THE RELATIONSHIP BETWEEN POVERTY AND ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE INTRODUCTION
Background of the study
Poverty is a global threat, plaguing both developed and developing nations. It has a devastating effect on developing nations generally but sub-Saharan Africa in particular (Addae-Korankye 2014). Poverty has become pervasive in Nigeria in the last four decades despite the economic boom of the 1970s (Anyanwu 1997; Mohammed-Hashim 2008; Obi 2007). Similarly, it was discovered that about 60% of Nigerians live in poverty despite the country’s enormous oil wealth (Sadiq 2007). It can be argued that poverty varies from one subgroup to another such that poverty is seen in all its manifestations and its magnifications as antithetic to economic growth (Rodrigues 2009).
Globally, poverty has been recognised as a major blemish in developing economies ever since economists began to take interest in the third world (Killick 1981). On the whole, the Nigerian economy depends so much on the exportation of oil that nearly all its budgetary revenues come from oil earnings sold in the international market. In 1973, most economic indicators such as real per capita income, real wages and private consumption were positively impacted by the first oil shock, which caused a dramatic increase and sharp rise in them. Similarly, income inequalities between urban and rural areas increased sharply, primarily because of the oil boom and its spin-offs (Anusionwu & Diejomoah 1981). However, the international price of oil decreased or fell constantly between 1980 and 1985 and brought about worsening economic conditions; there was a sharp fall in the standard of living and the biting hand of poverty was ushered in as a leading problem in Nigeria (Okunmadewa 1996). To this end, the oil boom was recognised to have contributed immensely to the large appreciation of the Nigerian naira, which subsequently caused adverse effects to agriculture as a non-oil tradable that had been the mainstay of the Nigerian economy.
In Nigeria, the nature of the determinants of poverty can be traced to low or declining level of economic growth, income inequalities, unemployment, corruption, bad governance, diversion of funds into non-developmental projects, fund embezzlement, inappropriate macroeconomic policies, inadequate endowment of human capital, debt or borrowing, labour market deficiencies that were caused by limited growth in job creation, low productivity, low wages in the informal sector and poor development of human resources. Poverty can also arise through structural deficiencies such as environmental degradation, worker retrenchment, frequent and increasing crime rates and violence, decrease in the real value of safety nets, structural changes in the family as well as the neglect of the agricultural sector, non-development of infrastructural facilities, lack of enabling environment for infant industries, epileptic power supply, depreciation of the Nigerian currency (naira) and the military government’s inability to properly manage the Nigerian economy (Ajakaiye & Adeyeye 2001; NPC 2004; Ogwumike 2001).
Poverty became prevalent in Nigeria beginning in 1985 and was seen as an obstacle or limitation to economic growth because poverty was measured based on the world standard of $1 per day and $2 per day. International prices were adjusted for local currency such that purchasing power parity conversion factors were employed to compute the depth of poverty as well as its prevalence in Nigeria (Obadan & Odusola 2001). The poverty gap calculated on the basis of $1 and $2 per day as the mean shortfall below the poverty line indicated that 70.2% and 90.8% of Nigerians, respectively, earned income that put them below the poverty line in a survey conducted in 1992–1993. During the same period, the poverty gap computed at $1 and $2 per day was 34.9% and 59.0%, respectively (Mohammed-Hashim 2008; World Bank 2001). In 2010, the World Bank defined or readjusted the international poverty line of $1 equivalent in 2001 to a new international poverty line of $1.25 per day in US prices (World Bank 2011). Generally, poverty brings about impaired access to resources, reducing the capability of individuals to enjoy an improved quality of life, which might have been converted from available productive resources (Adeyeye 1999; Ogwumike 2001; Sen 1997). On the other hand, poverty persists as a result of inefficient employment of common resources, occurring because of a weak policy environment and inadequate infrastructure, as well as a lack of access to improved technology. Other causes include the non-availability of credit instruments and exclusion of ‘problem groups’ from participating in the democratic process. Thus, widespread poverty and an over-reliance on earnings from oil might have hindered economic growth in Nigeria.
In spite of the strong growth rate in Africa’s second largest economy, poverty has kept rising in Nigeria to the extent that about 100 million of her citizens live below the poverty line of $1 per day (Daniel 2011). The proportion of Nigerians who were absolutely poor rose from 54.7% in 2004 to 69.9% in 2010 (National Bureau of Statistics [NBS] 2011; Omoniyi 2016). Nigeria’s economy is projected to continue to grow, but poverty is likely to get worse as the gap between the rich and poor continues to widen on a daily basis. This is why Kale (2012) considers poverty to be a paradox in which a higher proportion of Nigerians continue to live in poverty in spite of the continued enormous growth in the Nigerian economy year by year. To this end, the NBS (2010) reported that 112 518 507 million lived in relative poverty while it put Nigeria’s population at 163 million. It went further to compare this figure with Uganda, where only 28 million were poor; this is an indication that there are about four times as many people living in poverty in Nigeria as in Uganda. This shows that Nigeria has failed using all standards of poverty measurement including the relative poverty index. The various poverty measures in Nigeria pose different profiles; for instance absolute poverty puts it at 60.9%, 61.2% for $1 per day, 93.9% for the subjective measure while a recent survey conducted by Harmonized National Living Standard put the poverty profile at 69.0%. The much-celebrated gross domestic product (GDP) growth rate that averaged 7.4% in the last 10 years becomes questionable. Additionally, Nigeria’s Gini coefficient was 0.268 in 1980, 0.295 in 1990, 0.430 in 2004, 0.490 in 2009 and 0.834 in 2012 (Nwagwu 2014; UNDP 2009; World Bank 2014a). Similarly, the Human Development Index for Nigeria during the same period was 0.46 in 2004; it increased to 0.49 in 2009 and further increased to 0.51 in 2012 (UNDP 2011; 2013; World Bank 2014b; World Data Atlas 2015). These figures show that income inequality and human capital development increased in Nigeria during the period covered by this article.
This succinctly shows that there is a sharp disconnect between poverty and growth because the majority became poorer through exclusion. It is therefore necessary to mention that what is needed to fight the biting hand of poverty and ensure that poverty is banished, is a holistic attempt. This can only come through the adoption of macroeconomic policies of all-inclusive growth nationwide, to which it seem no adequate attention has been given by previous studies. The objectives of this article are to examine the relationship between poverty and economic growth, to analyse the determinants of economic growth and to establish the causes or determinants of poverty in Nigeria. The rest of this article is divided into four sections: a section dealing with a review of the literature, one to present the methodology of the study, one to discuss the results and finally the conclusion and recommendations.
Statement of the Problem
Many Economists would argue that igniting economic growth and sustaining it is the surest and most sustainable way to fight poverty. Cross-country studies on economic growth and poverty reduction indicate that a 1% increase in growth has been associated on average with a 1.5% reduction in poverty (Hasan, Mitra and Ulubasoglu, 2007). The Asian Development Bank (ADB) (2004) report stated that there is a great deal of variation in how much economic growth has reduced poverty across countries and even within countries over different periods of time. In statistical terms, the report noted that variation in economic growth can explain only around 45% of the variation in poverty reduction. These two ―stylized facts‖ about growth and poverty linkages – that poverty reduction is closely associated with economic growth but that this association is by no means perfect suggests two challenges for policymaker (Hasan et. al., 2007). According to author, first what are the policies that can ignite and thereafter sustain growth? Second, how does one ensure that growth generates significant opportunities for the poor?
To date, poverty situation in Nigeria remains a paradox, at least from two perspectives. Firstly, poverty in Nigeria is a paradox because the poverty level appears as a contradiction considering the country‘s immense wealth. Secondly, poverty situation has worsened despite the huge human and material resources that have been devoted to poverty reduction by successive governments in Nigeria with no substantial success achieved from such efforts (Oyeranti and Olayiwola, 2005). According to the authors, since poverty remains a development issue, it has continued to capture the attention of both national governments and international development agencies for several decades. Since the mid 1980s, reducing poverty has become a major policy concern for governments and donor agencies in all poverty stricken countries, Nigeria inclusive. Thus, to attain the objective of reducing poverty in Nigeria, the preoccupation of the government has been the growth of the economy as a pre-requisite for improved welfare. To this effect the government therefore initiated several economic reform measures which include Economic Stabilization measures of 1982, Economic Emergency Measures in 1985 and Structural Adjustment Programme (SAP) in 1986. Components of SAP include market- determined exchange and interest rates, liberalized financial sector, trade liberalization, commercialization and privatization of a number of enterprises (Aigbokhan, 2008).Specialized agencies were also established to promote the objective of poverty reduction. These include Agricultural Development Programmes, Nigeria Agricultural, Cooperative and Rural Development Bank, National Agricultural Insurance Scheme, National Directorate of Employment, National Primary Health Care Agency, Peoples Bank, Urban Mass Transit, mass education through Universal Basic, Education (UBE), Rural Electrification Schemes (RES) among others (Adigun, Awoyemi and Omonona, 2011). The recent effort is based on the seven point agenda. Like earlier reform packages, the strategy considers economic growth as crucial to poverty reduction. The major issues of the seven point agenda include: power and energy, food security, wealth creation and transportation. Others are land reforms, security and mass education.
There may have been increased polarization in income distribution, resulting in a wider gulf between the poor and the rich, manifested in a disappearing middle class in the Nigerian economy. Despite policy interventions in the past to correct this abnormality, income inequality has increased the dimension of poverty (Oyekale, 2007). Additionally, attention to the importance of income distribution in poverty reduction seems to be growing. Whether growth reduces poverty, and whether in particular, growth can be deemed to be ―pro-poor‖, depends, however, on the impact of growth on inequality and on how much this impact on inequality feeds into poverty (Araar and Duclos, 2007).
The rate of rising poverty in Nigeria has led to a number of empirical researches to understand the link between economic growth and poverty reduction. These research works (for example Adigun ,et al.2011, Akanbi and Du Toit, 2009; Orebiyi, 2008 and Osunubi, 2006) however, are one sided in the sense that they particularly focused on how various government policies affect poverty reduction and not if the growth performance are pro-poor. The argument in the theoretical literature on whether a country should focus on achieving growth and thereafter ensure that the pattern of its growth is pro-poor or focus on reducing poverty by ensuring that this will lead to growth is still unclear and therefore requires further empirical works especially for the case of Nigeria. This study is therefore designed to fill these gaps by attempting to address the following research questions: why has the rate of poverty been so high in Nigeria despite record increase in economic growth? What is the nature of relationship between poverty and Economic growth in Nigeria? If recorded economic growth cannot be translated into improved living condition of the poor, what other measures of policy can be explored to reduce poverty and how?
Objectives of the Study
The main objective of this study is to explore the linkages between poverty and economic growth in Nigeria. The specific objectives are:
i To ascertain if recorded economic growth in Nigeria translated into poverty reduction ii To assess if growth is pro-poor in Nigeria.
Based on the objectives outlined above, the following hypotheses therefore were formulated for this study:
Ho1 Recorded economic growth does not translate into poverty reduction in Nigeria Ho2 Growth in Nigeria is not pro-poor
Scope of the study
This study is limited to the Nigeria economy for the period 2004-2008, it uses Nigerian households‘ survey for two periods 2003/2004 and 2008 to make an ex-post analysis of changes in poverty.
Significance of the study
This research would contribute to the ongoing policy debate by identifying growth patterns of the Nigerian economy and to what extent the poor benefit from economic growth. In order to achieve this, it uses Nigerian households‘ survey for two periods 2003/2004 and 2008 to make an ex-post analysis of changes in poverty. It therefore employs Kakwani, Khandker and Son (2004) framework called Poverty Equivalent Growth Rate (PEGR) measure which utilizes unit record data available for two periods. This measure of pro-poor growth according to the authors, captures a direct linkage (or monotonic relation) with poverty reduction, indicating that poverty reduction takes into accounts not only growth but also how benefits of growth are shared by individuals in society. Therefore, a pro-poor growth measure that satisfies the monotonicity axiom implies that the magnitude of poverty reduction should be a monotonically increasing function of the pro-poor growth rate.
Limitations of the Study
Although the research has reached its aim, there were some unavoidable limitations. First because of time limit, this research was conducted using 1996-2004 Nigerian Living Standard Household Survey (NLSS) data. The study should have included 2008 NLSS but the data released then by the Federal Bureau of Statistics required some statistical amendments to be used for empirical study. The use of Poverty Equivalent Growth Rate (PEGR), instead of the usually Additively Decomposable Growth Rate measures resulted in the delay of the project completion in order to get acquainted with the software application.
Organizations of the Study
The paper is organized as follows: Following the introduction in chapter one is the literature reviews in chapter two, which include theoretical and empirical literatures. Chapter three is for methodology, the model of Pro-Poor growth, applying of additively decomposable poverty measures and Poverty Equivalent Growth Rate (PEGR) measures, calculating of PEGR and data sources, while chapter four consists of data analysis and presentations of the results. Chapter five contains summary, conclusion and recommendations