Do globalization, foreign direct investment, and inflation drive income inequality? Evidence from Somalia within the Kuznets curve hypothesis

Abstract

Understanding the dynamics of income inequality in Somalia is essential for diagnosing the structural barriers that impede inclusive economic growth and development. Recognizing these disparities can lead to more effective policies that foster equitable and sustainable progress. Therefore, this study explores the determinants of income inequality in Somalia from 1990 to 2020, utilizing the Dickey-Fuller test for stationarity and the ARDL approach for analysis. The bounds-testing approach validated the long-run cointegration relationship between economic growth, globalization, foreign direct investment (FDI), institutional quality, unemployment, inflation, and income inequality. The findings indicate that GDP per capita initially increases income inequality, supporting the Kuznets curve hypothesis, but this effect diminishes as the economy matures. Globalization consistently exacerbates income inequality in the long- and short-run. Conversely, FDI and institutional quality are significantly linked to reductions in income inequality only in the short-run. Higher unemployment rates and inflation significantly increase income inequality in Somalia across both time frames. Robustness analysis via KRLS confirms the reliability of the ARDL outcomes. Furthermore, the Granger causality tests reveal bidirectional causality between GDP per capita and income inequality, as well as between globalization and income inequality. At the same time, FDI, institutional quality, unemployment, and inflation exhibit unidirectional influences. Drawing on these findings, the study suggests the adoption of inclusive growth frameworks, sustained investments in education and infrastructure, strategic trade and investment reforms, comprehensive employment programs, and prudent monetary policies to mitigate income inequality in Somalia