DECOMPOSITION ANALYSIS OF INEQUALITIES IN HOUSEHOLD CONSUMPTION EXPENDITURE IN NIGERIA

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ABSTRACT


Income inequality is one of the major underdevelopment problems facing developing countries including Nigeria. Despite serious attention given to inequality in both theoretical and empirical literature, it is still understudied in the case of Nigeria because most empirical studies overaggregate analysis. This study departs from existing studies in two ways. First, the study disaggregates household consumption expenditure into food and nonfood and thus decomposes inequality into within-groups and between-groups components using generalised Entropy (GE) measures. The purpose is to ascertain where inequality in household consumption expenditure is coming from. Second, the study employs regression-based inequality decomposition to ascertain the determinants of inequality in food and nonfood expenditure using household demographic and socioeconomic characteristics as covariates. The data used in the analyses is the 2010 Harmonised Household Living Standards Survey for Nigeria. The results show that nonfood expenditure is the major source of inequality in household consumption expenditure in both urban and rural areas with inequality coefficients of above 0.6 compared to about 0.4 for food expenditure. The decompositions also show that within-group inequalities for nonfood and food expenditure are respectively 0.97 and 0.365 using the Theil index, while between-group inequalities for nonfood and food are respectively 0.016 and 0.035. Furthermore, the regression based inequality decompositions show that variables such as living in rural areas, household size, household dwelling and household dwelling characteristics account for the significant proportion of inequality in food and nonfood expenditure. The policy recommendation of this study, among others, is that policies should focus on addressing inequality within rural and urban areas especially with respect to nonfood expenditure than in inequality existing between urban and rural areas. Some of the nonfood expenditures that need to be paid attention to are expenditure in education, health, energy, accommodation, water and sanitation.


TABLE OF CONTENTS


Title Page
Table of Contents
List of Figures
List of Tables
Abstract
CHAPTER ONE: INTRODUCTION
1.1        Background of the Study
1.2        Statement of the Problem
1.3        Research Questions
1.4        Objectives of the Study
1.5        Research Hypothesis
1.6        Significance of the Study
1.7        Scope of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1     Conceptual Framework
2.2     Theoretical Literature
          2.2.1     Introduction
          2.2.2       Social Segregation Theory
          2.2.3       Political Theory
          2.2.4      Globalization Theory
          2.2.5      Human Capital Theory
 2.3     Empirical Literature
          2.3.1      Studies from other Countries
          2.3.2      Studies on Nigeria
2.4        Limitations of Previous Studies and Motivations

CHAPTER THREE: THEORETICAL FRAMEWORK AND METHODOLOGY
3.1   Theoretical Framework
3.2   Model Specification
        3.2.1 Nonparametric Specifications
        3.2.2 Decomposition of Income Inequality: Regression Based Inequality
3.3   Justification of the Approach
3.4   Identifying the Unit of Analysis
3.5   Determining the Measure of Welfare
3.6   Data Description

CHAPTER FOUR: PRESENTATION AND INTERPRETATION OF MODEL RESULT
4.1 Non parametric Result
4.2 Determinants of Inequality of food and Nonfood Expenditure

CHAPTER FIVE: SUMMARY OF FINDINGS, POLICY RECOMMENDATIONS AND CONCLUSIONS
5.1   Summary of Findings
5.2   Policy Recommendations
5.3   Conclusion
References
Appendix 


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.
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.. 


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