Growth Alone Won’t Help the Poor
Nigeria shows that economic growth combined with rising inequality won’t lift people out of poverty. The country’s next government should heed the lesson.
The global economy, in terms of GDP per capita, grew by 32 percent between 1990 and 2010. This growth has helped lift more than a billion people worldwide out of poverty, nearly cutting in half the 1990 global poverty rate.
However, using the same yardstick for measuring poverty across the developing world—and defining poverty as earning $1.25 or less per person per day (adjusted for price differences across the world)—the number of Nigerians in poverty between 1992 and 2010 increased to 70 percent of the population, an increase of 22 percent from the rate in 1992. Clearly, global growth was not good for Nigeria’s most vulnerable citizens. The poor were not lifted by the rising tide; instead, they were left to sink.
As of 2010, 7 out of 10 Nigerians were considered poor. And according to a study from the Center for Global Development, most of the poor are from the north of the country, with more than two-thirds at risk of spending their lifetime in poverty. This is despite a rise in the country’s GDP per capita by about 19 percent and a decline in the level of inequality.
Growth that reduces poverty is sometimes called “pro-poor growth” (also referred to as the “twin goals” of the World Bank) because it helps the poor escape poverty and it raises, in relative terms, their average living standard at a rate faster than the rest of the population. However, the widely accepted theory that holds that “growth is good for the poor” simply does not apply in the case of Nigeria, where impressive growth numbers alone failed to reduce rampant poverty. Indeed, growth, in some cases, had no impact on poverty whatsoever.
To offer a theory that runs directly counter to this popular myth, I used survey data from Nigeria with a sample size of about 78,000 households fielded between 1992 and 2010. To answer this question of why Nigeria’s growth isn’t helping the country’s poor, two sets of information are necessary: the amount of money households spend on goods and services—which gives an idea of the average household living standard—and a poverty line, a measure that separates the poor from the nonpoor.
In monitoring progress against poverty, the World Bank uses an absolute poverty line of $1.25 per person per day (accounting for purchasing power parity, that is equivalent to approximately 353 Nigerian naira per person per day based on the January 2019 consumer price index—enough to buy a light lunch or half a gallon of gas in Nigeria, but not a Starbucks coffee in the United States).
In the period from 1985 to 1992, Nigeria’s economy, during the structural adjustment program, expanded; the average living standard of Nigerian households rose by more than 26 percent relative to 1985, while the average living standard of the poor rose by a very small margin, just over 1 percent. This is because the growth came with a rise in the level of inequality; the gap between the rich and everyone else (measured by Gini index) widened by 16 percent. Moreover, the poorest of the poor, or the bottom 23 percent, saw a significant decline in their average living standard. The upper middle class gained more than the poor but less than the richest 15 percent.
Based on analysis of the data, it is clear that rising inequality in Nigeria between 1985 and 1992 prevented nearly 7 million of the country’s poor from escaping poverty. They were ill-prepared to take advantage of opportunities being offered by growth as most of them did not have the labor market skills that were in demand. In other words, inequality disadvantaged the poor in terms of opportunity growth.
The second growth period—from 1996 to 2004—tells a different story. The average living standard of the poor rose more (in terms of share of total income). This was due in part to a decline in the level of inequality. Due to rising growth and declining inequality occurring simultaneously, roughly 13 million Nigerians were able to escape poverty. This period also coincided with the return to a democratic government in 1999, a series of economic reforms in the banking and telecom industries, and a rise in nominal public sector wages and pensions.
Nigerian policymakers looking to learn from the past should ask two questions: Why was the first growth spell less pro-poor than the second? And how can future growth be made more pro-poor? The data shows that growth accompanied by declining inequality does more to reduce poverty than growth accompanied by rising inequality. The conditions under which the 1996-2004 growth occurred may be different from today’s, and there is no guarantee that applying the same approach will lead to the same result. But it’s worth a try.
Although there is a general recognition that Nigeria is highly unequal, it is hard to quantify inequality because of the lack of up-to-date data. But there is a broader point: Those in developing economies care less about income inequality than they do about living in poverty. In other words, their primary goal is getting people out of poverty. Moreover, Nigeria’s abundance of natural resources attracts corruption, and corruption weakens institutions. And when institutions are weak, oil revenues wind up benefiting the wealthy few (mostly top government officials and their friends and relatives) at the expense of the country’s majority.
Since a lack of skills prevents the poor from participating in new economic opportunities, pro-poor growth can be enhanced through investing in the human capital of the poor—namely their education and income-generating skills. At the moment, there is a widespread lack of access to the financial resources needed for investments in human capital because there is no system in place, as in the developed world, where young Nigerians can access student loans to finance their college educations.
As a result, social mobility has been stagnant in Nigeria for decades. High-paying jobs simply go to those with high-quality degrees. And high-quality degrees are a function of a high-quality education. Because high-quality education is a function of high-quality primary and secondary schools and students can seldom obtain a high-quality primary and secondary educational foundation from Nigerian public schools nowadays, families have to buy these credentials from a private school. One needs a large amount of money to buy a high-quality private education; if your parents are poor, you cannot buy a private school education. And so the children of the rich will always get the well-paid jobs. This cycle reinforces and maintains the widening inequality of opportunity in Nigeria.
The challenge for the next government, therefore, is to generate more growth while at the same time dealing with inequality and reducing poverty.
Whoever wins the election should take two steps: First, since Nigeria is an oil-rich country, it should attempt to implement a proposal developed by Todd Moss and his colleagues at the Center for Global Development—using oil revenues to make direct cash transfers to the poor, counting such transfers as income, and subjecting them to taxation, a policy that would enhance accountability and reduce official corruption. Although the current government is running a cash transfer program of 5,000 naira (approximately $14) per month per household, this won’t bring relief because fewer than 1 per cent of poor people are benefiting and the amount isn’t enough to boost the welfare of the poor in an economy currently experiencing inflation. Without an increase and an expansion of the number of beneficiaries it won’t do much to reduce poverty.
Second, the next government should set up a U.S.-style Council of Economic Advisors, made up of academic experts, that advises the president “not based on politics, not based on narrow interests, but based on the best evidence,” as former U.S. President Barack Obama once said of his own council. At the moment, Nigeria has no impartial economic team that guides and shapes the decisions of its president. (State governors and the vice president sit on a National Economic Council, but it is a far cry from the U.S. system.)
It is clear that most of Nigeria’s economic problems are partly the outcome of unintended flawed economic policies. Tackling inequality directly and bringing nonpartisan advice will not end poverty in Nigeria, but it would help ensure that future growth helps the country’s poorest citizens rather than being squandered.