The Impact of Income Inequality On Economic Growth: A Case Study On Nigeria

The Impact of Income Inequality On Economic Growth: A Case Study On Nigeria

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Abstract


There is mixed evidence in the literature regarding the relationship between income inequality and economic growth. Some studies have found a positive relationship, others a negative relationship while some found no correlation between the two variables. This study is an empirical analysis of economic growth and income inequality in Nigeria. Its purpose is to observe the impact of income inequality on economic growth in Nigeria, examine whether Kuznets curve holds and suggest probable and effective policy measures based on the findings to help reduce the gap between the rich and the poor.

Data was obtained from secondary sources namely, World Bank archives, National Bureau of Statistics and a statistical website called KNOEMA, using the appropriate instruments. In order to determine the shape of the Kuznets curve, a quadratic function was estimated, and the results confirm that the Kuznets inverted -U curve does not hold for Nigeria. The granger causality test was also conducted to determine the direction of the relationship between income inequality and economic growth. The results indicate that GDP granger causes income inequality in Nigeria. Finally, a multiple regression analysis was employed to estimate the relationship between the Gini coefficient, GDP and other explanatory variables. The results suggest the GDP, CPI, population growth and education are all true determinants of income inequality in Nigeria.

The findings from the research indicates that as economic growth increases, the level of income inequality actually worsens in Nigeria. The government is advised based on the results from the study to employ measures that would not only boost economic growth but also reduce the margin between the poor and the rich and ensure an equitable distribution of resources in the future.


Key words: income inequality, economic growth, Kuznets hypothesis

CHAPTER 1

INTRODUCTION

1.1 Background

The concept of inequality is at the heart of sustainable economic development. Inequality is defined as the difference between the standard of living across a population (Gallo, 2002). According to Clark (2015), over 70% of the population in developing countries live in highly unequal societies. There are various types of inequality such as: gender, wealth, health and income. The most popular among them is income inequality, and that is the primary focus of this paper. Income inequality is defined as the disparity in income between rich and poor individuals in a society. Income inequality is a growing problem globally, and it is even more evident in developing countries like Nigeria.

The issue of inequality in Nigeria peaked between 1985 and 2004 where the country’s Gini coefficient increased from 0.43 to 0.49. This immediately placed Nigeria among the most unequal countries in the world. One of the main causes of inequality was the growing level of corruption in the country and the absence of fair distribution of economic and human resources (Dali, 2015).

Economic growth is expected to not only increase the per capita income of a country. It is also supposed to improve the welfare and living standard of its citizens. However, in Nigeria there is a disconnection between economic growth and development as growth does not necessarily guarantee economic development. One of the main factors that have led to this is the way income is distributed amongst the rich and the poor.

Commonly referred to as the giant of Africa, Nigeria has a population of 173 million people. It is the largest country in Africa and currently accounts for 43% of the population. It is also the largest oil exporter in Africa and the has the largest natural


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gas reserve (Treasury Today, 2014). Nigeria is richly endowed with both human and natural resources. According to the Human Development Report (2015), Nigeria’s HDI value in 2005 was 0.467, which put the country in the low human development category and positioning it at 152 out of 188 countries.

The Ranker (2016) claimed that Nigeria is amongst the top 20 largest economies in Africa with a GDP of $594.257 billion, regardless of the country’s current economic setback it still manages to thrive. African Development Bank (2014) suggested that the Nigerian economy has experienced a slow and sluggish growth since the end of 2015. This is primarily due to the negative external and internal shocks the country has been facing such as: the fall in oil prices, security issues as a result of the Islamic terrorist group (Boko Haram) which led to the loss of over 2 million lives and the inadequate supply of foreign exchange in the forex market. Economic Growth declined from 6.2% in 2014 to an estimated 3.0% in 2015 and the level of Inflation increased from 7.8% to an estimated 9.0% (AFDB 2016). The central bank has sought adequate monetary and fiscal policies to reduce borrowing costs for the government and private sector and stimulate the economy.

2015 was a significant year for Nigeria. The general elections conducted in March led to the transition of power from a ruling party to the opposing party for the first time, and this led to a lot of political upheaval and instability. Currently, stimulating economic growth, ensuring security, improving social welfare and fighting corruption are the main priorities of the new administration.

Key Factors Contributing to income inequality in Nigeria

Corruption, Politics and Governance - According to Macrae (1982), corruption isan agreement between two parties, where one party has the ability to influence the allocation of resources. It is simply the abuse of public responsibility for private ends. The 2016 corruption perception index claimed that Nigeria is ranked 136 out of 176 countries with a low score of 28 out of 100. In addition to this over 85% of Nigerians believed that the rate of corruption in the country has significantly increased over the past few years (Transparency, 2016).


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Nigeria has gone through a lot of political changes since it gained its independence in 1960 and this has resulted in political instability. The military era marked a time of tyrannical rule and abuse of power by the elites and also signalled the rise in poverty rates. Studies have suggested that countries that deprive citizens of basic human rights like freedom of speech and expression are more likely to encounter poverty and inequality. This is because development and the growth of a nation begins with the input of the citizens on issues that are most important to them (Human rights watch, 2015). Once the communication between the government and the citizenry is not functional there would be issues in identifying and prioritising projects and policies to adequately fit the needs of the nation.

Like many developing countries, the political sphere plays a huge role in the welfare of the nation and overall economic growth. The most important and the least relevant policies formulated by the government are essential in either steering the economy towards success or doom. The Nigerian government is widely known for its inefficiency and poor governing skills due to the high level of corruption that prevails. Good governance is essential in ensuring the proper implementation of projects and schemes that aim to improve the welfare of citizens. It is one of the missing pieces in the inequality eradication puzzle.

Nigeria is a major oil exporting country abundant with both human and natural resources and this suggests that the economy has the capital to ensure steady economic growth. However, greed and corruption by elected officials in power has led to inefficient use of scarce resources and redundancy in implementation of economic policies. The level of corruption in the nation often hinders the progress of the country in terms of economic growth and economic development. Corruption also marginalises the individuals in society by creating privileged groups and excluded ones. This is one of the main causes of high inequality in the country.

Lack of Sectorial Diversity (Oil dependency) - The Nigerian economy lacksdiversity. Most of the country’s revenue and GDP is generated from the oil and the agricultural sector and this has curtailed the growth potential of the economy. The effect has been even more daunting as a result of the oil price fall recently which


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has taken a huge toll on oil exports in the country (Ucha, 2010). This is one of the attributing factors to low growth and rising income inequality in the nation.

Illiteracy – Does income inequality lead to increasing illiteracy rates, or is illiteracya cause of income inequality? The answer is that both factors are directly related and exhibit a casualty. According to the World Bank (2016), education is seen as an essential tool in breaking developing countries from the chains of poverty, ignorance and low employment and ensuring stable socio political and economic growth.

Other factors that contribute to the problem of income inequality in Nigeria include: low economic growth, macroeconomic shocks and inadequate government policies, unemployment and labour market inefficiency and health and diseases.

1.2 Research Objectives

The main objective of this research is to examine what sort of relationship exists between income inequality and economic growth in Nigeria and test the empirical validity of other factors that might have a possible impact. Additionally, we want to find out if Nigeria’s economic growth effect on income inequality follows Kuznets inverted U hypothesis.

Specifically, this research is designed to:


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