Abstract

Income inequality is one of the major underdevelopment problems of developing countries, Nigeria included. Although theoretical and empirical studies have given it serious attention, it remains understudied in Nigeria because most empirical studies work with over-aggregated measures. This study departs from existing work in two ways. First, it separates household consumption expenditure into food and non-food components and decomposes inequality into within-group and between-group components using generalised entropy (GE) measures, in order to establish where inequality in household consumption expenditure comes from. Second, it applies regression-based inequality decomposition to identify the determinants of inequality in food and non-food expenditure, using household demographic and socio-economic characteristics as covariates. The data are drawn from the 2010 Harmonised Household Living Standards Survey for Nigeria. The results show that non-food expenditure is the main source of inequality in household consumption expenditure in both urban and rural areas, with inequality coefficients above 0.6 compared with about 0.4 for food expenditure. Using the Theil index, within-group inequality is 0.97 for non-food expenditure and 0.365 for food expenditure, while between-group inequality is 0.016 for non-food and 0.035 for food. The regression-based decompositions show that living in a rural area, household size, the household's dwelling and the characteristics of the dwelling account for a significant share of inequality in both food and non-food expenditure. The study recommends, among other things, that policy should address inequality within rural and urban areas, especially in non-food expenditure, rather than inequality between urban and rural areas. The non-food items that deserve attention include education, health, energy, accommodation, water and sanitation.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Household consumption expenditure is one of the important components of gross domestic product (GDP). On average, it accounts for more than 60 per cent of GDP in all countries, and in developing countries it can be as high as 68 to 70 per cent. Consumption expenditure is the market value of all goods and services bought by households to satisfy their needs and wants, and it covers both food and non-food items. In a typical developing country such as Nigeria, households spend more than 60 per cent of their budgets on food and about 40 per cent on non-food items, which include education and medical expenses.

Research by the International Fund for Agricultural Development (IFAD, 2007) showed that inequality in household consumption expenditure is widespread and rising in both urban and rural areas of Nigeria. A report published by the National Bureau of Statistics (NBS, 2012) likewise found that inequality in household consumption expenditure varies greatly across the six geo-political zones. These variations are strongly influenced by the differences among zones in prices, income, population, tastes and cultural factors, and demand pressure in the different zones also helps to explain the differences in inequality.

The NBS data on average consumption expenditure for the six zones show clear regional patterns. The South-West zone has the highest share of non-food spending, at 29 per cent, while the North-West has the highest share of food spending, at 25 per cent. The South-South and South-West zones spend more of their budgets on non-food than on food items, whereas the North-Central, North-East, North-West and South-East zones depend more heavily on food. Estimates for the zones also differ in the level of inequality. The mean inequality index for household consumption expenditure across the zones is about 0.41, or roughly 40 per cent, and it is highest in the North-West, at about 0.43, and lowest in the South-South, at about 0.22. More recent national figures show that the trend has not been steady. The NBS (2018) reports that inequality in Nigeria worsened between 2004 and 2013 but improved in 2016, with the Gini coefficient rising from 0.356 to 0.41 and then easing to 0.391, and the Theil index rising from 0.217 to 0.395 and then falling to 0.31.

Inequality in household consumption expenditure has often been traced to differences in educational attainment, because the education of the household head tends to improve the living standards of individuals and households. Odozi and Oyelere (2023), who analysed four waves of the General Household Panel Survey, find that education and urban residence remain significant contributors to consumption inequality in Nigeria, although their effects have weakened over time, and they note that inequality fell during a period in which poverty rose. Because inequality and low per capita income often occur together in developing countries, changes in income distribution are likely to have significant consequences for poverty. If more household expenditure went into capital investment, it would help to raise output. Higher output would create employment and boost economic activity, which could stimulate further investment and so narrow inequality in household consumption expenditure.

Nigeria nevertheless shows many of the characteristics of other developing countries. They include large household sizes, low wages, a low employment rate, a high dependency ratio, widespread subsistence agriculture and heavy dependence on food consumption (FAO, 2013). These conditions reflect considerable deprivation among different groups of consumers, which in turn helps to account for the inequality in consumption expenditure among Nigerian households. The focus of this study is to provide further evidence on inequality in Nigeria.

1.2 Statement of the Problem

High income inequality is one of the critical problems of development, especially in developing countries such as Nigeria, where poverty is widespread and economic growth fluctuates. High inequality weakens the ability of economic growth to filter down into a substantial reduction in poverty. Ostry, Berg and Tsangarides (2014) add that lower net inequality is robustly associated with faster and more durable growth, and that inequality and the failure to sustain growth are two sides of the same coin. Inequality appears to have widened in Nigeria over the past decade and a half, following the rise of a political class and the stagnation of the real sector that could have spread the benefits of growth to all population groups.

The National Bureau of Statistics (NBS, 2012) reported that there is large inequality in household consumption expenditure in Nigeria, and it identified inequalities in income, security and social amenities among the contributing factors. The Nigerian economy is marked by severe inequality in household consumption expenditure, which affects households in areas such as health, education and finance. Growth in household consumption in the twenty-first century, although unprecedented in scale and diversity, has been unevenly distributed, leaving a backlog of shortfalls and wide gaps, while expenditure per capita has risen steadily in industrial countries over the past quarter of a century. Some developing regions are far from catching up, which implies that consumption growth in them has been slow or even stagnant. It has been observed that the average African household consumes 20 per cent less today than it did twenty-five years ago.

To reduce inequality in household consumption, some researchers have proposed free compulsory education for poor households as a way of reducing inequality, extreme poverty and hunger in Nigeria. They also suggest that government should give greater help to households, particularly in rural areas, through free acquisition of skills and training for self-employment, subsidized prices of social amenities and subsidized costs of formal education. Mukaila and Egwue (2022) make a related recommendation for rural Nigeria, calling for stronger education and the empowerment of women. Studies of personal consumption expenditure also show that the government's efforts over time to reduce poverty have been slow and almost ineffective in improving household living conditions, whatever the ideas that justified the schemes, and that there is wide inequality between the food and non-food expenditure of households. The high level of inequality is due to the few economic opportunities that certain household groups have to benefit from government schemes, and this has led a large share of households into menial occupations such as roadside automobile repair, motorcycle taxi riding and petty trading. Kolawole (2021) points in the same direction, noting that the incidence of poverty remains very high despite many poverty alleviation programmes, and recommending that elite capture be prevented through proper targeting.

Several economists argue that inequality in household consumption expenditure is a heavy burden on economic growth in Nigeria. Successive administrations have tried to reduce inequality through poverty alleviation schemes aimed at both poverty and inequality. These include the Universal Basic Education (UBE) programme, the National Health Insurance Scheme (NHIS), the Structural Adjustment Programme (SAP), the National Poverty Eradication Programme (NAPEP) and, more recently, the Subsidy Re-investment and Empowerment Programme (SURE-P) established in 2012, the YouWin programme and others. Despite all these efforts to narrow inequality in household consumption expenditure, there is still no appreciable improvement in the living conditions of households in Nigeria (NBS, 2012).

This study departs from earlier studies of inequality in Nigeria. Many of those studies concentrated on the distribution of inequality, especially its components among households, and a few examined inequality among households on the basis of aggregate consumption expenditure. Odozi and Oyelere (2023), for example, track inequality in overall consumption expenditure across survey waves, while Mukaila and Egwue (2022) concentrate on rural income inequality. Decomposition of consumption inequality by expenditure component has been applied elsewhere, as in the study of Malaysia by Ayyash and Sek (2020), and the generalised entropy measures used here make it possible to split inequality into within-group and between-group parts (Shorrocks, 2013). The regression-based approach adds the ability to quantify the contribution of different explanatory variables to inequality while holding the others constant (Bigotta et al., 2015). This study takes the view that analysing consumption inequality in aggregate, without looking at its separate components, cannot decisively reveal the specific situation and sources of inequality in Nigeria. It therefore contributes to the literature by examining the extent of inequality in household consumption expenditure through decomposition, and by identifying the sources of inequality in consumption expenditure in Nigeria.

1.3 Research Questions

The study seeks to answer the following questions:

i. How large is inequality in food expenditure among household groups in Nigeria?

ii. How large is inequality in non-food expenditure among household groups in Nigeria?

iii. What are the sources of inequality in food expenditure among household groups?

iv. What are the sources of inequality in non-food expenditure among household groups in Nigeria?

1.4 Objectives of the Study

The broad objective of the study is to carry out a decomposition analysis of inequalities in household consumption expenditure in Nigeria. Specifically, the study seeks to:

i. Ascertain the extent of inequality in food expenditure among household groups in Nigeria;

ii. Ascertain the extent of inequality in non-food expenditure among household groups in Nigeria;

iii. Ascertain the contributing sources of inequality in food expenditure among household groups in Nigeria; and

iv. Ascertain the contributing sources of inequality in non-food expenditure among household groups in Nigeria.

1.5 Research Hypotheses

In line with the objectives, the study is guided by the following hypotheses:

H01: There is no significant difference in food expenditure inequality among household groups in Nigeria.

H02: There is no significant difference in non-food expenditure inequality among household groups in Nigeria.

H03: Household socio-economic and demographic factors do not significantly explain inequality in household food expenditure in Nigeria.

H04: Household socio-economic and demographic factors do not significantly explain inequality in household non-food expenditure in Nigeria.

1.6 Significance of the Study

Certain policies could clearly be drawn up in response to inequality in household consumption expenditure in the Nigerian economy. Such policies, and the process of drafting them, can benefit from this study in the interest of faster economic growth. Its findings will be informative for policies specifically meant to address inequality and useful for poverty alleviation among household groups in Nigeria. The results will also help policy makers working for sustainable development to identify the variables that affect household consumption expenditure. One relevant government policy is the equal right of citizens to education in Nigeria, and to achieve and sustain it, government should subsidize the cost of education so that an average Nigerian can afford it.

Besides government, the study has other possible beneficiaries. Non-governmental organizations (NGOs) can use the findings as a basis for advocacy to promote the health of the poor and needy through the provision of health care for households. NGOs that may find the results directly relevant include Lift Above Poverty Organisation (LAPO), Grassroots Empowerment Network (GEN) and the Total Health Organisation (THO). Researchers can use the results as a basis for further studies of inequality in Nigeria or in other countries. Finally, business managers will find the results useful in carrying out their social responsibilities.

1.7 Scope of the Study

The study focuses on inequality in household consumption expenditure, mainly through its disaggregation into food and non-food expenditure. The data are cross-sectional survey data, drawn from the 2008/2009 Harmonised Nigeria Living Standards Survey (HNLSS), which was conducted in 2010. The survey covers all 36 states of the Federation and the Federal Capital Territory (FCT). The units of interest are the sectors (urban and rural) and the geo-political zones (South-South, South-West, South-East, North-Central, North-East and North-West). The core variables of interest are household per capita expenditure on food and on non-food items, harmonized both spatially and over time.

References

Ayyash, M., & Sek, S. K. (2020). Decomposing inequality in household consumption expenditure in Malaysia. Economies, 8(4), 1–15.

Bigotta, M., Krishnakumar, J., & Rani, U. (2015). Further results on the regression-based approach to inequality decomposition with evidence from India. Empirical Economics, 48, 1233–1266. https://doi.org/10.1007/s00181-014-0819-5

Kolawole, R. J. (2021). Evaluation of poverty alleviation programmes in Nigeria: The demand driven approach perspective. International Journal of Development and Management Review, 16(1).

Mukaila, R., & Egwue, L. O. (2022). Analysis of rural income inequality in Nigeria: Before and during the democratic era. Scientific Papers Series Management, Economic Engineering in Agriculture and Rural Development, 22(4). https://www.managementjournal.usamv.ro/pdf/vol.22_4/Art49.pdf

National Bureau of Statistics. (2018). Snapshot of inequality in Nigeria (2004, 2013, 2016). https://nigerianstat.gov.ng/download/698

Odozi, J. C., & Oyelere, R. U. (2023). Evolution of inequality in Nigeria: A tale of falling inequality, rising poverty, and regional heterogeneity. Journal of Economics, Race, and Policy, 6(4), 297–309.

Ostry, J. D., Berg, A., & Tsangarides, C. G. (2014). Redistribution, inequality, and growth (IMF Staff Discussion Note No. 2014/002). International Monetary Fund. https://doi.org/10.5089/9781484352076.006

Shorrocks, A. F. (2013). Decomposition procedures for distributional analysis: A unified framework based on the Shapley value. Journal of Economic Inequality, 11. https://doi.org/10.1007/s10888-011-9214-z