Institutional Quality, Innovation Diffusion and the Dynamics of Income Inequality in Nigeria and South Africa: Evidence from the Fourier ARDL Framework.

Abstract

This research work investigates the dynamic and long-run relationships among institutional quality, innovation diffusion and income inequality in Nigeria and South Africa using annual time series data. In order to take care of the gradual structural shifts embedded in developing and emerging economies, this study incorporates the Fourier unit root test and Fourier Augmented Autoregressive Distributed Lag (FARDL) techniques, which give room for smooth and unknown structural breaks. The Fourier unit root results confirm cross-country heterogeneity in the stationary properties of the series and reveal the importance of modelling gradual structural transitions in inequality dynamics. The short-run FARDL results reveal that enhancements in institutional quality reinforce income inequality in both countries, which implies uneven distribution of early institutional gains. Innovation diffusion reveals varying effects, worsening income inequality in Nigeria and reducing inequality in South Africa. Government expenditure on infrastructure and GDP per capita exhibit weak and statistically insignificant short-run impacts on income inequality. In the long-run, institutional quality maintains positive relationship with income inequality in both countries. While innovation diffusion keeps increasing inequality in Nigeria, innovation continues to impact a persistent equalising effect in South Africa. The Significance of the Fourier terms in both economies stresses the influence of smooth structural transitions in moulding inequality outcomes. Generally, the findings in the study substantiate the importance of inclusive institutional reforms and broad-based innovation diffusion in tackling income inequality in African economies