Africa's Structural Transformation and Inequality Dynamics: Could Governance Quality Explain the Developer's Dilemma?

ABSTRACT: The promotion of industrialization encourages economic diversification and structural transformation. However, persistent income and wealth disparities have accompanied Africa's pursuit of structural transformation. While some people and industries gain from the process, others are left behind, causing social and economic inequalities to worsen. Structural transformation and income equality are vital factors in Africa's quest for sustainable development. However, the developer's dilemma results from the difficult choice that policymakers must make between driving structural transformation and guaranteeing equal income distribution. Governance quality can increase the advantages of structural transformation, resulting in a smaller inequality gap. However, persistent economic challenges and uneven development among nations have affected Africa's institutional quality. This study therefore examines the relationship between structural transformation, governance quality, and income inequality in Sub-Saharan African (SSA) economies. By focusing on a panel of eleven SSA countries, the research seeks to reveal the dynamics of how structural transformation impacts income inequality and how governance quality can modulate these effects. The research employs advanced panel regression analysis to explore this relationship. The study specifically examines the employment shares in the agricultural, manufacturing, and services sectors as indicators of structural transformation. Institutional quality is considered as a mediating variable, with a composite index derived from six indicators of the Worldwide Governance Indicators (WGI). The analysis also incorporates control variables such as inflation, per capita GDP, government expenditure, and trade openness. The findings reveal that the employment shares in the agricultural, manufacturing, and services sectors significantly impact income inequality. A U-shaped relationship between these shares and income inequality is observed, suggesting the existence of the Kuznets hypothesis. This indicates that, initially, as economies undergo structural transformation, income inequality may increase, but after reaching a certain threshold, further structural transformation can lead to a reduction in inequality. The study also highlights the critical role of institutional quality in modulating the effects of structural transformation on income inequality. This study highlights the critical need for African economies to adopt policies that address income inequality by promoting balanced development across different sectors through strategic sectoral employment policies. It also emphasizes the need for strong governance and institutional reforms to ensure that the benefits of structural transformation are equitably distributed.