows the existence of wide gap in methodology, which requires more investigation. In line with this, this study uses both OLS and Quintile Regression Model; particularly focuses on Quintile Regression Model to analyze causes of income inequality at different distribution and tries to fill the gap at specific medium town.
Lastly, this study has a number of differences with the above conducted researches. Firstly,within towns’ very different conditions likely found in distinct areas, with spatial distinction bases such as demographic, social economic characteristicsof residents. Secondly, inequality is multidimensional concept that makes the assessment difficult as many different indicators and variables can be used to measure depending on the purpose of the study. Thirdly, there is lack of location specific studies for cities and towns of western part of the country. The issue of income inequality may differ from town to town which calls for studying the situation rather than generalizing based on the studies in few urban centers.
Having this in mind, this research designed to investigate the income inequality situation and determinants of income inequality in one of the medium urban area of Ethiopia, Nekemte town. In order to pinpoint the income inequality among urban household and its determinants various inequality indices calculated by DASP and econometric analysis by Quintile Regression Modelused. Thereby, it will provide a basis for evaluating the government’s progress towards inclusive growth strategies and relevance to other medium towns’ for inequality analysis. It helps to understand the pattern of income distribution and how different patterns of householdsocio economic influence income inequality in the study area.