Growth Redistribution and Inequality Effects on Poverty in Nigeria

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Jude Chukwu (Department of Economics, University of Nigeria and Visiting Research Fellow, IPC-IG) introduced his research, presenting its empirical findings during a presentation on the IPC-IG’s Seminar Series. He delved into the patterns of growth and inequality in Nigeria, as well as on the extent of pro-poorness and inclusiveness of growth in the country.

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Growth Redistribution and Inequality Effects on Poverty in Nigeria

  1. 1. Growth, Redistribution and Inequality Effects on Poverty Changes in Nigeria Jude Okechukwu Chukwu PhD Candidate Department of Economics University of Nigeria jude.chukwu@unn.edu.ng Visiting Research Fellow IPC-IG, Brasilia/Brazil IPC-IG, SEMINAR SERIES, 28th July, 2014
  2. 2. Presentation Outline 1. Introduction: context and motivation 2. Study objectives 3. What does theory tell us? 4. Empirical Evidence4. Empirical Evidence 5. Estimation Method: Models and data 6. Empirical Results 7. Conclusion and Policy Implications
  3. 3. Introduction/1 The economy has been growing on average between 6.5% and 7.2% for a decade (NPC, 2012). GDP growth rate was 3.7% in 2004. By 2010, it had increased to 7.8% (World Bank, 2013). Rise of 4.1%, which is above continental Africa’s average growth rate of 4.0%. Trickle-down theory: increase in growth rates enables the poor toTrickle-down theory: increase in growth rates enables the poor to derive maximum benefits. Growth is good for the poor (Dollar & Kraay, 2000) Yet in rare cases the economic growth might increase inequality and offset gains of the poor from the economic growth (Esanov, 2006). The paradox is that the poverty level in Nigeria contradicts the country’s immense wealth (Obadan, 2004).
  4. 4. Introduction/2 Fig. 1: Nigeria GDP Growth Annual (%)
  5. 5. Introduction/3 Fig. 1: Change in GDP Growth (%) 2004 - 2010
  6. 6. Introduction/4 Figure 3 show that poverty increased at National level by 14.6%; in rural sector by 9.9% and urban sector by 18.6% Poverty changes were positive in Rural and UrbanPoverty changes were positive in Rural and Urban sectors, Southern zones but negative in all the Northern zones South-east showed worst evidence of poverty increase by 29.72%, while South-west showed least increase by 3.10% followed by South-south (17.7%)
  7. 7. Introduction/5: Poverty Trends and Changes: 2004 & 2010/Fig 3 50 60 70 80 -20 -10 0 10 20 30 40 National Rural Urban South South South East South West North Central North East North West 14.6 9.9 18.6 17.72 29.72 3.1 -10.68 -5.52 -3.52 Poverty 2004 Poverty 2010 Poverty Change
  8. 8. Introduction/6 Inequality rose by 4.1% at national level; increased by 2.2% and 4.2% at rural and urban sectors respectively Inequality changes were positive in all SouthernInequality changes were positive in all Southern zones, North east and North West but negative in North central (about -5.4%) Highest increase by 18.1% was in the South east followed by South south (oil rich/coastal region) with an increase of 12.8% while South west (Lagos axis) had least increase in inequality by 0.2%
  9. 9. Introduction/7: Inequality Trends and changes: 2004 & 2010/Fig 4 10 15 20 12.8 18.1 8.6 -10 -5 0 5 National Rural Urban South South South East South West North Central North East North West 4.1 2.2 4.2 0.2 -5.4 0.7 Inequality 2004 Inequality 2010 Inequality Change
  10. 10. Introduction/8 Nigeria’s growth paradox is a policy concern since average growth rates have been trending upwards, while poverty and inequality deteriorate HNLSS, 2010 indicted the high growth rates between 2004 and 2010 - both poverty & inequality were reported to haveand 2010 - both poverty & inequality were reported to have increased: poverty rose by 14.6% and inequality by 4.1% Why did the impressive growth in the 2000s not lead to decline in poverty and inequality in Nigeria? Has growth been pro-poor and inclusive in Nigeria?
  11. 11. Introduction/9 Departs from Adigun et al (2011); Odozi & Awoyemi (2010); Aigbokhan (2008) in three main respects: employed latest 2010 HNLSS for analyses. Previous Nigerian studies used 1996 NLSS and 2004 HNLSS considered poverty elasticity with respect to within and between-group inequality using models by Araar (2007) evaluates pro-poorness and inclusiveness of growth between 2004 and 2010
  12. 12. Study objectives i. decomposes poverty changes into growth effect and redistribution effect ii. estimate marginal FGT impact and FGT elasticity with respect to within-and-between groupwith respect to within-and-between group inequality iii. estimate the pro-poorness and inclusiveness of growth
  13. 13. What does theory tell us?/1 Poverty-growth-inequality triangle (Bourguignon, 2004): inequality has direct impact on poverty as well as indirectly on poverty through growth Kuznet’s (1955) inverted-U predicts rise in inequality at early periods of high and rising growth rates and fall in inequality during later periodsduring later periods Okun’s (1975) treatise on equality and efficiency argue that greater income inequality is an incentive for work and investment Trickle down hypothesis states that inequality is good for growth
  14. 14. What does theory tell us?/2 Barro (2000): effect of inequality on growth may be non-linear: it may be bad for growth in poor countries but good for growth in rich countries Four stylized facts on the relative importance of growth and inequality on poverty exists: *1. Growth effect is dominant *2. Growth is less effective in reducing poverty in high inequality economies *3. Growth is less effective in reducing poverty in LDCs than in mature economies *4. Growth has larger impact on poverty reduction in rural areas, while distribution has larger impact on poverty reduction in urban areas
  15. 15. Empirical Evidence Studies that find that poverty change was mainly due to inequality include Esanov (2006) for Kazakhstan, Anwar (2010) for Pakistan, Kirama (2013) for Tanzania etc Studies that find that poverty change was mainly due to growth include Baye (2006) for Cameroon, Epoh & Baye (2007) for Cameroon, Odozi and Awoyemi (2010) for Nigeria and so on.Cameroon, Odozi and Awoyemi (2010) for Nigeria and so on. Cheema and Sial (2010) for Pakistan found that growth and redistribution effects were negative indicating that both effects reinforced each other to reduce poverty Studies that support the prospective viewpoint are Araar (2012) and Klasen & Misselhorn (2008).
  16. 16. Estimation Method/1 Model for objective 1: Shapley Value approach by Shorrocks (1999) and Datt & Ravallion (1992) approach were employed for growth and redistribution decomposition. Model for objective 2: Araar’s (2007) models for poverty and inequality within-group and between-group were employed.inequality within-group and between-group were employed. Model for objective 3: Pro-poor indices such as Ravallion and Chen (2003); Ravallion & Chen index – g; Kakwani and Pernia (2000); Kakwani and Pernia (2000) - 1; Kwakani, Khander & Son–PEGR-(2003); PEGR – g; and the Growth Incidence Curve were used
  17. 17. Estimation Method/2 Data and their features: * 2004 NLSS & 2010 HNLSS obtained by NBS were employed * Both covered 36 states and FCT (37 Strata), and used two-stage multi-stage sampling technique with EAs as Psu-first stage and Households as Usu-second stageHouseholds as Usu-second stage * 2004 NLSS surveyed 19, 158 households: 4646 in Urban (24.2%) and 14, 512 in rural (75.8%) • * 2010 HNLSS surveyed 34, 619 households: 9,348 in Urban (27%) and 25, 271 in rural (73%) * Both were survey set for sample design prior to estimations
  18. 18. Empirical Results/1 Table 1: Poverty Decomposition into Growth and Redistribution Components, 2004-2010, NIGERIA FGT Growth Effect Redistribution Effect Residual Difference in Poverty (d2 – d1) Datt & Ravallion Shapley Datt & Ravallion Shapley Datt & Ravallion (d2 – d1)Datt & Ravallion Shapley Value Datt & Ravallion Shapley Value Datt & Ravallion (d2 – d1) 2010 - 2004 P0 -0.3381 (-0.3262) -0.3321 0.1006 (0.1125) 0.1065 0.0119 (-0.0119) -0.2256 P1 -0.1624 (-0.1984) -0.1804 0.0875 (0.0514) 0.0695 -0.0360 (0.0360) -0.1109 P2 -0.0974 (-0.1343) -0.1159 0.0657 (0.0288) 0.0473 -0.0369 (0.0369) -0.0686 Source: Author’s calculation based on NLSS 2004 and HNLSS 2010 Note: Values in brackets are for 2010 as reference period
  19. 19. Empirical Results/2 Table 1 show that P0 fell by 22.56%; the growth = 33.21% in poverty reduction while, redistribution adversely accounted for 10.65%; thus dampened positive impacts of growth on poverty It is likely that national poverty would have fallen the more due to growth, iff, inequality had not varied given the realized decrease in poverty of -0.2256 as against the potential of -0.3321 (growth)in poverty of -0.2256 as against the potential of -0.3321 (growth) Poverty gap declined by 11.09%, growth accounted for 18.04% in poverty reduction; while redistribution adversely accounted for 6.95% Poverty severity fell by 6.86%, the pure growth effect accounted for 11.59% in poverty reduction, while redistribution adversely accounted for about 4.73%
  20. 20. Empirical Results/3 The results suggest that had inequality not increased, the reduction in poverty would have been more Tables 2 and 3 show the sectoral decomposition (urban and rural) of poverty changes, and follow same pattern as for Nigeria Poverty reduction was more due to growth than due to redistribution In urban sector, poverty declined by 35.74%, 16.56% and 10.2% for headcount ratio, poverty gap and poverty severity respectively In rural sector, poverty declined by 18.04%, 9.25% and 5.74% for headcount ratio, poverty gap and poverty severity respectively Poverty reduction declined faster in urban than rural areas Study finds that for all FGT poverty measures, redistribution reduced the positive impacts of growth on poverty This finding is consistent with Anwar (2010) for Pakistan
  21. 21. Empirical Results/4 Table 2: Poverty Decomposition into Growth and Redistribution Components, 2004-2010, URBAN Sector/1 FGT Growth Effect Redistribution Effect Residual Difference in Poverty (d2 – d1) Datt & Ravallion Shapley Value Datt & Ravallion Shapley Value Datt & Ravallion (d2 – d1) 2010 - 2004 P0 -0.4719 (-0.4718) -0.4718 0.1143 (0.1144) 0.1141 0.000011 (-0.000011) -0.3574 P1 -0.2045 -0.2433 0.1166 0.0778 -0.0776 -0.1656P1 -0.2045 (-0.2822) -0.2433 0.1166 (0.0389) 0.0778 -0.0776 (0.0776) -0.1656 P2 -0.1177 (-0.1888) -0.1533 0.0868 (0.0157) 0.0512 -0.0712 (0.0712) -0.1020 Source: Author’s calculation based on NLSS 2004 and HNLSS 2010 Note: Values in brackets are for 2010 as reference period
  22. 22. Empirical Results/5 Table 3: Poverty Decomposition into Growth and Redistribution Components, 2004-2010, RURAL Sector/2 FGT Growth Effect Redistribution Effect Residual Difference in Poverty (d2 – d1) Datt & Ravallion Shapley Value Datt & Ravallion Shapley Value Datt & Ravallion d2 – d1 2010 - 2004Value Value 2010 - 2004 P0 -0.2853 (-0.2786 -0.2820 0.0982 (0.1049) 0.1016 0.0067 (-0.0067) -0.1804 P1 -0.1428 (-0.1679) -0.1553 0.0753 (0.0502) 0.0628 -0.0251 (0.0251) -0.0925 P2 -0.0871 (-0.1134) -0.1003 0.0560 (0.0298) 0.0429 -0.0262 (0.0262) -0.0574 Source: Author’s calculation based on NLSS 2004 and HNLSS 2010 Note: Values in brackets are for 2010 as reference period
  23. 23. Empirical Results/6 Findings in South south, South west, North central and North west are consistent with those of Nigeria, urban and rural sector Results for South east and North east differ a little from others: for the south east, poverty reduced by 2.41% for P0, while, P1 and P2 increased marginally by 1.69% and 2.26% respectively For North east, change in poverty reduced by 21.7% for P0, the P1 & P2 decreased by 8.45% and 4.13% points respectively. Redistribution impact supplemented the growth effect Despite that growth made inequality to deteriorate, the distributional change was targeted towards exiting the marginally poor households out of poverty. This is consistent with the findings of Kang and Imai (2010) for NU minority in Vietnam.
  24. 24. Empirical Results/7 Table 4: Elasticity of poverty with respect to within-group and between-group inequality Group MII MIP P0 ELS P0 MIP P1 ELS P1 MIP P2 ELS P2 South south 0.00708 0.000328 0.450556 0.000767 2.281928 0.000797 3.998963 South east 0.000688 0.000227 0.321574 0.000729 2.232403 0.000792 4.091086 Source: Author’s calculation using DASP in STATA 13.1 NOTE: MII means marginal impact on inequality; MIP represents marginal impact on poverty; ELS means elasticity; P0 = poverty headcout, P1 = poverty gap; and P2 = poverty severity. South east 0.000688 0.000227 0.321574 0.000729 2.232403 0.000792 4.091086 South west 0.001113 0.000211 0.184137 0.001186 2.246063 0.001380 4.409713 North central 0.000727 0.000425 0.568770 0.000749 2.169840 0.000745 3.642724 North east 0.000869 0.000457 0.512063 0.000893 2.166069 0.000931 3.808073 North west 0.001121 0.000967 0.839879 0.001159 2.178917 0.000996 3.158547 Within 0.005226 0.002616 0.487000 0.005483 2.210817 0.005641 3.837036 Between 0.000135 0.000076 0.548316 0.000143 2.245673 0.000127 3.364633 Population 0.005421 0.002526 0.453362 0.005704 2.217143 0.005942 3.896517
  25. 25. Empirical Results/8 Elasticity of poverty with respect to within- and between-group inequality Simulated elasticities are all positive Results are sensitive to the choice of poverty measure Between-group elasticities are numerically larger than within- group elasticities for P0 and P1 Between-group elasticity is less than within-group in the case of poverty severitypoverty severity heterogeneity exists in impact and elasticity estimates across geo- political zonal distributions using all the FGT poverty measures Heterogeneity exists despite that same redistributive processes, same “inequality and poverty aversion” parameters and same poverty line are employed. Study finds that heterogeneity is due to variations in initial sub- group distributions, not due to disparities in the quality of growth nor differences in redistributive policies
  26. 26. Empirical Results/9 Table 5: Pro-poor indices NIGERIA 2004 - 2010 Pro-poor indices Poverty Incidence (P0) Poverty Depth (P1) Poverty Severity (P2) Growth Rate of Mean Income (g) 1.1125 1.1125 1.1125Growth Rate of Mean Income (g) 1.1125 1.1125 1.1125 Ravallion & Chen (2003) index 0.3463 0.3463 0.3463 Ravallion & Chen (2003) - g -0.7662 -0.7662 -0.7762 Kakwani & Pernia (2000) index 0.6672 0.5514 0.5396 Kakwani & Pernia (2000) index -1 -0.3328 -0.4486 -0.4604 Kakwani, Khander & Son (2003) PEGR Index 0.7423 0.6134 0.6003 PEGR - g -0.3702 -0.4990 -0.5121
  27. 27. Empirical Results/10 Growth is pro-poor if the resulting growth rate is greater than the mean income growth rate (Stoterau, 2010; Kabubo-Mariara et al, 2012). In table 5, growth in mean income is everywhere greater than all estimated pro-poor indices Results show positive growth rate between 2004 and 2010 suggesting that mean income increasedsuggesting that mean income increased Ravallion & Chen (2003) index is 0.3463 which is less than growth rate of the mean income (1.1125): Growth was anti-poor instead of pro-poor Growth process b/w 2004 and 2010 could not have been pro-poor since the Kakwani and Pernia (2000) indices are less than unity in all FGT poverty measures
  28. 28. Empirical Results/11 Absolute and Relative Pro-poorness of growth Absolute pro-poorness of growth: Ravallion & Chen (2003) index, Kakwani & Pernia (2000), and Kakwani, Khander & Son (2003) Relative pro-poorness of growth: Ravallion & Chen (2003) index minus g; Kakwani, Khander & Son (2003) minus g; and the Kakwani & Pernia (2000) minus unity Estimates of 3 indices of absolute pro-poorness are statistically greater than zero signifying that the change decreased absolute poverty; while, the estimates of the indices of relative pro- poorness are –ve but not statistically different from zero Growth between 2004 and 2010 has not been sufficiently relative pro-poor. Result is consistent with Duclos and Verdier-Chouchane (2010) for Mauritius.
  29. 29. Conclusion and Policy implications Overall, economic growth does not seem to be accompanied by poverty reduction Poverty is worsening in Northern geo-political zones, and they lag behind their southern counterparts in the fight against poverty Inequality is also worsening in the Northern zones than in the Southern zones Growth has neither been pro-poor nor inclusive While growth has been anti-poor, inequality has been rising and inhibiting the growth process It is likely that robust inequality reducing policies to complement growth promoting policies are needed The low response of growth to poverty could be due to poor targeting of vulnerable groups and lack of quality institutional frameworks
  30. 30. Thank you for your rapt attention OBRIGADO!!!!!

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