Distributional Effects of Growth and Public Expenditures in Africa: Estimates for Tanzania and Rwanda

In this paper we explore the effects of fiscal policies and growth on measures of the household welfare across the distribution of expenditure for two countries in Africa: Rwanda and Tanzania. We explore issues of inefficiency in government expenditures and dilution of growth benefits among the better off sectors of the population in these two countries (in lieu of the poor sectors) by looking at the effects within a country and across different groups of households and administrative entities. We exploit variation in expenditures and growth across and within regions of each country to estimate the elasticities of income with respect to these expenditures at different points of the expenditure distribution, using household survey data and government expenditure at the district level. We find that overall, mean income growth benefits the top income groups. The welfare spillovers are mostly present for top 20% of the income distribution, with the middle of the distribution in Tanzania responding slightly to these spillovers. Social Public expenditures does not affect inequality in a considerable manner, but tend to work towards decreasing inequality. However, mean income growth is related to ‘increases’ in inequality in the sense that the richest sectors of the population benefit the most from growth. We find that the growth elasticity of income is only above one for the top quintile in both countries. In Tanzania a 1% increase in average household expenditure is related to a 1.96% expenditure growth in the top quintile and 0.43% in the third quintile. While in Rwanda it is related to a 1.93% increase in household expenditure in the top 20% of the distribution.