Abstract

The study examines the determinants of income inequality in Cameroon. The model specifies income inequality measured by Gini coefficient as dependent on determinants of income distribution proxy to economic growth, unemployment rate, inflation rate and foreign direct investment. Annual time series data from 1985-2017 was the sourced using secondary data and analyzed using Ordinary Least Squared (OLS) estimation technique.

It was evidenced that income inequality is significantly affected by the determinants of income distribution. Unemployment rate and inflation rate have a significant effect on the income inequality where as economic growth and foreign direct investments have no significant economy on income inequality of the country.

Thus recommendations that Efforts of the government should be mobilized towards the formulation and implementation of more pragmatic employment policies in Cameroon. Since the empirical findings in this research work have shown that a rise in the employment rate has not been sufficient to reduce inequality of income distribution in Cameroon. A more pragmatic employment policy would enable workers to create wealth from their income (and not just for sustenance) which enhances a more evenly distributed of income.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Overcoming poverty and inequality is still one of the biggest development challenges facing economists and politicians both in developing and developed countries. It is universally acknowledged that success can only be guaranteed by a mix of national and multinational contributions.

It is for this reason that at the Millennium Summit held in September 2000 in New York, USA, 191 countries with Cameroon present adopted the Millennium Declaration. The declaration which focused on issues of peace, security and development and covered areas including environment, human rights and the sound management of public affairs was worked out into eight major goals and eighteen quantitative targets to be achieved before 2015 and now popularly known as the Millennium Development Goals (UNDP, 2002).

Among the eight goals, three of them (eradication of extreme poverty and hunger, achieving universal primary education and promoting gender equality and empowerment) occupy a central part in this dissertation either as important factors determining Cameroons progress in meeting up the MDGs or as the goals per se under analysis.

Alvaredo et al. (2018) provided a comprehensive review of income inequality over the last 40 years and stressed a surge in income inequality in China, Russia, and India. Particularly, in China, it was found that in 2015 the top 10 percent of the population accounted for nearly 42 percent of the national income, but the bottom 50 percent only owned 15 percent of the national income; these groups both equally shared nearly one-third of the national income in 1978. During the same period, the urban–rural income gap has widened. Urban households earned twice as much as rural households in 1978.

However, they earned a 3.5 times higher amount in 2015. Similarly, over the period from 1989 to2015, the incomes of the top 1 percent and the bottom 50 percent have varied significantly in Russia. The share of the top 1 percent has increased from 25 percent to 45 percent of the national income compared to the share of the bottom 50 percent from 30 percent to 20 percent. In India, inequality has increased dramatically from the 1980s onwards, mostly due to economic reforms, leading to the share of the top 10 percent of the population accounting for nearly 60 percent of the national income.

Soon after adoption, monitoring of progress towards the MDGs is being carried out at global and country level. In the context of Cameroon, much has been reported on the trend of income and inequality (see INS (2002, 2003 and 2004); Fambon and Baye (2002); Baye (2004); Emini et al.; (2005)) but more is still to be done empirically on issues concerning poverty and inequality as well as particular sectors of the economy.

Because appropriate understanding based on proper empirical analysis of country or group specific determinants of income and inequality, gender bias and employment issues is required for the formulation of policies needed to attain the MDGs. Besides poverty and inequality analysis carried out in this dissertation, I also look at issues related to the formal and informal sector and gender in agriculture because of the pivotal role they assume in Cameroons economic growth and development process.

This dissertation therefore goes beyond estimating poverty and inequality rates by addressing issues related to the formal and informal sector because of the discrepancy in income and inequality related issues between both sectors. Income rates estimated in this study corroborate perfectly with those estimated by the NIS (2004), confirming a reduction in poverty of 13 percent between 1996 and 2001. Despite this reduction in poverty, inequality remained constant between 1996 and 2001.

Therefore the average growth of 4.5% experienced by Cameroon during this period contributed to a reduction of the national poverty rate but the benefits from growth did not contribute to a reduction of inequality. To better understand the issue of inequality in Cameroon, consumption inequality and gender constraints in agriculture are further issues analysed in this dissertation with the hope of informing policy makers on the causes, effects and consequences of some of the policies applied.

Since obtaining its independence, Cameroon’s real GDP per capita between 1960 and 2000 evolved at an average annual rate of 1.1 %. This rate is more than 2.5 times the evolution rate of Sub-Saharan African countries but three times less than that registered by South-East Asian countries’ (O’Connell and Ndulu, 2000).

The evolution has not been regular and there are contrasts between the four major periods that best characterise Cameroon’s growth process. The period from 1960-1975 marked the first phase of growth with an average annual per capita GDP of 1.2 %. This period was marked by the organisation of the productive structures of the economy.

The discovery and exploitation of petroleum in the mid-seventies introduced the second growth phase which lasted until 1985. During this period, the average annual GDP per capita was about 7 %. From 1985-1995, it is the third phase also known as the decline phase of the GDP per capita.

During this period, Cameroon experienced an unprecedented economic crisis blamed on poor macro-economic performance, occasioned, at least in part, by a slum in world market prices of its export commodities (petroleum, cocoa, coffee, rubber and timber) that exposed the structural deficiencies of the country, and by overvaluation of the CFA franc against the dollar — a currency in which most of Cameroon’s exports are quoted (Baye, 2004).

The devaluation of the CFA franc’ in 1994 put Cameroon back on the path of growth and ushered in the fourth phase starting 1995. The Cameroon economy is now relatively well balanced between three traditional sectors, namely agriculture, industry and services. Since the return to growth in 1994/1995, the primary sector, industry and services have regularly contributed respectively 23 to 25 %, 26 to 30 % and 40 to 45 % to GDP.

Before the return to growth, the economic crisis had taken a heavy toll on the economy with the main symptoms being: drastic declines in incomes, economic and social infrastructure, in the supply of social services and loss of jobs. Restructuring of public and para-public enterprises, a freeze on recruitment to the public service and staff redundancies created a surge in unemployment which affected most of all women and young people.

In a joint effort with international donors, the government of Cameroon applied a combination of policies to put the economy back on the path of growth. Since signing the First Triennial Programme with the IMF in 1997 which was supported by an Enhanced Structural Adjustment Facility (ESAF), growth became perceptible.

Positive economic performances have been noticed at the macro-economic level and at the structural and sectoral reform levels. GDP in real terms has grown at an average rate of 4.5 % and inflation has been held at less than 4 % (UNDP, 2002; UNICEF, 2006).

The progress recorded later on qualified Cameroon for eligibility for the Heavily Indebted Poor Country (HIPC) initiative in October 2000. Cameroon’s admission enabled it to sign a second program with the IMF supported by a Facility for Poverty Reduction and strategy before reaching the point of completion at the end of the program. At the point of completion, attained in 2006, Cameroon benefitted from the full implementation of the HIPC and Multilateral Debt Relief Initiative (MDRI) Initiatives which reduced Cameroon’s stock of debt (in net present value terms) from US$5.7 billion in 2005 to US$525 million 2006.

In 2006 alone, debt service relief was estimated at US$128 million. Resources freed up by debt relief where expected to be used in accordance with a clear and well-defined strategy in line with the government’s poverty reduction strategy (IMF, 2006).

Although stabilization and structural adjustment programs have perceptibly improved GDP growth and strengthened macro-economic balances in recent years, this has not stopped them from being the target of much criticism owing to the fact that they paid more attention on economic efficiency to the detriment of equity considerations. In 1996, the poverty rate of Cameroon was estimated at 53.3 % and dropped to 40.2 % in 2001 indicating a reduction in the average incidence of poverty in monetary terms at the national level (DSCN, 2002).

This means that the impact of the economic recovery on the living conditions of the population has been slight. Recent figures for 2007 published by the National Institute of Statistics of Cameroon indicate that the poverty rate has remained constant at 39.9 % (NIS, 2008). The indicators of access to basic social services and of the level of incomes are still very low. In the labour market, there is still chronic unemployment with the majority of the active population in the informal sector.

1.2 Statement of the Problem

It is widely noted that widening inequality has significant implications for growth and macroeconomic stability. Income inequality can lead to a suboptimal use of human resources, cause political and economic instability, and raise crisis risk. Growth, inequality and poverty put together form one of the most contentious issues of development economics with regards to their links to one another.

Between 1990 and 2005, approximately two thirds of the countries experienced an increase in income inequality. That is, the incomes of richer households have increased relative to those of the middle class and poorer households. In about the same period, the World Bank says that the number of people in extreme poverty (living on an income of less than US$1 a day in Purchasing-Power¬Parity terms) has fallen from 1.4 billion in 1980 to 1.2 billion in 1998 (Wolfensohn, 2002).

If one focuses solely on the same period, there are signs that a positive correlation exist between rising inequality and economic growth. It should remain clear that absolute poverty and inequality are two different concepts.

Poverty referring to the fraction of the population, or the number of people, whose income falls below a designated amount intended to reflect some minimally acceptable standard of living. To be meaningful, the standard must remain fixed over time; two common ones are thresholds of $1 or $2 per day (in 1985 dollars). Inequality on the other hand refers to the gap between the rich and the poor people in a region, country or the entire world. Statisticians have come up with many ways to measure income inequality (see Salai-i-Martin, 2006).

This paper focuses on income and inequality in Cameroon. Following Sen (1976); Forster et al. (1984); Atkinson (1987) and Bourguignon (1979) an income  and an inequality profile for Cameroon is constructed that captures several concepts of poverty and satisfies various poverty and inequality axioms. That is beyond the head-count index, the poverty gap and severity of poverty are presented in the profile and estimations made on the amount required to close the poverty gap.

The profile is established across the national territory by provinces, sector of employment (formal, informal and agricultural) and urban, semi-urban and rural demarcations. Using the estimation of the head-count index, a poverty map for Cameroon is also developed. Estimations from the profile indicate that there exist a link between the extent of poverty and the level of inequality in Cameroon.

There is an inverse relationship which seems to exist between poverty and inequality in Cameroon. That is, the lower the degree of poverty, the higher the level of inequality. With this in mind, the question of an existing trade-off between poverty and inequality cannot be ignored. Therefore in this study, we will focus on the determinants of income inequality in Cameroon

1.3 Research Question

1.3.1 Main question

What are the determinants of income inequality in Cameroon?

1.3.2 Specific questions

1. What is the effect of economic growth on income inequality in Cameroon?
2. What is the effect of the unemployment rate on income inequality in Cameroon?
3. What is the effect of the inflation rate on income inequality in Cameroon?
4. What is the effect of foreign direct investment on income inequality in Cameroon?

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