ABSTRACT
The issue of poverty is posing serious threat to the development of the Nigerian economy. Growth was seen as the driving force for poverty reduction by studies carried out in the 1980s. But, recent attention has now been shifted to the role of income distribution in reducing poverty since the yield of growth may not be equally shared and poverty not reduced. However, a distinct conclusion is yet to be established on the role of inequality in poverty reduction. Analysis on Poverty growth and inequality has received much attention among scholars, both in Nigeria and various other economies of the world. However,there seems to be a gap in literature on the flow of the triangle and the possibility of the previous levels of poverty, growth and inequality influencing the relationship of the triangle. Therefore, this research investigated the poverty- growth-inequality-nexus in Nigeria, using state data for
1992 to 2010 in a four year round panel framework. The study employed a dynamic
simultaneous equation model while the Fixed Effect, Panel Least Square, First Difference Generalized Method-of-Moments and the System Generalized Method-of-Moments (GMM) econometric estimation techniques were used in the estimation of the model. The result from the study proved the System Generalized Method-of-Moments of estimation to bethe best approach in analyzing the interaction among poverty growth and inequality in Nigeria rather than the other methods.The result of the empirical study revealed that growth is positively and significantly related to poverty andthere was a negative and significant effect of income inequality on poverty. Poverty was found not to have any significant effect on growth and inequality. Poverty was positively related to growth and negatively related to inequality. The result of the study further showed that there is a positive feedback relationship between growth and inequality. States with high previous poverty levels tend to experience higher present levels of poverty and states with high previous levels of growth tend to experience higher present level of growth. The result of the study also showed that unemployment and literacy rates were critical determinants of poverty levels. Deliberate effort of the government in redistributing income is highly recommended to ensure poverty reducing impact of growth in Nigeria. Also, the need for unemployment reduction as a major part of policy measures aimed at poverty reduction in Nigeria is highly recommended for effective poverty reduction in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1Background to the Study
The fight against poverty is now one of the main objectives of the development process. It is imperative to view its long-term effects and solutions given its relation with growth and inequality. This has raised the debate and broadened the spectrum of analysis on the poverty- growth-inequality interrelationships, with halving extreme poverty by 2015 constituting the first, and perhaps the most critical, goal of the Millennium Development Goals (MDGs). The major concern of world economy is on how to reduce poverty. Thus, ensuring that those in need get their share of the world’s riches from the large amount of wealth created in the past century (Todaro and Smith, 2006).
There is no single definition of poverty. Poverty can be defined based on individual’s perception under different circumstances. However, in a simple form, it is defined as a state of deprivation or lack of resources to meet basic needs. According to Todaro and Smith (2006), “the poor can be defined as the number of people living below a given minimum level of
‘income’-an imaginary international poverty line which recognizes neither national boundaries nor levels of national per capita income” “Human Poverty is more than income poverty; it is the denial of choices and opportunities for living a tolerable life” (United Nations, 1997).
Sen (1999) noted that poverty amid plenty is the world’s greatest challenge. Poverty makes the people live without fundamental freedoms of action and choices. More than half of the citizen’s of the developing countries lived on less than $1.25 a day in 1981 this has however, dropped to 21 percent in 2010. Yet, about 2.8 billion live on less than $2 a day, and 1.2 billion live on less than $1.25 a day of the total world population of about 7 billion. According to World Bank (2010), Sub-Sahara Africa countries have the highest levels of poverty and income inequality in the past three decades. About 500 million are poor out of its total population of about 877.6 million. Irrespective of the fall in poverty rate of 10 percent between
1999 and 2010, Sub-Sahara Africa is the only region that had a rise in number of poor individuals between 1981 and 2010. There were more than twice as many extremely poor people living in SSA in 2010 (414 million) than there were three decades ago (205 million). As
a result of this, Sub-Sahara Africa accounts for a third of the world’s total poor population in
2010 as compared to the 11 percent of the world’s total poor in 1981 (World Bank, 2010).
In 2006, out of the 50 nations on the UN list of least developed nations, 34 are in Sub-Sahara Africa. A more sobering statistics is that about 14.6 million children (simply, one in every five) live in absolute poverty as at 2007 data. As presented by the Human Development Report (2013) of United Nations Development Programme, human development index for the region was 0.475 in 2012 from 0.366 in 1980 which has been the worst since 1980 as compared to other regions. It has the lowest life expectancy rate of 54.9 and lowest mean years of schooling of 4.7. It also had the highest number of youths as well as the highest number of youth unemployment of 50 percent in 2012 and average youth unemployment of 12 percent over the period. The degree of poverty can depend upon two factors-the average level of income and the extent of inequality in income distribution.
Although growth is seen as the main drivingforce for poverty reduction, interest has nowbeen based on the role of income distribution in reducing poverty since the yield of growth may not be equally shared and poverty not reduced. A distinct conclusion is yet to be established on the relationship between equity and economic growth. The question at hand is whether countries should fight to stimulate economic growth usingmore robust economic incentives that lead to more inequality or strive to reduce inequality, enhance social stability, foster growth and reduce poverty.
From past studies, there are different effects considering rich versus poor countries, regions versus nations and cross section versus time series evidence. Garbis(2005) noted that initial thinking on the impact of inequality on growth is that greater inequality might be beneficial. This means redistribution of income that implies a trade-off of more growth for the price of more inequality. This ambiguouslyaffects the poor people.Inequality may limit growth at the nation level even when the increase in economic motivesadvances growth especially at the lower level, with high mobility of factors. It is a general impression among Economists that poverty seems to be high majorly as a result of the increasing income inequality.It is important that successful development strategies look at their interdependency andinteractions. Hence,Bourguignon (2004) refers to this relationship as the poverty-growth-inequality triangle.
1.2 Statement of the Problem
The policy that would help in the achievement of equity in distribution and alleviation of poverty had been an ongoing debate. Before now, the major debate was the professed trade-off between growth and inequality according to Kuznet’s inverted U-hypothesis that suggested that inequality rises during the initial stages of development and then declines. Question has also been raised on the trickle down of the output of economic growth to the poor as proposed by early theories of development. However studies on different countries have shown that such a pattern cannot always hold for all countries (Deininger and Squire, 1996; Aigbokhan, 2000) and recent emphasis has been on explaining the rationale behind distinct experiences by different countries.
Nigeria’s poverty situation is of a major interest. Statistical data attest to the growing incidence and depth of poverty in the country, and this presents a paradox considering the country’s endowment of vast human and physical resources. The country is rich, but the people are poor (World Bank, 1996a, in Obadan, 1997). Irrespective of the fact that poverty reduction has been at the center ofthe country’s economic policy and development programmes since independence with different targeted program(for instance, National Accelerated Food production Programme, Directorate for Food, Road and Rural Infrastructure (DFRRI), Better Life Programme, National Directorate of Employment, National Poverty Eradication Program (NAPEP), National Economic Empowerment Development Strategies (NEEDS) and Subsidy Reinvestment and Empowerment Programme (SURE-P)), using huge human and material resources and covering different sectors (agriculture, health, education, housing and finance), no noticeable success has been achieved in this direction. The poverty rate is still on the increase given an average of 5 percent per capita growth rate since 2000 (Ichoku,Agu and Ataguba, 2012). However, there are diverse views empirically on the impact of these programmes on the poor and poverty reduction. While some believe it has had positive impact (for example Obadan, 1994; Canagarajah, Ngwafon and Thomas, 1997), others opposed it (examples, Osinubi, 2003; Olaniyan and Bankole 2005; Ichoku et.al,2012).
According to World Development Report (2015), Nigeria was amongst the low-income countries with GDP per capita of $1700 in 2014. Similarly, the HDR (2013) ranks Nigeria
37thin terms of GDP, while onper capita GDP basis, it ranks 143rd. The HDR (2013) ranks
Nigeria 30th on the basis of Purchasing Power Parity (PPP $), and 150th on Per Capita Purchasing Power Parity (PPP $). Its human development ranking is equally very low. Human Development Index (HDI) in 2011 puts it at 156th position among 177 countries as compared to
the 151st position in 2002, while its Gender Development Index (GDI) is at the 132ndposition. However, Nigeria ranks 6th and 7th as oil exporter and producer, 10th as the most populous country in the world, 26th largest economy in the world and the largest economy in Africa (World Bank, 2015). According to UNDP HDR (2009, 2010), Nigeria’s human poverty index (HPI) for 2007 was 36 percent placing Nigeria at the 114thposition. Also in 2010, multidimensional poverty index was about 0.310 with about 62percent poor multidimensional while World Bank (2015) rates Nigeria among the 5th poorest nations in the world as at 2014. Inequality is also very high with the ratio of the richest 10 percent to the poorest 10 percent of
16.3 and a Gini index for the nation of 42.9 in 2010 (UNDP, HDR, 2011).
Nwaobi(2004) observed thatNigeria’s challenges are beyond enhancing one sector, State or region and the use of policies that lead to inefficiencies in resource allocation. It requires the adoption of policies that will improve the welfare of all living in it. According to the National Bureau of Statistics (NBS, 2012) and UNDP (2013), an estimated population of about 15 percent of Nigerianlived in poverty in 1960. The incidence of poverty based on $1 a day increased sharply between 1980 and 1985 as well as between 1992 and 1996. However, there was a decrease in poverty level between 1985 and 1992, see figure 1.
Figure 1.1: Poverty-growth-inequality trends
Source: Authors chart using data from Central Bank of Nigeria, CBN, (2013), National Bureau of Statistics
(2012) and Human Development Report, 2009, 2013
Figure 1 also shows that Real GDP growth rate followed the same trend as poverty increasing from 9.54 in 1985 to 10.48 2004 but dropped to 7.98 percent in 2010. Having rebased the
Nigerian GDP, the annual growth rate of GDP rose to 7.44 percent in 2014 (NBS, 2014). NBS (2012) estimated the incidence of poverty of most States in Nigeria in 2010 to be over
60.0percent. This means that over 60.0percent of their population is poverty stricken while some States have a very high incidence of poverty (for instance, Adamawa, 74.2; Sokoto, 81.2; Gombe, 74.2; Kastina, 74.5; Jigawa 74.1).The poverty incidence in the different States differs as a result the institutional componentsof the States. Per capita expenditure and the inequality are also on the rising side. Per capita expenditure increased continuously from N15.98 in 1985 to N1585.17 in 2007 and N2391.4 in 2010.Inequality rose continuously from 34.28 in 1980 to
46.50 in 1996, experienced a little drop in 2004 and increased to 44.96 in 2010 (NBS, 2006; Central Bank of Nigeria, (CBN), 2010). This has raised a question on the theoretical postulation of an inverse relationship between poverty and growth in Nigeria. To understand the nexus between growth, poverty and inequality is thus a major challenge both in research and policy debates.
Several studies have been carried out on poverty, growth and inequality ranging from measurement to analysis and empirical literature seems to lead to contradicting conclusions. A major feature of the relationship between growth and poverty that is often neglected is that there is no invariant relationship between the rate of growth and the rate of poverty reduction (faster growth is not always accompanied by faster rates of poverty reduction) (Epaulard,
2003) and the reasons for these variations are not yet fully understood. Thus, eliminating poverty in the shortest possible time requires an understanding of what lies behind these variations. Inequality has been found to play significant role in the poverty-growth-inequality relationship by some studies (Bourguignon, 2003; Epaulard, 2003; Kalwij and Verschoor,
2007), other studies have reached the decision that there is no deliberate and regular link between increase in growth and reduction in poverty because growthwas found not to beenough in the reduction of poverty (Deininger and Squire, 1998; Fosu, 2009) while othersdemonstratedthe existence of a relationship between per capita income growth and poverty reduction (Dollar and Kraay, 2002).
In Nigeria, some studies have been carried out on Growth and Poverty alleviation (see: Aigbokha, 1997, 2000; Bulama, 2004; Obadan, 1997; Obi, 2007; Ichoku et. al, 2012). Aigbokhan (2000) examined Nigeria’s poverty profile and found that poverty is increased because of the existence of polarization in the distribution of income. The result of the study also showed that there is no existence of “trickle down” experience; growth did not enhance
poverty and inequality reduction. The study of Bulama (2004) showed that poverty, inequality and economic growth correlate.
Tesliuc (2003) noted that most of these inconsistencies in these previous studies might be as a result of the methods used to evaluate poverty. It is also possible that inequality’s impact on growth differs based on the economic setting. Past growth measures have been examined using nominal per capita expenditures and income data, as presented in official reports (Bulama,
2004; Obi, 2007). The use of real per capita expenditures as recommended by Boccanfuso and Kaboré, (2004) can mitigate conclusions on poverty trends and growth relationship.Bulama (2004) conducted some studies using Ordinary Least Square (OLS) method of which the stationarity of the data was not confirmed. These only gave a partial result since it was carried out on a partial analysis. Thus, a dynamic study is important in analyzing this nexus.
This study used a new methodology knowing that per capita expenditure changes over time. One possible indicator of pro-poor growth is the growth elasticity of poverty, that is, the percentage fall in poverty when the economy grows by one percent. As noted by Kurita and Kurosaki (2007), Kakwani (1993) shows that the elasticity to a counterfactual growth pattern that makes the entire Lorenz curve unchanged depends on the shape of the Lorenz curve and the location where the poverty lines fall on the curve. Kakwani, Khandker and Son (2004) and Heltberge (2004) examined this elasticity using current micro-dataset. These are different ways to show the changes that occur in the distribution. However, it is hard to infer the structural relationship among poverty, growth and inequality using these methodologies since the changes in poverty and those in average expenditure in the same period are linked by construction. It is, therefore, imperative to evaluate this nexus for Nigeria in a dynamic panel framework as recommended for future research by Alesina and Rodrik(1994) in their seminal paper in this field of study.
Hence, this study deviated especially from the most recent comprehensive study on the subject in Nigeria because it evaluated growth using real per capita expenditures. It also evaluated the poverty growth inequality nexus in Nigeria using measures of poverty and inequality data of the most recent survey in a dynamic panel framework. It is quite clear from the literature that growth alone is not enough to tackle the problem of poverty rather inequality may also be vital. Thus, meeting the goal of poverty reduction, for instance, may require special attention predicated on a better understanding of the poverty–growth–inequality nexus, particularly in Nigeria.
1.3Research Questions
Given the Nigerian growth and poverty structure, the following questions therefore, became imperative:
i. How is growth related to poverty in Nigeria?
ii. Is poverty a significant function of inequality in Nigeria?
iii. What is the relationship between growth and inequality in Nigeria?
1.4 Objectives of the Work
The broad objective of this study was the presentation of a dynamic analysis of the Poverty- Growth-Inequality Nexus, using Nigeria as a case study. Specifically, the objectives of the work are to:
i. Analyze the relationship between poverty and growth in Nigeria.
ii. Evaluate the statistical relationship between poverty and inequality in Nigeria iii. Ascertain the relationship between growth and inequality in Nigeria.
1.5 Research Hypotheses
Based on the above objectives, this research tested the following hypotheses:
i. Poverty has no significant relationship with growth in Nigeria.
ii. There is no significant relationship between poverty and inequality in Nigeria. iii. There is no significant relationship between growth and inequality in Nigeria.
1.6. Significance of the Study
The quest for poverty reduction is a pompous developmental concern in Nigeria. The country is faced with the major problem of a viable policy framework to achieve these objectives of poverty reduction and reduction of inequality in the face of high growth rate. There is also the problem of the possibility of a trade-off. Thus, if reducing inequalities brings quicker reduction in poverty, then distribution policy will take upper hand; and if it is growth that will bring down poverty fast, it will take the priority. This has led to different studies on the subject
matter with inconclusive results. This work contributes to the development of Nigeria economy and literature on this issue in two major ways:
First, it provided a deeper understanding of the Poverty-Inequality- Growth Nexus in Nigeria using the current survey and also proffers possible policy measures that accommodated the inequality growth trade-off in Nigeria for government and other stakeholders in the war against poverty. Knowing the status of a problem makes a problem half solved. Thus, the study brought out the structural relationship among growth, Inequality and poverty in Nigeria. This is of immense relevance to the poverty reduction developmental policies.
To test the theoretical hypothesis on the relationship among poverty, inequality and economic growth, the study used the system dynamic panel data model that allows researcher and policy makers to understand the dynamics and adjustments of economic variables. Dynamic panel data modeling has proved to be relevant and useful for understanding economic interactions between markets and agents in a complex world knowing fully that many economic relationships are dynamic in nature. It avails us the opportunity of exploring the cross-sectional and the time-series changes in growth and inequality as well as their impact on poverty.
Our research result is, therefore, expected to provide a quantitative policy framework to tackle the poverty and inequality problem that is eating up the economy. It is also anticipated to be an essential component in our efforts to establish the basis for long-term and sustainable development in Nigeria. It will give direction towards the combination of attention to income distribution and satisfaction of basic human needs in Nigeria. It also contributed to the existing knowledge and research in macro-micro-modeling.
1.7 Scope of the Study
The study analyzed the Poverty-Growth-Inequality Nexus in Nigeria using semi- macro panel datasets from National Bureau of Statistics and Human Development Report, Nigeria for different years.The study used data on poverty measured by head count index, growth measured by real per capita expenditure and inequality captured by Gini coefficient. Other variables arehousehold size, adult literacy rate, unemployment rate and sources of water available to the people. The thirty-six States and Abuja constituted the cross-sectional scope while the period 1992 to 2010 using 1992, 1996, 2004 and 2010 formed the time series scope. The period used for the time series was chosen based on the limitation of data availability.
1.8 Limitation of the Study
This study is limited to the availability of recent data and had the most recent data available to be the General Household Survey 2010. It also had to make use of only four years round data as these were the only available periods of the national survey. The data for the study were obtained from different sources as only one source could not provide us with all the data needed for the study. The data used are as published in the various survey reportsand other secondary sources that may also be prone to lack of perfect accuracy. The study also intended to compare the possibility of the impact of different measures of poverty and inequality, but this was not possible due to lack of data.
This material content is developed to serve as a GUIDE for students to conduct academic research
AN ANALYSIS OF THE POVERTY GROWTH INEQUALITY NEXUS IN NIGERIA 1992-2010
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