Recently, I came across the idea that some inequality is necessary for economic growth. As unsettling as this sounded to my egalitarian ears, it turned out there were some valid points to support the notion too.
What theory tells us is that, first, inequality fosters innovation. This arises from the opportunity of moving from a low-income group to a higher income group as a result of one’s innovations. The incentives that accrue to innovators, often in the form of a higher income, serve as motivation for the outside-the-box thinking and risk-taking that sparks innovation and technological advance. The innovators become better off than most members of the population due to higher income earned (thereby widening the income gap), but their innovations lead to increased productivity and output; consequently, increased growth. It is important to note here that the potential for upward economic mobility is the factor which fosters innovation and not just a mere prevalence of inequality.
The second point is that high-income earners are more likely to save than low-income earners. As a result, the returns on their savings further widens the inequality gap (since low-income earners save little or nothing at all). But the savings behaviour of high-income earners has a positive effect on the economy via capital accumulation. This is stressed in this study which explores the relationship between savings, capital accumulation and economic growth in Nigeria.
This all seems to make sense, but it does not explain why Nigeria – known for high levels of inequality and an invisible middle class, is still a ‘lower middle income country’. ‘Lower middle income’ is jargon for ‘developing country’, by the way.
According to UNDP reports, Nigeria’s Gini coefficient – a measure of economic inequality ranging from 0 to 100 where 0 represents perfect equality – is 48.8 (2013) and the lowest the figure has been since 1990 is 43.8 in 2005.
This rising Gini coefficient (increasing inequality) can be attributed to two factors: an increase in the population of low-income earners, many of whom live below the poverty line; and/or an increase in the income of high-income earners. I argue that both cases are true for Nigeria; i.e. we are experiencing an increase in the number of the very poor and the very rich.
Nigeria’s population grew by 36.8 million in ten years (2000-2010). In that time, regardless of the rate being considered, the number of poor Nigerians increased by millions. Using the rate of $1.90/day, the number of poor Nigerians increased by 12.1 million between 2003 and 2009. In the same period, using a higher rate ($3.10/day), the number increased by 14.5 million.
Despite poverty rates rising since 2000, Nigeria’s economy has steadily expanded, at least before last year's recession. Given a more equitable distribution of income, the growth in GDP ought to offset increasing income inequality. However, that doesn’t seem to be the case as the data on the number of poor people has shown.
Data on income shares also show a trend of increasing inequality. While income shares of the highest 10% and 20% earners grew by an average of 2% between 2003 and 2009, the income shares of the lowest 10% and 20% earners fell by 0.07% and 0.3%, respectively. This evidence shows how widening inequality went hand in hand with accelerating economic growth.
Nigeria meets and probably exceeds the inequality quota needed for the “inequality drives growth” notion. Does the growth we have experienced further validate this notion or is there still more to be desired – a faster growth rate and (or) more even distribution of income?
I argue here that Nigeria’s growth could be even faster but is being slowed down by inequality. In other words, inequality, rather than fostering economic growth in Nigeria, is slowing it down. I attribute this to unequal access and in some cases, a complete lack of access to basic human capital services which are often cited as crucial for economic growth. In essence, the pace at which health and education services are growing in Nigeria does not match the increasing demand that comes with population growth.
How do both health and education influence economic growth? We know that the stock of knowledge and skills that an individual possesses determines her productivity. Naturally, an unhealthy individual will have lower productivity; as such, health and education are imperative for increased productivity; which when channelled into the right sectors, translates into economic growth.
Accessing basic health services in Nigeria is often a hassle. Asides from the day-to-day difficulties one encounters as a result of an inefficient system, Nigeria still battles with high death rates for infectious diseases, many of which are curable or have suppressants, such as Antiretroviral (ARV) for HIV. We also struggle with more ‘complicated’ issues such as maternal and infant mortality which still occur at alarming rates. The health system is largely ineffective at addressing the needs of poor Nigerians. If in doubt, a trip to a primary health care facility in any rural area will be sure to resolve that.
Factors such as nutrition and sanitation also affect the overall health of an individual. Moreover, a lower income level suggests poorer nutrition and sanitation. Poor sanitation and nutrition expose affected individuals to common diseases and illnesses that often diminish their health and consequently reduce their productivity.
Another determinant of workforce productivity is education. This is an area of personal interest, but the data here is abysmal. While the Millennium Development Goals (MDGs) have done a tremendous job in increasing enrollment and attainment rates (for primary schooling), completion rates have dwindled, implying an increasing dropout rate. The data on youth literacy shows a declining trend, and based on Demographic Health Surveys (DHS), the number of people with no access to education has not changed much since the 70s.
While productivity-boosting innovations are not dependent on an innovator’s diploma, there is evidence that schooling is imperative for growth and productivity. Also when you consider that we cannot all be great innovators, and even the best innovations require a market, the need for, at least, basic (primary) education is established. However, in Nigeria, we see that even access to basic primary education is a problem. Again, if in doubt, take a trip to any local government and watch out for the state of the UBE schools.
While Kuznets Hypothesis (the theory introduced at the beginning), holds true for some societies across the world, Nigeria may not be one of those. Not because we do not meet the inequality criteria which is supposed to foster an innovation-friendly environment, but because we still struggle with equipping the greater portion of the population with the capabilities to power their productivity. The provision of these basic services should not be considered lightly, because of population growth projections, but also because they are necessary to bring people out of poverty and reduce the gaping income inequality that the nation has dealt with for years.
It is worrisome to think that many years after becoming a sovereign nation, Nigeria still battles with issues such as access to basic education and health care. Even more disturbing is the thought that we are receiving more people (mostly through new births) into this party which, so far, has been a huge flop.