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1.1 Background to the Study
Poverty in the face of abundance is now the world‟s greatest challenge and major developmental objective is the achievement of equality in the distribution of income and reduction of poverty. About 2.8 billion persons of the world‟s population live on less than $2 a day, and 1.4 billion on less than $1 a day (World Bank, 2009). Poverty is a major limitation of economic development and the dearth of economic opportunity is seen to increase the poverty level of an individual or household. This dearth of opportunities is strengthened by inequality. Analysts have argued that solving the problems of poverty and inequality needs appropriate policies that aims at the gaps and ensures that the poor in a given population can benefit from it.
However, there are regional variations in poverty incidence and the level of income inequalities in the globe. Sub-Saharan African countries have had the highest levels of poverty and inequality in income in the past years. According to the UNDP (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 compare to other regions. It had the lowest life expectancy rate of 54.9, lowest mean years of schooling of 4.7, and highest number of youths as well as the highest number of youth unemployment of 50% in 2012 as compared to other regions and the Sub-Sahara average youth unemployment of 12%.
Absolute poverty (income less than $1 per day) in sub-Saharan Africa increased from 288 million in 1981 to 516 million in 2001, increasing from 42 % to 47 %which is about13% of the
world‟s total poor population. In 2006, 34 of the 50 nations on the UN list of least developed countries are in Sub-Sahara Africa and a more sobering statistic is that about 14.6 million children (simply, one in every five) live in absolute poverty as at 2007 data (World Bank (2009).
In Nigeria, this situation is contradictory given the large resources (human and physical) that the country is endowed with. The country has increasing rate of poverty both at the regions and at the national level, high unemployment rate, high income inequality, low quality human capital, high percentage of population on welfare and high out migration in the face of high economic growth measured by GDP. Information from the National Bureau of Statistics - NBS (2006; 2012) and UNDP (2009) showed that about 15% of Nigeria’s population was poor in 1960. Poverty rates in Nigeria increased from 27.2 percent in 1980 to 42.7 percent in 2004 and further to 65.6 percent in 2010.While the27.2 percent for 1980 equals‟ 17.7 million persons, in 2010, 112.5million persons were found poor in absolute terms.
Unemployment rate increased from 2.3 in 1980, to 18.1 in 2000. This however dropped to 11.8 in 2004 but rose to 21.1 in 2010 and about 25% in 2012. Manufacturing capacity utilization was only 55.4% in 2010 in comparison to the amount of resources that is in the country. Life expectancy has been so low over the period, between 45 and 51 from 1980 to 2010 unlike other developing countries like Kenya, Pakistan, Ethiopia to name but few with increasing life expectancy rate (National Bureau of Statistics, 2006; Central Bank of Nigeria, 2013); (UNDP, 2009; 2013).
1.2 Statement of the Problem
According to World Bank (2011) of the World Bank, Human Development Index (HDI) in 2011 puts Nigeria at 156th position among 177 countries as compared to the 151st position in 2002, Nigeria‟s human poverty index (HPI) for 2009 was only 36.2% placing Nigeria at the 114th position and among the 7th poorest nations in the world while the ratio of the richest 10 percent to the poorest 10 percent was 16.3 with Gini index from 42.9 in 2004 to 44.7 in 2010 (National Bureau of Statistics - NBS, 2012; UNDP, 2013). Yet the country ranks 6th and 7th as oil producer and exporter and ranks 10th as the most populous country in the world with a real GDP growth rate of 7.0 in 2009 which grew to 8.0 in 2010 which however dropped to 6.3 in 2013.
The extent of poverty depends on the income level and the extent of inequality in income distribution as have been shown by past studies thus income inequality was found to be vital in the poverty reduction measures (Bourguignon, 2003; Adams, 2004; Kalwij and Verschoor, 2007). In analyzing the link between poverty and inequality, Valentine (1968) as cited in Bradshaw (2006) noted that “the essence of poverty is inequality. In slightly different words, the basic meaning of poverty is relative deprivation”.
Studies have also been carried out on inequality and poverty reduction in Nigeria (see
(Obadan, 1997; Aigbokhan, 1997;2000; Bulama, 2004; Obi, 2007); among several of such studies). Aigbokhan (2000), investigating the profile of poverty in Nigeria, found that polarization in distribution contributes to increase in poverty and there was no evidence of “trickle down” phenomenon based on the data he used. On the other hand, the study of Bulama (2004) showed the existence of correlation between poverty, inequality and economic growth. In like manner, Obi (2007) showed that government expenditure is an effective tool for reduction of poverty.
While many studies have examined the relationship between inequality and poverty (e.g., (Bourguignon, 2003; Adams, 2004; Kalwij and Verschoor, 2007)), the question of whether a causal relationship exists between, inequalities and poverty, has received less attention, particularly for African countries, the direction of the causality and any other possible variable that may be found in the linkage. Knowledge of this will help policy makers in the development of correct policy that will tackle these world problems. In this research we aim at filling this gap by extending the existing literature on this matter using Nigerian data.
1.3 Objectives of the Study
1. To determine the relationship between income inequality and poverty
2. To examine the causal relationship between income inequality and poverty
1.4 Research Hypothesis
Ho; There is no significant relationship between income inequality and poverty
H1; There is a significant relationship between income inequality and poverty
1.4 Organization of the Study
The paper is divided into five sections. Following this introduction is section two, which reviews recent literature on the issues of poverty and inequality. Section three is built on the methodology for our empirical investigation while section four shows our result. We summarise the study in section five, where we also make policy recommendations for the way forward.
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