Can trade openness, tariffs and exchange rates address the inequality problem in Southern African Development Community?

Abstract

The African Continental Free Trade Area (AfCFTA) is a trade agreement among African countries aimed at establishing a single market for goods and services, promoting intra-African trade, and boosting economic growth across the continent. The pressing issue is that Africa is known as the most unequal continent in the world, next to Latin America. Similarly, in the past few years, the Southern African Development Community (SADC) struggled to sustainably reduce its level of income inequality due to the existence of informal sectors, migration, and the international COVID-19 pandemic deepened this crisis. Therefore, the purpose of the study was to investigate the impact of trade openness, tariffs, and real exchange rates on income inequality for selected SADC countries for the period 2004 to 2020. The study employed the Panel Autoregressive Distributed Lag (PARDL) technique to investigate the relationship among variables, while Granger causality examined the causal connection between variables. The empirical findings revealed that exports, tariffs, and real exchange rates have a positive and significant impact on income inequality, whereas imports are inversely and significantly related to income inequality. The Granger Causality test identified five causalities between the Gini coefficient and exports, tariffs, and real exchange rates and between real exchange rates and exports. Based on the empirical findings, SADC can adopt the economic policy to promote trade openness and regional integration, particularly by leveraging the opportunities presented by the AfCFTA to address income inequality. By reducing trade barriers and facilitating the free movement of goods and services across SADC member states, the region can stimulate economic growth, attract investments, and create employment opportunities. Additionally, by harmonizing tariff regimes and implementing fair trade practices, SADC can ensure that smaller regional economies have equal access to markets and resources. Furthermore, by managing real exchange rates effectively, SADC can enhance export competitiveness, promote industrialization, and attract foreign direct investment, which can contribute to reducing income inequality and fostering inclusive economic development.