HUMAN CAPITAL INVESTMENT AND POVERTY REDUCTION NEXUS IN NIGERIA

ABSTRACT

This study examines the nexus between human capital investment and poverty reduction in Nigeria. Specifically the study investigated the profile of poverty in Nigeria in the wake of human capital investment drive since 2005, the impacts of education and health expenditures on poverty level using probit regression model. The major findings  of the study revealed, among other things, that poverty incidence by gender is higher for male-headed households than the female-headed household, households headed by old people who are 65 years and above have the highest poverty incidence in Nigeria followed by household whose heads fall within the age group 35 to 44 years old, the poverty gap and severity is higher for household whose head falls into the age range of below 25 years (human capital development range), the larger  the  household  size  the  higher  the  poverty  headcount  ratio  and  that  contrary  to expectations that the higher  the education level (human capital investment), the lower the poverty status, our findings reveal that the axiom is true only to some extent. While poverty level  decreases   with  additional  educational  attainment,  this  stopped  at  the  secondary education  level where we found that the headcount index for post secondary education is higher than that of secondary education, although poverty status of post secondary education headed household is still better than those of heads who only attained primary education or those that have no formal education at all. Also the study revealed that the increase  in the expenditure on education significantly affects the probability of households being poor. One acquires more education by increasing ones expenditure  on education,  the  increase in the expenditure  on health significantly  affects the probability  of  households  being poor. The results show that expenditure on health reduces the  probability that the household will be poor. This is because, as the households  increase, their resources become more and more stretched and per capita expenditures  decrease. This will reduce the amount the household can save and invest and therefore increasing their likelihood of being poor. Finally the study found  that the level  of  educational  attainments  reduces  the probability  of being  poor  as compared to those  with no education. As one acquires more education, his/her chances of getting higher  paid job broaden. Thus, getting higher paid job owing to higher education attainment  pull one out from poverty, and on this, we calls for both the government  and private  individual to scale up their expenditures on education and health as to redirect the ravaging level of poverty in the country.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Ever since the initiation of the United Nation Millennium Project (2005) there has been  more emphases on the need for a ‘big push’ strategy in human capital investment to  help poor countries break out of their poverty trap and meet the MDG challenge. The report argues that, to enable all countries to achieve the MDGs, there should be identification of priority human capital investments  to empower  poor people,  and these  should be built into MDG-based strategies  that  anchor  the  scaling-up  of  human   capital  investments,  capacity-building, resource  mobilization,  and  official  development  assistance.  Seven  main  investment-and- policy clusters are identified in  the areas of rural development; urban development; health systems; education; gender  equality; environment;  science and technology and innovation. Dramatic  increases  in  external  aid  flows,  to the  tune  of  0.54%  of  rich  countries’  gross domestic product (GDP) by 2015, are seen as the inevitable source of the necessary finance, given the lack of domestic resources in many countries.

This ‘big push’ strategy is designed to set low-income economies on a growth path that will become self-sustainable, as core investments in infrastructure and human capital will enable poor  people  to  join  the  global  economy  and  establish  the  basis  for  private-sector-led diversified exports and welfare state. However, in Nigeria, the contribution of human capital investment to poverty reduction has not always been as positive or as significant as one might expect. Nigeria is a country with a population of over 167 million people according to the latest NBS report, where over 60% of Nigerians living in rural areas are poor. This is because in rural areas, social services and infrastructure are limited or nonexistent. Nigeria is the most populous black African country where about 70% of the population live under two dollar per day and as a result, has been classified as a poor nation. (NISER:2003)

In Nigeria, majority of those living in rural areas are poor and depend on agriculture for food and income. Small scale farmers who cultivate tiny plots of land and depend on rainfall rather than irrigation system produce about 90% of the country’s food. Women play a major role in the production, processing and marketing of food crops. The poorest group go on subsistence living but are often short of food, particularly  during the  pre-harvest  period.  Many poor Nigerians suffer from malnutrition and other diseases related to poor nutrition such as acute

necrotizing, ulcerative, gingivitis. The HIV/AIDS pandemic has also taken a heavy toll on the rural population and could be considered an emerging public health problem.

Despite the massive campaign for human capital investment, extreme poverty in Nigeria is still very outrageous. The outrage is not just avoidable deprivation, or suffering and death are intolerable; it is also that these situations coexist with affluence.  Corruption is endemic in Nigeria and this has impoverished the nation. Intergenerational poverty exists in the country. Fight against poverty is necessary to reduce intergenerational transfer of poverty in Nigeria because most Nigerian children are born into poverty. With this outrageous poverty rate in Nigeria with the means of massive human capital investment such as education, health care; fight against inequality etc.,  one may whether what actually is the nexus between human capital investment and poverty.

The  role  of  human  capital  investment  in  poverty  reduction  of  an  economy  has  been underscored in many studies. Education and viable health care, as key components of human capital  investment  are recognized  as being vital in increasing  the  productive capacity  of people. Education in particular, especially at the higher level, contributes directly to poverty reduction and economic growth by making individual workers more productive and indirectly by leading  to the creation  of knowledge,  ideas,  and technological  innovation  (Larocque,

2008). An investment in human capital is very beneficial in the society poverty  problems, both at the micro level as well as macro level and it affects the system both  directly and indirectly. Increase in individual’s wage is a direct effect while the increasing externalities associated to education are an indirect effect (Dahlin 2005,   Klenow 2001 and Michaelowa,

2000). Education is basic to development, and also regarded as the only instrument through which the society can be transformed  from poor to rich. As a salient factor  in  transition program,   education   equips  human  resources  with  the  needed   knowledge,   skills  and competencies,   which  would   make   them   functional,   and   contribute   to  the  all-round development of the nation. It does not only help to supply the essential human capital which is a necessary condition for poverty reduction but also for a sustained economic growth but it is  a  key  to  poverty  reduction  and  vehicle  for  promoting  equity,  fairness  and  social justice(Okojie, 1995; Yesufu, 2000; Todaro, 2007).

The growing evidence on the nexus of human capital investment and poverty reduction and the  importance   of  human  capital  investment,   especially  education  investment   in  the

development process has made social sector investment an important component of national strategies for poverty reduction strategies and sustained growth and development. In Nigeria, in  terms  of  budget  estimates,  the  ratio  of  public  expenditure  on  social  and  community services to total public expenditure averaged 2.2 percent between 1977 and 2007. Out of this amount,  about  6.5  percent  has  been  directed  to  education   during  the  same  period. Nevertheless, a major trend in education in Nigeria is that investment on the sector has not been encouraging.  Public  expenditure  on education  as  a percentage  of the gross national product was 1.5percent (1960); 1.7percent (1985-87) and 0.7percent (1995). This compares very unfavorably  with  other  developing countries  such as Jamaica  4.9percent  (1985-87),

7.5percent (1995-97) and Malawi 3.5percent (1985-87), 5.4percent (1995-97). (UNDP, 2003:

313). In recent times, the percentage of the annual federal government budget to education in Nigeria  for  the  periods  2005-2007  was  6.3%,  7.8%,  8.7%  in  2005,  2006,  and  2007 respectively  instead  of 26.0 percent  as recommended  by the United  Nations  Educational Scientific  and  Cultural  Organization  (UNESCO).  Evidently,  there  is  still  a  significant shortfall  in educational  investment  necessary  for the  realization  of poverty reduction  and sustainable growth and development in the country.

The future direction of the macroeconomic policy of investing in human capital in Nigeria is uncertain.   This   uncertainty   may   be   attributed   to   the   existence   of   macroeconomic disequilibrium  in  financial  allocation  and  unsatisfactory  performance  of  the  country’s economy in recent times. A review of Nigeria’s economic development between 2000 to date revealed  that  overall  macroeconomic  policies  and  development  strategies  have  failed  to provide an enabling environment that could alter the structure of production and consumption activities in order to diversify the economic base that would improve the welfare state of the citizenry.  The  country  has continued  to  be a mono-cultural  economy,  depending  on oil, indicating that the export base is yet to be diversified. Widening saving investment gap, high rates of inflation,  chronic  balance of payment problems  and underutilization  of resources have continued to be the order of the day. Poverty and inequality is wide spread with about

71 million Nigerians living below $1 a day and the gini coefficient of 0.49. Socio statistics such as infant mortality under 5years, and maternal mortality rate as well as unemployment rate are higher than the averages for developing countries (Fakiyesi and Ajakaiye, 2009).

In the light of Nigeria’s current economic problems, and particularly its poverty situation and the rate of human capital investment and unimpressive rates of economic growth, this study

takes the position of ascertaining the nexus between human capital investment and poverty reduction  in Nigeria.  Since  a healthy  and well-educated  people  make  an  economy  more productive,  it is apparent that capacity building through investment  in  human capital will enhance  welfare  by  alleviating  poverty  and  protect  the  Nigerian  economy  from  further distortions.  Accordingly,  there  is  however,  a  need  to  critically  examine  the  relationship between  investment  in human  capital  and  poverty  reduction  in Nigeria,  with  a  view  to deriving implications  for policy direction.  This indeed  constitutes  the major focus of this study

1.2 Statement of the Study

Poverty is a multifaceted concept, which manifests itself in different forms depending on the nature and extent of human deprivation. In absolute terms, poverty suggests insufficient or the total lack  of basic  necessities  like food,  housing  and medical  cares. It embraces  the inadequacy   of   education,   health   care   and  environmental   services,   consumer   goods, recreational opportunities, neighborhood amenities and transport facilities. In relative terms, people are poverty-stricken when their incomes fall radically below the community average (World Bank 2000). This implies that such people cannot have what the larger society regard as the minimum necessity for a decent living. In precision terms, the poor can be defined as; (i) individuals and households lacking access to basic services, political contacts and other forms of support; (ii) households whose nutritional needs are not met adequately; (iii) ethnic minorities who  are  marginalized,  deprived and persecuted economically,  socially, morally, and politically; and (iv) individuals and households below the poverty line whose incomes are insufficient to provide for their basic needs (World Bank 2001).

One important consensus in the literature on poverty is that, poverty is a rural phenomenon (World Bank, 1990; Fields, 2000). By this, it is acknowledged that rural communities are the worst  hit  by  poverty.  Unfortunately,  the  importance  of  the  rural  poor  is  not  always understood, partly because the urban poor are more visible and more vocal than their rural counterparts. Incidentally, the rural sector is the predominant sector in the Nigerian economy. It plays some fundamental roles, which include job creation at relatively low unit costs, and thus remains the most important  growth priority of the country. This specifically makes it necessary to investigate human capital investment and poverty further.

The quantitative as well as qualitative welfare measurements in Nigeria attest to the growing incidence and depth of poverty in the country. This situation however,  presents  a paradox

considering the vast human and physical resources that the country is endowed with. It  is even more disturbing that despite the huge human and material resources that have  been devoted to poverty reduction by successive governments in Nigeria, no noticeable success has been achieved in this direction. The Human Development Report (UNDP, 1996) reveals that Nigeria is one of the poorest among the poor countries of the world. Nigeria ranks 54th with respect to the human poverty index (HPI) – making it the 20th poorest country in the world. It is also ranked 30th in gender related  development index (GDI) while occupying

40th position from below in its human development index (HD1).

This evidence was collaborated in (Okonjo Iweala, Soludo and Muhtar, 2003; and the Punch Newspaper,  2009:14)  which  unanimously  reported  that poverty  is deep and  pervasive  in Nigeria, with about 70 percent of the population living in absolute  poverty. According to these  reports,  the  ballooning  poverty  situation  notwithstanding,  Nigeria  is  blessed  with abundant resources, both natural and human resources (Chukwuemeka; 2009:405), but in the first four decades of its independence,  the  potentials remained largely untapped and even mismanaged  (see  also  Omotola,  2008:497).  Putting  the  problem  in  proper  perspective, (Nwaobi; 2003:5) asserts that Nigeria presents a paradox. The country is rich but the people are poor.

This lack of capabilities to human capital services such as education, health and nutrition has threatens  to make  poverty  dynastic,  with descendants  also becoming  poor  (World  Bank,

2000). Statistics has revealed that poverty level increased from 42.3% in 1985 to 46.7% in

1992. It rose sharply to 65.8% of the population in 1996 (FOS, 1998). However, in absolute terms the population of the poor Nigerians increased four-fold between 1980 and 2007. The moderate poor rose from 28.9%, in 1992 to 36.3% in 1996, while the percentage of the core poor more than doubled from 13.9% in 1992 to 29.3% in 1996. Nigerians in terms of physical quality of life index (PPLI) scored 38% in 1991. The Human Development Index (HDI) was

0.391 in 1998 ranking the country as 142 out of the 174 countries surveyed. In the year 2000, the HDI score for Nigeria was 0.439 which ranked Nigeria in the 151st  position among 174 countries  surveyed  (UNDP;  2000).  In 2002, the HDI score was 0.466  which categorized Nigeria in the low human capital development  countries in the  151st   ranking among 177 countries (UNDP; 2004).

Therefore, since educational and health status affects the individual participation in economic activities and consequently the level of the labour force in an economy, a re-examination of the nexus of human capital investment to poverty level in Nigeria is imperative, and this is the principal focus of this study. Hence the study seeks to provide an answer to the following research questions.

1.3      Research Questions

i.     What is the nature of Nigeria poverty profile in the wake of human capital investment drive?

ii.     What is the nexus of human Capital investment to poverty level in Nigeria?

iii.     What is the impact of education spending on poverty level in Nigeria?

iv.     What is the impact of health spending on poverty level in Nigeria

1.4      Objective of the Study

The major objective of this study is to investigate the nexus through which investment in human Capital sectors can impact on poverty level in Nigeria. Specifically, this study will examine critically:

i.     the poverty profile in Nigeria in the wake of investment in human capital; ii.     the impact of household education spending on poverty level in Nigeria; iii.     the impact of household healthcare spending on poverty level in Nigeria;

1.5      Research Hypotheses

The three research hypotheses build for this study are:

H0:   Poverty has not significantly responded to human capital investment in Nigeria.

H0: There is no significant  impact  of household  education  spending  on poverty  level  in

Nigeria

H0: There is no significant  impact  of household  healthcare  spending on poverty level  in

Nigeria

1.6      Relevance of the Study

This work explores the nexus between Human capital investment of household and poverty level in Nigeria. This is particularly important at the present, as we are once again witnessing pressure for substantial increase in investment in human capital development in developing

countries, because of slow rate of progress toward the target contained in the  Millennium

Development Goals especially in Sub-Sahara African Countries which Nigeria is one.

Also this study is undertaken with the aim of providing an overall view of existing theories, evidence and methods, and of looking at possible ways to provide better guidance to policy- makers in the use of available techniques and information to set priorities for human capital investment. It will also guide key decision-makers in low income country governments (e.g. in finance and sector ministries and central banks),  and to donor agencies which support human capital investment projects in Nigeria.

Again this study is very relevant, firstly because the existing evidence on poverty impact of human capital investment is hardly conclusive, but points to a number of interesting issues that  requires  further  investigations.     Secondly,  because  of  pressure  on  the  developing economy to step-up their investment on human capital sectors especially education and health sectors. Beside these this study, thus, is an attempt to provide update information on levels of human capital investments  in Nigeria  and its impact  in  achieving  the MDGs on poverty reduction.

1.7      Scope of the Study

This study is an investigation of the nexus between human Capital investment and poverty level in Nigeria. Here the main focus is on the ‘investment in human capital’ sectors and the

‘level of poverty’ in Nigeria. The term human capital may not be familiar to all of  you. Human capital refers to the skills, education, health, and training of individuals. It is capital because these skills or education are an integral part of us that is long-lasting, in the way a machine, plant, or factory lasts.

During the nineteenth century, education, skills, and other knowledge have become crucial determinants  of a person’s  and a nation’s  productivity.  One  can even  call  the  twentieth century the Age of Human Capital in the sense that the primary determinant of a country’s standard of living is how well it succeeds in developing and utilizing the skills, knowledge, health, and habits of its population.

In this  study  we  defined  human  capital  sectors  as education  and  health  sectors.  This  is because; education plays a key role in the ability of a developing country to absorb modern technology  and  to  develop  the  capacity  for  self-sustaining  growth  and  development.  A

shortage  of  educated  people  might  limit  growth  while  excess  supply  of  it  might  create unemployment and thus limiting economic growth. On the other hand, health comes next to education in the development of human resources. There is symbiotic nexus between health and education.  Educational  facilitates  general enlightenment  in  the population  as well as acquisition of the varied and much needed skills for the transformation of the society, have the tendency to foster a change in the attitudes and habits which may be conducive to the attainment of high health status particularly among people.

As is well known,  poverty is multi-dimensional.  There are several different  indicators  of well-being  (e.g.  education,  health,  nutrition,  security),  and  a  minimum  level   deemed acceptable by society associated with each. Based on this, one might argue  that it is most informative, and most honest, to keep separate the information on the amount of poverty in each different indicator  (Deaton; 1997). However, it is often useful to combine information on the amount of poverty in the different dimensions  into a single aggregate  measure of poverty.

There are two main ways of doing this. The first involves estimating the amount of income required to attain each of the k poverty lines. Two well known examples of income poverty lines  are  the  US$1-a-day  and  US$2-a-day  measures  proposed  for  international  poverty calculations and comparisons by the World Bank (World Bank, 2002). The second approach involves constructing a weighting system that reflects the  relative importance that society places on each different welfare dimension. However, such a system could be criticized as being arbitrary. A more elaborated definition of poverty in this study will also consider the

‘capability’  of  the  poor,  as the  Sen  Approach  to  human  capital  development  defines  it. Improving access to education and health services for the rural population in remote areas can be seen as part of this enabling process.

This study adopted the poverty measure that satisfied the principles of Sen’s index of poverty

and the Forster-Greer-Thorbecke (FGT) P

α

class of measures. According to Fields (2000) the

most common poverty measures that satisfy the principles are the Sen’s index of poverty and

the Forster-Greer-Thorbecke (FGT) P

α

class of measures. The P

α

classes of poverty measures

are most frequently used. There are 3 main poverty measures proposed by Forster, Greer and

Thorbecke (1984) and they are the headcount (where α =0), poverty gap (where α =1) and the
squared poverty gap (where α =2) indices. With the most recent human capital investment and poverty data available for Nigeria, this study covered a period of 1970 to 2009.

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