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DECOMPOSITION ANALYSIS OF INEQUALITIES IN HOUSEHOLD CONSUMPTION EXPENDITURE IN NIGERIA

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CHAPTER ONE

INTRODUCTION

 

1.1. Background of the Study

Household consumption expenditure is one of the important components of gross domestic product (GDP). On the average, consumption expenditure accounts for over 60 percent of the gross domestic product in all countries.When developing countries are singled out, consumption expenditure could account for as high as 68 perccent to 70 percent of the GDP (Yakubu and Abbas, 2012).

Consumption expenditure is defined as the market prices of all goods and services purchased by households to satisfy their needs and wants. It includes all foodand non-food expenditure. For a typical developing country such as Nigeria, households spend more than 60 percent on food items and about 40 percent on non-food items (which include education expenditure and medical expenditure) (Yakubu and Abbas, 2012).

.Research by International Fund for Agricultural Development (IFAD) showed that inequality in household consumption expenditure is widespread and rising in both urban and rural areas in Nigeria(IFAD, 2007). Similarly, a report published by the National Bureau of Statistics (NBS) in 2012, revealed that inequality in household consumption expenditure varies greatly in the six geo-political zones of Nigeria. The report further showed that these variations are greatly influenced by the heterogeneity of zones in terms of prices, income, population, tastes and cultural factors.Bamidele, Abayomi, and Esther (2010) argue that demand pressure in different geo-political zones also helps to explain inequality differential. Figure 1 shows the average consumption expenditure in percentage terms for the six geo-political zones in Nigeria.

Fig 1: Food and Non-food expenditure among Nigerian Geo-political Zones

The chart shows that household consumption expenditure for south-west zone has the highestproportion (29 percent) for non-food items, while the North-West zone has the highest (25 percent) for food items. The South-South and South-West zones consume more of non-food items while the rest of the zones have high dependence on food items. In general, South-South and South-West zones spend more of their income on non-food than food items, while the North-Central, North-East, North-West and South-East spend more on food than non-food items.

Awoniyi, Amos, and Omole (2011) also established that inequality in household consumption expenditure profile exists among the six zones in Nigeria. They showed that the mean index inequality in household consumption expenditure among zones in Nigeria is 0.4093.The highest is in the North-West zone with an index of 0.4305. Then the least is in the South-South zone with an index of 0.2233. Therefore, about 40 percent inequality in household consumption expenditure in Nigerian households is evident. This is even higher in the North-West zone with 43 percent inequality, and least in the South-South zone with approximately 22 percent inequality.

Often, this inequality in household consumption expenditure has been traced to the level of educational attainment since this characteristics of household heads has a way of improving living standard of individuals and households (Olaniyan and Awoyemi, 2006). However, considering the economic implication of income inequality and low per capita income indeveloping countries, the poverty consequences of changes in income distribution are likely to be significant (Fofack and Zeufak, 1999).This implies that if householdconsumption expenditures are more on capital investments, it will go a long way to boost output. The outputs will createemployment as well as boost economic activities that might stimulate investments such that the effect can reduce the widespread of inequality in household consumption expenditure.

However, Nigeria, as a typical developing country, exhibits several characteristics of other developing countries one of which is large household size. Other characteristics include: low wages, low employment rate, high dependency ratio, prevalence of subsistent agriculture, and high dependence on food consumption (FAO, 2013). This has reflected greater deprivation among different strata of consumers, which also accounts for the existing inequality in consumption expenditures among Nigerian households (Adekunle, Adegbite, & Fakayode, 2012). 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 with high level of poverty and fluctuating economic growth. High inequality reduces the ability of economic growth to trickle down to substantial reduction in poverty (Bourguignon, 1979). Inequality appears to be widening in Nigeria over the past one and half decades following the rise of the political class and stagnant real sector that could help to share the benefits of growth to all population groups.

National Bureau of Statistics (NBS, 2012) reported that there exists huge inequality in household consumption expenditure in Nigeria. The report revealedsome factors that contributed to inequality in household consumption expenditure in Nigeria. The factors: include inequalities in income, security and social amenities.The Nigerian economy is fraught with severe inequalities in household consumption expenditure. Consumption inequality has affected different characteristics of households especially in the areas of health, education and finance (Obaro and Vincent-Osaghae, 2006). Further evidence (Obaro and Vincent-Osaghae, 2006) shows that the 21st century growth in household consumption expenditure, unprecedented in its scale and diversity,is skewed in its distribution, leaving a backlog of shortfall and gaping inequalities while expenditure per capita has increased steadily in industrial countries over the past 25 years. Some developing regions are far from catching-up, implying that consumption growth has been slow or even stagnant in such countries. It has been observed that the average African household today consumes 20 percent less than it did 25 years ago (Pradhan, 2011).

However, in a bid to militate the state of inequality in household consumption expenditurein Nigeria, some researchers like Ejieh (2009) and Suleiman (2009) suggest free compulsory education for the poor households as a basis for reducing inequality, extreme poverty, and hunger in Nigeria. They also suggest that government should devote greater assistance to households, particularly in the rural areas in terms of free acquisition of skills and training for self-entrepreneurship, subsidized prices on social amenities, and cost for acquisition of formal education. The study of personal consumption expenditure carried out by Nwabueze (2009) shows that government’s efforts overtime to alleviate poverty have been slow and almost ineffective in improving the living conditions of the households irrespective of the ideas that justified those schemes. Nwabueze stated that there exists a wide economic inequality in food expenditure and non-food expenditure of households. The findings from Nwabueze show that the high level inequality isdue to very few economic opportunities available to certain household groups to benefit from government established schemes. Nwabueze also stated that such scenario gave rise to greater percentage of households indulging in menial occupations like road-side automobile repairing, motor cycle taxing, and petty trading.

Several Economists have argued that inequality in household consumption expenditure is a huge burden on economic growth in Nigeria. Various political administrationsin Nigeria have made efforts to reduce inequality by introducing different poverty alleviation schemes, targeted at reducing both poverty and inequality. The schemes include the Universal Basic Education (UBE), National Health Insurance Scheme (NHIS),Structural Adjustment Programme (SAP), National Poverty Eradication Programme (NAPEP) and recently, the establishment in 2012 of the subsidy Re-Investment and Empowerment Programme (SURE-P), Youwin, and so on. In spite of all these efforts by the Government to bridge the inequality in household consumption expenditure, there are yet no appreciable positive impacts in the living conditions of the households in Nigeria (National Bureau of Statistics, 2012).

This study departs from previous studies that have been carried out on inequality in Nigeria. Many of such previous studies (Olaniyan and Awoyemi, (2006), Obaro and Vincent-Osaghae (2006), Ejieh (2009), Awoniyi, Amos, and Omole (2011), Eregha, Sede, Oziegbe, and Onotanigohwo 2012), among others) focused mainlyon inequality distribution (especially on the components of inequalities among households). A few-like Olaniyan and Awoyemi (2006) and Ereghaet al., (2012) had looked at inequality in households based on the aggregate consumption expenditure in Nigeria.This study is of the view that a study of inequalities in household consumption on the aggregate without looking at inequality from various components of consumption expenditure can not decisively reveal the specific situation and sources of inequality in Nigeria. Hence, this study contributes to literature by unraveling the extent of inequality in household consumption expenditure decomposition and the sources of inequality in consumption expenditure in Nigeria.

1.3 Research Questions

The study seeks to address the following questions:

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:

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

iii. Ascertain contributing sources of inequalities in food expenditures among household groups in Nigeria; and

  1. Ascertain contributing sources of inequalities in non-food expenditures among household groups in Nigeria.

 

1.5 Research Hypotheses

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

It is obvious that certain policies could be drafted as a result of inequalities in household consumption expenditure in Nigeria economy. Such policies and the process of drafting them can benefit from this study for the purpose of enhancing economic growth. Therefore, the findings from this study would be very informative to specific policies that are meant to address inequality. The findings of this study would be resourceful for policy formulation towards alleviating poverty among household groups in Nigeria.

The results of this research would also be useful for policy makers working towards sustainable development in Nigeria in the process of trying to identify the variables affecting household consumption expenditure. One of the government policies in that regard is equal right of citizens for education in Nigeria. To achieve and sustain such policy, government should subsidize the cost of education in order to make it affordable for an average Nigerian.

Apart from this study being useful to government, the following are other possible beneficiaries from the findings of this study:Non-Governmental Organizations (NGO) can use the findings of this study as the basis for conducting advocacy on the promotion of good health of the poor and the needy through the provision of health care for household. Some of the NGOs that may find the outcomes of this study to be of much direct relevance are Lift Above Poverty (LAPO), Grassroots Empowerment Network (GEN), and Total Health Organization (THO).

Researchers would also use the outcome of this study as the basis for conducting further research on inequality either in Nigeria or other countries outside Nigeria. Finally, business managers would find the outcome of this study useful in executing their social responsibilities.

1.7 Scope of the study

This study focuses on inequalities in household consumption expenditure mainly on expenditure inequalities on disaggregation into food and non-food expenditure. The data for the study which is cross sectional data survey was generated specifically from the 2008/2009 Harmonized Nigeria Living Standard Survey (HNLSS) conducted in 2010. The survey covers all 36 States of the Federation and the Federal Capital Territory (FCT). The units of interest to this study include sectors (urban and rural) and geo-political zones (South-South, South-West, South-East, North-Central, North-East and North-West). The core variables of interest for the conducting of investigation is household per capita expenditure in food and non-food, regionally harmonized both spatially and inter-temporally.

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