FOREIGN AID AND POVERTY REDUCTION
BACKGROUND OF THE STUDY
Mass
poverty is the poverty that affects the majority of a population. More than 70%
of Nigerians lack the usual or socially acceptable amount of money or material
possessions needed to lead a happy life. The broad implications of mass poverty
in Nigeria cannot be over emphasized. There is frustration on the faces of over
90m people who are living on less than USD1 per day.
However,
poverty is pronouced when the basic necessities of life (which include adequate
income, education, good health, security, self-confidence and certian freedoms)
are absent. Literatute abounds in expantiating on the subject matter.
Furtherance to the discussion is the research for diverse solutions to the bane of poverty is a
common phenomenon in many developing countries like Nigeria;it seems to be a
unique dilemma that has defied all understanding. Not even the economist’s
interpretation and reasoning of the problem as “a natural resource curse” in
the case of reasoning of the explaining the country’s masspoverty (Adedeji, 2010).
While
foreign aid refers to the distribution of humanitarian, development or military
aid by a foreign party to a domestic party. In 2012 several millions of
Nigerians lived in poverty and suffer more than they have ever done in recent
history, because they live below the poverty line. In 2012 the prices of goods
and services have doubled at the same time that wages remain stagnant and
unemployment remains a nationwide scourge.
Nigeria is a country with now over 160 million
people therefore the dimension of mass poverty in Nigeria is both dreadful and
shocking. The political system in Nigeria also put the outcome of the lives of
people in the hands of poverty through a unilateral system of government where
everything is decided by one person.
In
almost all instances the economy in Nigeria have been corrupted, For example
rather than reforms, which would eradicate poverty and establish viable
political structures like regional governments and devolution of power, the
government has done nothing about fighting poverty. Meanwhile this study
intends to fill the vacuum of the level of poverty in Nigerian.
1.1.2
The poverty trap
Until
recently, poverty was understood largely in terms of income or a lack of one.
To be poor meant that one could not afford the cost of providing a proper diet
or home. But poverty is about more than a shortfall in income. It is about the
opportunities and choices that are widely regarded as essential to lead a long,
healthy, creative life and to enjoy a decent standard of living, freedom,
dignity, self-esteem and the respect of others.
Poverty has
multiple dimensions, and many of them are inter-related, making for a vicious
cycle
Poor
health, disease and disability can prevent people from working full time,
limiting their income and their ability to work to move out of poverty. Health
problems for the breadwinner mean income problems, but an illness in the family
can ruin an entire household. Not only is income lost, but expenses go up due
to the need for medicines and health care and the need for family members to
care for the sick person. Those with less formal education tend to be
disproportionately represented in the ranks of the poor, perhaps because they
are more likely to hold poorly paid jobs or to be unemployed. Poor families
often face enormous difficulties in keeping their children in school due to the
costs, as well as to the pressure to have as many household members, including
children, out working.
Women
with children constitute the majority of the poor in many countries. Where
women can move out of poverty their children appear to face a brighter future,
but where their chances are limited, poverty is transmitted inter
generationally. In many cases, girls have higher dropout rates as they are the
first to be pulled out of school to help with household work and childcare.
Yet, experience has shown that investment in girls’ and women’s education not
only makes for greater equity but also tends to translate directly into better
nutrition for the family, better health care, declining fertility and
potentially greater economic empowerment.
1.2.3 The roots of poverty
Poverty
exists in many of the industrialized countries and characterizes whole regions
of the developing world. The roots of poverty lie in a tangled web of local
situations combined with national and international circumstances. It is the
product of economic processes occurring at a variety of levels, as well as a
range of particular social and economic conditions that appear to structure the
possibilities of the individual. Some countries have to pay more to finance
their debt than they can spend on health and education. An obligation to repay
debt incurred by past regimes sometimes due to bad advice from developed
countries, sometimes due to corrupt regimes has severely curtailed the ability
of many countries' efforts to break the poverty cycle.
The
notion of poverty varies by country. Generally speaking, to allow for
international comparisons, the World Bank has established an international
poverty line of $1 a day per person in 1985 purchasing power parity (PPP)
prices. According to this measure the portion of poor people in the world’s
population those living on less than $1 a day fell slightly between 1987 and
1993, from 30 percent to 29 percent. But the absolute number of poor people
increased, from 1.2 billion to 1.3 billion. Another 2 billion are only a little
better off.
1.2 STATEMENT OF PROBLEM
The
essence of this research is to examine whether foreign aids help reduce poverty in Nigeria, because, majority
of developing countries heavily depend on external resources. In some of the
poorest countries, such as Nigeria, Burundi or Sierra Leone, development aid
amounts to more than 30% of gross national income [World Bank (2009)]. Since
1960, member countries of the OECD's, Development Assistance Committee (DAC)
have spent almost 2.5 trillion US dollars on Oversea Development Assistance
(ODA). In recent years, ODA amounts to more than 100 billion US dollars per
year. In light of these huge figures, there has been an increasing interest in
the efficiency of foreign aid. The question is whether aid promotes economic
development, or whether aid has undesirable side effects making it less
effective.
In
the past 35 years, a large number of studies investigating the aid-growth nexus
have been published. For example, 12% of World Bank projects completed between
1993 and 1997 involved decentralizing responsibilities to lower levels of
government [Litvack et al. (1998)].
The
rationale for considering decentralization in anti-poverty programs is that it
might have positive effects on the economic development [Oates (1993)]
The
efficiency argument also plays an important role in the case of aid assignment.
If local bureaucrats have better information of local needs, they might also
have an advantage in selecting the most effective development projects to be
financed by foreign aid. Thus, decentralization should increase aid
effectiveness.
While
the efficiency argument describes a clearly positive impact of
decentralization, there may also occur reverse effects, e.g. coordination
problems, excessive regulation, administrative costs, and local capture. For
example with the capture of local governments, there is a tendency for the
local government to provide excessive services to the local elite at the
expense of the general public [Bardhan (2002), Bardhan and Mookherjee (2006)].
Despite
the enormous effort researchers have invested on this issue, there is still no
consensus. Since the literature presents a mixed picture of a direct impact of
aid on growth, numerous studies have begun to focus on the conditions under
which aid potentially works. One important issue that has so far been neglected
in this literature is the role of government sector in aid-receiving countries.
The question of foreign aid’s impact on poverty reduction is highly
controversial and excites polarized opinions. Optimistic views of aid are
exemplified by those of Jeffrey Sachs (2005), who calls for a doubling of
worldwide aid flows as a moral obligation of rich countries that will send
‘forth mighty currents of hope’ and lead to ‘the end of poverty’. In contrast,
William Easterly (2001, 2003 and 2006) is a vocal septic highlighting
aid’s apparent historic inability to spur growth. And today, in the midst
of a serious global economic crisis, where aid is arguably more needed than
ever, the attention of both the aid community and decision makers is on “Dead
Aid” (Moyo, 2009), which argues for a complete cessation of aid flows to
Africa.
Nigeria
with a population of over 140milion people (2008 census) and a land area of
9323.768km is characterized with vicious circle of poverty- and very low level
of domestic savings which cannot facilitate adequate domestic investment. The
huge debt and financial crises faced by Nigeria have constituted much burden to
the growth of the economy-making it difficult to improve domestic savings. In
recognition of these problems, Ajayi (2003) said that of all capital inflow,
Foreign Direct Investment is the most promising due to its potential of dealing
with the problems of savings gap, shortage of technology and needed skills. Its
also explains among other things, that the rational for the search for
widespread strategies to create a favorable condition for attracting aid - so
as to accelerate economic growth and development, and reduced the level of
poverty.
This
research provide an overview of the academic literature that has evaluated the
effectiveness of aid across the countries.
1.3 RESEARCH QUESTION
Does
foriegn aid have impact on poverty level in Nigeria?
1.4 OBJECTIVE OF THE STUDY
The
study analyze the relationship between foreign aid and poverty level in the
Nigeria economy. It is hoped that this research findings will be of use to
private sector, development planners and the government. This will help in the
formulation and the implementation of appropriate policies that will enhance
capacity utilization and help to reduce poverty.
1.5 SCOPE OF THE STUDY
The
study concentrated only on foreign aid with the corresponding poverty reduction
and some relevant policy variables within the Nigerian economy and will covers
the period of thirty two (30) year’s ranging from 1982 to 2012
1.6 TEST OF HYPOTHESES
H0:
Foreign aid has no significant impact on poverty in the Nigerian economy.
H1:
Foreign aid has significant impact on poverty in the Nigerians economy.
1.7 SCHEME OF CHAPTER
The study is organized into five
chapters as follows: Chapter one deals with the introduction - statement
of the problem, objectives of the study, scope of the study, significance of
the study, definition of the study and other key terms. Chapter two treats
literature review theoretical and empirical review, chapter three treats
methodology, data source, and model specification. Chapter four is devoted to
data analysis, finding and discussion, while Chapter five showed the outcome of
the research work which explains the summary conclusions and policy
recommendations.
CHAPTER
TWO
2.0 LITERATURE REVIEW AND
THEORETICAL FRAMEWORK
2.1 INTRODUCTION
Poverty
is more than just a lack of material things (CFA, 2005). It manifests itself in
the deprivation of lives that people lead (UNDP, 1997). Over the last decade, a
consensus has emerged that poverty is multi-dimensional and that the reduction
of poverty is a recognized objective of development aid and the principal
reason for public support of aid giving (White, 1995; Devarajan and Reinikka,
2004; Mosley et al., 2004). Scholars acknowledge that a principal challenge in
the development of interventions for poverty reduction lies in being able to identify
who the poor are, why they are poor and what should be done towards the
reduction of that poverty. In a 1997 White Paper on International Development –
focused on eliminating world poverty - the United Kingdom’s Secretary of State
mentioned two key elements required to be in place if the fight to eliminate
poverty were to succeed.
First,
was the need for a clear set of internationally agreed policies and principles
which promote sustainable development (these now exist in the MDGs); and the
second was the need for political will to address the problems of international
development both in poorer and richer countries.
In
times past, aid was seen as a global ‘hand-out’, something ‘we’ do for ‘them’
and this approach has been attended with mixed successes. Today it is the norm
to consider aid as a ‘hand-up’ that backs real efforts by poor countries to
eradicate poverty. Inspite of views held to the contrary in some sectors,
scholars insist that aid does matter and that the major challenges are to
evolve solutions in order to improve its effectiveness in meeting clearly
articulated development objectives (Johnston and Manning, 2005). Foreign aid is
one of the instruments available to the international community in addressing
the development needs of the poor nations.
The
evidence that foreign aid has a direct impact on poverty reduction is weak.
Kosack (2003) finds that aid can directly increase welfare but only in
democracies. However, there is strong evidence that foreign aid has an indirect
impact on poverty and well-being through its impact on pro-poor expenditures of
the giving countries (Mosley and Hudson, 2001, Verschoor and Kalwilj, 2002,
Gomanee and Morrissey, 2002, and Gomanee and others, 2003). This study used GDP
per capita as a measure of poverty and well-being.
The
macroeconomic impact of foreign aid has long been a hotly contested subject.
Aid’s impact on growth in developing countries is arguably the most contested
topic. It is also an important topic given its implications for poverty reduction,
the other key criterion against which aid ought to be assessed. Despite the
massive flow of foreign aid to developing countries, economic growth and living
condition which are assumed to be highly affected by inflow of foreign aid
remained poor. According to McGillivray et al (2005) there was much optimism
associated with foreign aid to developing countries in the early years of its
provision. This was shortly after the Marshal plan. The perceived success of
this plan could be revisited with developing countries. Poor countries remained
poor because the levels of investment were too low, this was due to low levels
of domestic savings, insufficient amounts of foreign exchange required to
purchase foreign capital goods or both. Foreign aid could fix this, by
supplementing domestic savings or foreign exchange reserves. This would
increase investment and in turn growth. A fundamental argument for aid, at
least on economic grounds, is that it contributes to economic growth in
recipient countries. As it was argued by Gomannee, Girma and Morrissey (2005)
Sub-Saharan Africa (SSA) represents a challenge to the aid effectiveness
argument: the region has been a major recipient of aid for decades, yet has
exhibited very poor economic growth performance over that period. However, the
Commission for Africa (2005) (cited by Gomannee, Girma and Morrissey (2005)
argues for a substantial increase in resources for SSA, especially to finance
needed investment, estimated as requiring an additional US$25 billion per annum
in aid to Africa to be achieved by 2010, with a further US$25 billion per annum
increase by 2015.
Le
and Winters (2001) provide an excellent instruction in evaluating the impact of
aid policies on poverty. The paper follows the policies in evaluating the impact
of foreign aid on poverty. Prior to the 1990s, Australia, (by far the largest
donor of aid, the country in need; provided aid in the form of budget support.
Since foreign aid therefore supplemented government revenue, it is very hard to
isolate the effects of aid from the impact of other government expenditures.
The general perception is that it had little impact on poverty reduction since
successive governments directed little expenditure towards the social sectors.
Moreover, a fiscal response model indicates that foreign aid has led to small
increases in investment expenditures but to minor reductions in health and
education expenditures (Feeny and McGillivray, 2003).
The
impact of foreign aid on poverty and well-being of the people in Nigeria can be
investigated by assessing how aid programmes have addressed basic needs.
Streeten and Burki (1978) classify essential basic needs into six areas:
nutrition, basic education, health, sanitation, water supply, and housing and
related infrastructure.
There
are number of different strategies to address basic needs. “Meeting these needs
in nutrition, education, health, and shelter may be achieved by various
combinations of growth, redistribution of assets and income, and restructuring
of production” (Hicks and Streeten, 1979, pp. 568). The analytical framework
adopted by this paper follows Le and Winters (2001). They assert that the
effective use of foreign aid to reduce poverty requires optimally allocating
aid among the following three components: promotion of economic growth; direct
targeting of the poor; and the provision of safety nets and direct transfers.
The optimal mix of the above components will depend upon the characteristics of
the recipient in question. Inferences of the impact of aid on poverty are drawn
from an examination of the sectoral composition and geographic distribution of
aid in relation to the country’s poverty and the well-being situation of the
people in Nigeria.
2.1.2
The Geography of Poverty
Most
of the world’s poor live in South Asia (39 percent), East Asia (33 percent,
mostly in China and Indochina), and Sub-Saharan Africa (17 percent). South Asia
also has the highest incidence of poverty (43 percent of its population),
followed by Sub-Saharan Africa. Countries in which more than half of the
population lives below the international poverty line include Guatemala,
Guinea-Bissau, India, Kenya, Lesotho, Madagascar, Nepal, Niger, Senegal,
Nigeria and Zambia
Analysts
have found a strong positive relationship between foreign aid and poverty reduction.
For example, East Asia (excluding China), which contains the world’s
fastest-growing economies, reduced the share of its population living in
poverty from 23 percent in 1987 to less than 14 percent in 1993. But in
Sub-Saharan Africa, where negative growth of GNP per capita predominated during
that period, the incidence of poverty hardly changed.
Poverty
reduction has received increased focus in development debate in the past two
decades. Progress on poverty reduction has become a major measure of success of
development policy. In the 1970s and 1980s, the pre-occupation was with growth,
the need to grow the economic and income. Thus, growth was seen as a
prerequisite for improved welfare. Many developing countries in the 1980s
implemented structural adjustment programmes (SAP) aimed at enhancing growth.
Following
these programmes, many countries recorded positive real growth rates. The
development literature in the 1990s was dominated by the view that growth is
central to any strategy aimed at poverty reduction. Studies suggest that
countries that made noticeable progress on poverty reduction were those which
recorded fast and high growth rates (Dollar and Kraay 2000).
This
view was somewhat modified to suggest that it is not growth per se, but the
structure of growth that matters (Ravallion and Datt, 1996, Mellor 1999). It
has further been recognized that income inequality matters when it comes to
making progress on poverty reduction. It is noted that little progress can be
made in poverty reduction when inequality is high and rising (Addison and
Cornia, 2001). This contradicts earlier theories of development which suggest
that inequality is good for growth and, therefore, for poverty reduction
through growth. This has, therefore, called attention to the role of inequality
in the growth and poverty reduction process.
This
study has contribute to this discussion by analyzing the impact of foreign aid
allocation on Nigeria economy and how it would help towards reducing poverty on
the vast majority of Nigerians. No government is an island on its own; it would
require aid so as to perform efficiently and effectively. One major source of
aid is foreign borrowing. The motive behind foreign aid is due to the fact that
countries, especially the developing ones that lack sufficient internal
financial resources and this calls for the need for foreign aid.
External
debt is a major source of public receipts. The accumulation of foreign aid
should not signify slow economic growth. Soludo (2003) argued that countries
seek two broad categories; macroeconomic reasons to either finance higher
investment or higher consumption and to circumvent hard budget constraint. This
implies that an economy borrow to boost economic growth and reduced poverty.
Abrupt
growth performance in Sub Saharan Africa (SSA) put forward the dispute about
aid potency, especially on economic performance. Economists have long tried to
find out whether (ODA) Official Development Assistance is effective to promote
economic growth in this region. The answer, however, remains inconclusive in
the literature. In recent years, Ndambendia and Njoupouognigni (2010) and
Rotarou and Ueta (2009) found strong and positive relationships between foreign
aid and poverty reduction. On the other hand, while Mallik (2008) found a
negative relationship between ODA and poverty in SSA countries, Bezuidenhout
(2009) found no significant interaction between these two variables.
2.2.2 Perspectives on poverty
Poverty
has many dimensions and the Human Development Report (HDR) 1997 published by
the UNDP, mentions three of them:
Income
perspective: This is strictly applied when a
person’s income level is below the poverty line; defined as living on less than
$1/day (UNDP, 1997).
Basic
needs perspective: This applies in conditions of
deprivation of material requirements needed for minimum acceptable fulfillment
of human needs. These requirements would include food, health, shelter,
education and employment.
Capability
perspective: This applies when there is absence of
some basic capabilities to function. These capabilities would include being
well nourished, adequately clothed and sheltered and avoiding preventable
morbidity.
2.3 THEORETICAL REVIEW
Different
theories have been developed by scholars on the field in addressing the issue
of foreign aid in developing countries; but the theory that is used in this
research is the Three Gap Theory and the Neo-Classical Theory.
The
three gap theory whichwas developed by Chenery and Strout in the mid-1960s
which tries to fill the financing and poverty gap which occur as a result of
deficit financing and low per capital income. While the Neo-classical theory
using the cobb-douglas production function which tries to fill the productivity
gap that occur in the country.
2.3.1. THE THREE GAP THEORY
Three
gap models try to incorporate fiscal gap. A third, “fiscal gap” may also be
important because domestic savings availability for investment and foreign
exchange availability for capital goods imports may have little impact on
private sector investment and growth without complementary public investment in
roads and other forms of infrastructure, or in human capital. Three gap models
have been used to account for this in understanding why growth has commonly
failed to pick up during structural adjustment in reducing the level of poverty
in the country.
In
this research work, the three gap model and assumptions will be apply, in
building the country level of absorptive capacity and reduce the level of
poverty.
The
three gaps are explain below:
·
Financial gap or Savings gap or
constraint: Although it died in the academic literature some
time ago, the ghost of the financing gap lives on today in the international
financial institutions. Over 90 percent of country desk economists at the World
Bank, for example, use some variant of the financing gap today, to make growth
and financing gap projections. According to World Bank model, “the Increment
Capital Output Ratio (ICOR) and prior investment determine GDP.” Country
economists make assumptions about ICORs and national saving and calculate the
financing gap corresponding to a target growth rate. World Bank staff present
the result of this calculation at meetings where aid donors agree upon aid
amounts for a specific country. The donors and multilaterals also apply
analytical and political judgment to determine the aid given, of course, but
the number produced by the financing gap influences the outcome. To start off
with some country examples, World Bank economists programmed the Ugandan
economy in 1996 to grow rapidly (at the common growth target 7 percent). With
little savings and an ICOR of 3 implying high investment requirements, the
World Bank’s public report presented to the donor community argued for high aid
because anything less “could be harmful for medium-term growth in Uganda, which
requires external inflows.”The “medium term” in this argument was two to six
years as indicated in the projection tables. A World Bank report in 1993a
argued that Guyana “will continue to need substantial levels of foreign capital
inflows, to provide sufficient resources to sustain economic growth”. A 1993b
World Bank report on Lithuania said that “large amounts of external assistance
will be required” in order to “provide the resources for critical investments”
to stem the output decline. A 1998 report on Lithuania stated explicitly that
it was using the Financing Gap to perform a “consistency and feasibility check”
of the growth target with “the country’s access to external financing.” A 1989
World Bank report noted that “India’s low per capita income means its domestic
resources are limited relative to its investment needs. Increasing levels of
concessional assistance will ensure India’s rising purchases of capital goods.
·
The Foreign Exchange Gap or
Constraint: Apart from foreign exchange
restrictions, we assume for the most part that output X (measured gross of
intermediate imports) can vary freely in the short run; capacity limitations
are introduced briefly. The level of activity is indicated by the
output-capital ratio, u = X/K. Labor and intermediate imports are the variable
production inputs, with fixed input-output coefficients b and a respectively.
Variable cost per unit output is therefore wb + ea, where w and e stand for the
nominal wage and exchange rates, and the import price is normalized at unity.
The output price is set by a mark-up factor 1/(1 - ?r) over variable cost, P -
(wb + ea)/(l - TT), where n turns out to be the share of profits in the
total value of output, PX - wbX + eaX + 7rPX. The capital stock is made up in
proportions $ and 1 - $ of nationally produced and imported goods
respectively; the cost of a unit of investment is therefore P. « 0P + (1 $)e.
In what follows, we do not explicitly consider devaluation, so it is
simplest to set e – Pk P. Saving and foreign exchange gap equations can be
derived from flows of funds augmented by hypotheses about uses and sources of
national saving. We work with four flows for private savers and investors, the
financial system, the government, and the foreign sector and assume that
private saving is channeled to higher bank deposits, increases in the stock of
narrowly defined money, or asset-holdings abroad through capital flight. The
level of nominal saving is assumed to depend on income and the rate of
inflation, in line with recent emphasis in the literature on the inflation tax
and other wealth effects.
·
Poverty gap:
Tries to explain the existence of vicious circle of poverty which occur as a
result of low per capital income, low productivity, low savings, low
investment, low consumption etc.
Economists
generally assume that people’s willingness to save for future consumption grows
with their incomes. The poorer people are, the less they can afford to plan for
the future and save. The same logic applies to businesses and governments. Thus
in poor countries, where most incomes have to be spent to meet current—often
urgent—needs, national saving tends to be low. Low saving hinders
desperately needed domestic investment in both physical capital and
human capital. Without new investment, an economy’s productivity
cannot be increased and incomes cannot be raised. That closes the vicious
circle of poverty. So are poor countries doomed to remain poor? Recent data on
gross domestic investment in East Asia suggest that the answer is no. Despite
low initial GNP per capita, gross domestic saving and gross domestic
investment in the region were high and growing until the 1998 financial
crisis.
Experts
are still trying to explain this phenomenon. Generally speaking, however, many
of the factors that encourage people to save and invest are well known,
including political and economic stability, a reliable banking system, and
favorable government policy. In addition to domestic investment, foreign
investment can help developing countries break out of the vicious circle of
poverty, particularly if such investment is accompanied by transfers of
advanced technology from developed countries. The opportunity to benefit from
foreign investment and technology is sometimes referred to as the “advantage of
backwardness,” which should (at least theoretically) enable poor countries to
develop faster than did today’s industrial countries.
However,
many of the conditions needed to attract foreign investment to a country are
the same as those needed to stimulate domestic investment. A favorable
investment climate includes many factors that make investing in one country
more profitable and less risky than in another country. Political stability is
one of the most important of these factors. Both domestic and foreign investors
are discouraged by the threat of political upheaval and by the prospect of a
new regime that might impose punitive taxes or expropriate capital assets. As a
result a country can fall into another vicious circle, one seen historically in
some Latin American countries. Political instability scares away new
investments, which prevents faster economic growth and improvements in people’s
economic welfare, causing even more dissatisfaction with the political regime
and increasing political instability. Falling into this vicious circle of
political instability can seriously impede efforts to boost economic
development and reduce poverty.
While
the Neo-Classical Theory which the Cobb Douglas Production Function,in economics,
the Cobb–Douglas production function is a particular functional form of the production
function, widely used to represent the technological relationship
between the amounts of two or more inputs, particularly physical capital and
labor, and the amount of output that can be produced by those inputs. The
Cobb-Douglas form was developed and tested against statistical evidence by Charles Cobb and Paul Douglas
during 1927–1947.
Wire-grid
Cobb-Douglas production surface with isoquants
Formulation
of the model
In its most standard form for production of a single
good with two factors, the function is
Where:
·
Y = total
production (the real value of all goods produced in a year)
·
α and β are the output
elasticities of capital and labor, respectively.
These values are constants determined by available technology.
Output elasticity measures the responsiveness of
output to a change in levels of either labor or capital used in production, ceteris
paribus. For example if α = 0.45, a 1% increase in capital
usage would lead to approximately a 0.45% increase in output.
Further, if
α + β = 1,
The production function has constant returns to scale, meaning that doubling
the usage of capital K and labor L will also double output Y. If α + β < 1,
Returns to scale are decreasing, and if
α + β > 1
Returns to scale are increasing. Assuming perfect
competition and α + β = 1, α and β can be shown to
be capital's and labor's shares of output.
Cobb
and Douglas were influenced by statistical evidence that appeared to show that
labor and capital shares of total output were constant over time in developed
countries; they explained this by statistical fitting least-squares regression
of their production function. There is now doubt over whether constancy over
time exists.
2.3.2 EMPIRICAL REVIEW
Odusanya
et al 2011, Observed that foreign aid
have positive effect on poverty, through public expenditure if properly
channeled to the productive sectors of the economy. He believed that the impact
of foreign aid in Nigeria cannot be over emphasized especially in the aspect of
financing gap expenditures of the nation which most times requires huge initial
capital. Several developmental projects in the country were mostly financed
through aid, which as a result has a long term effect on poverty reduction as
well as economic growth of the country.
Aluko and Arowolo (2010) used
co-integration and and error correction and observed that there is positive
relationship between the dependent variable poverty and foreign aid. That the
misuse of foreign loans has grievous effect on the economy of the recipient
countries. He therefore stated that the debt burden arising from
conditionality’s, has stiffened the economic opportunities of the third world
to grow and develop. The inability to develop is hereby reflected in the
poverty level of the country.
Alabi et al (2011), observed that for
foreign aid have welfare impact on the Nigerians, there is need for proper aid
integration by a recipient government of international assistance from donor
partners into national or state developmental goals and strategies.
Gomanee et al (2005) address directly
the mechanism via which id impacts growth using a sample of 25 sub-saharan
African country over the period of 1970-1997, they obsderved that foreign aid
has a significant posistive effect on economic growth and poverty reduction,
furthermore,they identified investment as the most significant transmission
mechanism and they conlcude that on average, each 1% point increase in the
aid/GNP ration contribute one quarter of 1% point on growth rate. As a result
Africa’s poor growth record needs to attributed to factors other than aid
ineffectiveness.
Ram (2004) look at the issue of poverty
on economic growth from the view of reciepient countrys policies as being the
key role in the effectiveness of foreign aid nevertheless, in his reesearch the
he disagree with the widely acknowledgme view that aid towards countries with
better policies that lead to higher economic growth nd poverty reduction rate.
As a result base on his findings, he observed and conclude that evidence is lacking
to support the leading belief that foreign assistance to countries with good
“policy” will increase the impact on growth and poverty reduction in developing
countries.
Mausd and Yontcheva (2005) Assesses the
effectiveness of foriegn aid in reducing poverty through its impact on human
development indictors and whether foreign aid reduce government efforts in
achieving developmental goals, they a dataset of both bilateral aid and NGO aid
flows, they observe that NGO aid reduces infant mortality and does so more
effectively than official bilateral and the impact of illiteracy is less
significant. They also test whether foriegn aid reduce government in achieving
developmental goals and find mixed evidence of a substitution effect from
1990-2001.
2.3.3
Conceptual Framework
2.4 Bacha Three Gap Model
Three
gap models by Bacha will be used in this research work. The three gap model
tries to incorporate fiscal gap to the two gap model. A third, “fiscal gap” may
also be important because domestic savings availability for investment and
foreign exchange availability for capital goods imports may have little impact
on private sector investment and growth without complementary public investment
in roads and other forms of infrastructure, or in human capital. Three gap
models have been used to account for this in understanding why growth has
commonly failed to pick up during structural adjustment in reducing the level
of poverty in the country.
In
this research work, the three gap model and assumptions will be apply, in
building the country level of absorptive capacity and reduce the level of
poverty.
2.5 DEVELOPMENT AID AND POVERTY REDUCTION
Foreign aid in its broadest sense has been defined
as consisting of all resources – physicalgoods, skills and technical know-how,
financial grants (gifts), or loans (at concessional rates) and support in
international negotiations – transferred by donors to recipients. Lancaster
(cited in Lancaster 1999, p. 490) also defines foreign aid as a “transfer of
concessional resources, usually from a foreign government or international
institution, to a government or non-governmental organization in a recipient
country. It may be provided for a variety of reasons, including diplomatic,
commercial, cultural and developmental.” However, development aid encapsulates
a narrower and more restrictive definition being seen as the “types and forms
of foreign aid from rich countries to poor countries, and to poor people, which
help to address acute human suffering and which contribute to human welfare,
poverty reduction and development” (cited in Riddell, 2007, p. 17). In all
cases, it is noted that the definition of aid (whether foreign or development)
is largely donor-driven and based on the intentions of those giving the aid
rather than those using it, the recipients. This uncontested, donor-driven
approach has remained the norm and also manifests in the fact that it has
always been the donors who decide how much aid to give and the form in which it
is to be given (Randel et al., 2000; Riddell, 2007). Be that as it may be,
great progress has been made in reducing global poverty (as percentage of the
population) over the last forty years and Official Development Assistance (ODA)
from rich countries has helped (Hermias and Kharas, 2008). Billions of dollars
have been pledged and remitted and the available statistics in literature
attest to this:
The
total sum of international official development assistance now tops $100
billion per year, with Europe financing almost two-thirds. EU (European Union)
members directly provided $49 billion of bilateral ODA in 2006 and, through
multilateral bodies, another $19 billion... In sub-Saharan Africa, EU countries
contribute three-quarters of total ODA” (cited in Hermias and Kharas, 2008, p.
1); Development aid is therefore clearly recognized as an instrument that can
contribute towards human development (of which poverty reduction is a vital
component) either directly or indirectly. However, this increase in development
aid has been accompanied by a curious increase in the levels of poverty noted
among developing nations of the world. The gap between rich and poor continues
to widen and the seeming inability of the billions of dollars already deployed
to stem this tide of deprivation remains an intractable dilemma (Randel et al.,
2000).
2.6 AID EFFECTIVENESS AND COUNTRY
PROGRAMMABLE FUNDS
2.6.1 Aid Effectiveness – Donor-side
The
reasons often advanced for donors’ motivations in providing development aid are
multiple and varied. Studies reveal justifications ranging from: to help
address emergency needs; to assist recipient nations achieve their development
goals (Riddell, 2007); to promote donor country political and strategic
considerations - rather than real needs of the receiving countries (Alesina and
Weder, 2002; Burnside and Dollar, 2000; Kharas, 2007; Alesina and Dollar,
2000); to support trade and commercial flows (Knack and Rahman, 2004; Kharas,
2007); to promote relationship with former colonies; to encourage or reward
common voting patterns in the United Nations (Randel et. al., 2000). Schraeder
et al. (1998), studying the determinants of aid flows in Africa easily reject
an altruistic vision of donors’ motivation. A view upheld in Easterly (2002),
which posits that official development partners have been known to keep
providing funding even when development objectives are not being promoted;
because multilateral and donor agencies are often rewarded for volumes of
assistance rather than results. According to Svensson (2003), one reason for
this is that aid is not always given for poverty alleviation purposes. Evidence
suggests that incentive systems exist which reward both donors and recipients
for reaching a high volume of resource transfer. Since non-disbursed amounts
may lead to reduced allocations for the next fiscal year, emphasis expectedly
shifts to disbursement volumes and results are measured against volume figures
without regard for the quality of development impact. White (1995) concurs that
the donor country commercial and political interests occasionally determine aid
volume and patterns and this serves to corrupt the purely developmental
objectives often professed by the donors themselves.
Whether
borne out of altruistic reasons or self-interest, it is clear that rich nations
have firm reasons for continuing to commit vast resources to address the
challenge of international development among developing countries of the world
and these reasons are known to influence aid programmes.
The
effectiveness of aid is also reduced by the low share going into country
programmes, donors’ fragmentation into small and often disconnected projects,
and by the significant volatility of aid over time. Presently, hundreds of
official agencies are trying to promote development. 46 governments run
bilateral aid programmes administered through multiple agencies; these
governments also fund about 233 multilateral development agencies; add to these
the thousands of international NGOs and multiplied thousands of local NGOs and
CBOs and one can begin to understand why aid has not achieved the necessary
transformational impact – it is spread too thinly and inefficiently (Kharas,
2007). Johnston and Manning (2005) counted more than 60,000 ongoing projects –
triple the number in 1970 – of which 85 per cent cost less than $1 million. The
problem of donor multiplicity has increased over time but this has not
necessarily translated into recipients receiving more aid (Riddell, 2007). With
the increase in the average number of donors per country, the attendant
reduction in average project size implies a growing fragmentation of aid
(Kharas, 2007). Poor countries, particularly in sub-Saharan Africa, are those
that suffer from the highest degree of aid fragmentation (Hermias and Kharas,
2008). Studies show that only around 15 per cent of total aid is directly
poverty-oriented (White, 1995). Other factors which combine to inhibit aid
effectiveness include:
•
Increasing volatility of aid flows over time: Volatility of aid flows
has been rising and this factor is estimated to reduce the effectiveness of ODA
by around 20 per cent (Knack and Rahman, 2004; Hermias and Kharas, 2008)
•
Donor collusion: While harmonisation of donor activity is encouraged to
counter the adverse effects of fragmentation, an unintended side effect is the
evolution of collusion among donors. There is safety in numbers and when
donors, acting in harmony, fail to achieve the goal of lasting poverty
reduction, it is easier to point the finger of blame at the recipient country.
Donors agencies therefore tend to feel no pain from their failures (Easterly,
2002; Hermias and Kharas, 2008; Easterly, 2007).
•
Lack of accountability in a sectoral context: Donor agencies’
performance has been assessed in the light of individual projects rather than
overall sectoral performance. This lack of enhanced accountability has led to
numerous flash-in-the-pan ‘success stories’ which are really just ‘development
experiments’ that fail to achieve the expected impact because of a lack of
scaling up (Hermias and Kharas, 2008).
•
Aid recipients’ preferences: presently, very few development agencies
undertake systematic client surveys and where these are done, the results
usually have little bearing on actual programmes. Recipient countries are also
not at liberty to substitute aid from one donor for a (more desirable)
programme offered by another partner without losing overall aid resources
(Hermias and Kharas, 2008; Lancaster, 1999).
•
Declining volumes of aid for the poorest nations: Aid volumes available
to the poorest have actually been on the decrease in recent times (Randel et
al., 2000; Kharas, 2008).
•
Parallel systems for aid delivery and burdensome donor requirements: On
the premise of ensuring accountability and transparency in the utilisation of
funds, donors continue to build parallel systems to deliver aid - even where
recipient capacities are strong - taxing the limited administrative resources
of recipient nations (Easterly, 2002; Kharas, 2008; Moss et al., 2006).
•
Lack of precise identification of project beneficiaries: Because of a
prevailing assumption that any rural-based development project is poverty
alleviating, loopholes for diverting benefits from the poorest are created
since the path to ensure their receipt of project dividends is not clearly
specified (Mosley, 2002; Knack and Rahman, 2004; NPC, 2006).
•
Country approaches that inadequately address the underlying causes of
poverty (Randel et al., 2000; Knack and Rahman, 2004; Lancaster, 1999).
•
Lack of political will and leadership in some of the largest donors:
Contributing onefifth of the world aid total in 2007, the United States is the
single largest aid donor. But\ the US approach to development is clearly
focused on bilateral cooperation and it displays indifference to the Paris
Declaration and the Accra Agenda for Action which calls for improved aid
coordination. Japan is another large donor which finds the Paris Declaration to
be tangential to its development efforts (Randel et al., 2000; Kharas, 2008)
•
Poaching of skilled local staff from key government agencies and lack of
government ownership of development programmes and projects (Birdsal, 2005;
Knack and Rahman, 2004; Moss et al., 2006).
2.6.2.
Aid Effectiveness – Recipient-Side
Mosley
et al. (2004) show that the differential impact aid might have is dependent upon
the recipient country’s characteristics which include corruption, inequality
and the composition of public expenditure. It has been argued that development
assistance availed developing countries does not often reach the really needy
on account of the corruption of the bureaucracy and of the officials of
developing countries. According to the World Bank (cited in Alesina and Weder,
2002, p. 1126): “there is no value in providing large amounts of money to a
country with poor policies”. Recipient countries are more often than not
beleaguered by poor institutional development, inefficiencies and bureaucratic
failures (Alesina and Dollar, 2000; Riddell, 2007). A chronicle of the
challenges they face would also include:
•
Weak institutions and policies (Dollar, 1999)
•
Conflict (Randel et al., 2000)
•
Lack of commitment to pro-poor strategies (Knack and Rahman, 2004)
•
Limited absorptive capacity (Killick, 1991)
•
Shortage of skilled manpower: Less than 10 per cent of aid recipients are
considered as having the sound frameworks required to monitor and assess
development results and less than a quarter link their development strategies
with their national budget (Kharas, 2008)
•
Poor incentive to work in rural (and the most impoverished) parts of the
country (Devarajan and Renikka, 2004; Mosley, 2002)
•
Lack of participation of beneficiaries in initiating poverty-focused projects
(Mosley, 2002)
2.6.3
The Poverty Trap Model
The
poverty trap model is actually more of a theoretical framework than an
econometric one. The earliest poverty trap model was used by Nelson (1956).
Unlike the gap model which sees foreign aid as a way to raise investment and
thus influence growth, this model assumes that growth is hampered by poverty
traps which can come from various factors like low production capacity, high
population, weak savings. Regardless of the causes, poverty traps are seen to
compromise growth. Foreign aid, which is a temporary injection of capital, is
assumed to help the economy get out of the poverty trap and take-off towards
growth. Nelson sums it up nicely when he says that “increases in income and
capital achieved through funds obtained from abroad can help to free an economy
from the low-level equilibrium trap” (p. 904). Unlike the gap model which
necessarily requires the continuous and incremental inflow of aid into a
recipient country, the poverty trap model requires a onetime infusion of aid to
spur economic growth in developing countries. But like the gap model, this
model too has its limitation Harms and Lutz state that it takes more than an
infusion of aid for a country to get out of poverty and achieve economic
growth. They say that the role of good governance and private capital is
downplayed in the poverty trap model and that aid at best only provides a brief
cure to poverty.
2.7
COUNTRY PROGRAMMABLE AID (CPA)
“Although
total aid in 2005 was over $100 billion, only $38 billion was for investment in
development projects and programmes – and of this perhaps half actually got to
the intended beneficiaries” (cited in Hermias and Khara, 2008, p. 2); “Most ODA
is for special purpose needs which do not translate into funds available for
development projects and programs... Sub-Saharan Africa is especially hard hit
by this wedge between ODA and CPA. It only received $12.1 billion in CPA in
2005, showing almost no increase over the preceding two decades” (cited in
Kharas, 2007a, p.1).
In
the context of the MDGs, the donors as a group can be called stingy, at least
relative to their commitments. “Only Denmark, Norway, Sweden and the
Netherlands have met the goal of aid as a share of GDP of 0.7 per cent to which
all committed at Monterrey, Mexico (confirming earlier commitments) in 2002”
(cited in Birdsall, 2005, p. 17). According to Kharas (2007a), development aid
covers a multitude of different types of transfers but not all of them go
directly to poor countries. Special purpose flows such as administrative
overheads of development agencies; their domestic advocacy efforts to raise
more assistance; debt forgiveness on non-concessional flows; emergency
assistance and food aid; and technical assistance are all considered in donors’
books as aid. Not all of these resources are readily available to poor
countries for application towards development projects and programmes.
Therefore the net aid transfers (which are total aid less special purpose aid
flows) are the funds available for specific investments, sector-wide support,
budget support and many other forms of project and programme mechanisms aimed
at promoting development. This proportion is what is known as country
programmable aid -CPA.
Records
show that in 1997, ODA to low income and least developed countries fell by $3.6
billion – more than 12 per cent (Randel et al., 2000). More recently, the OECD
reported that aid provided by the 22 members of the DAC in 2006 fell by 5.1 per
cent from 2005 levels and that the figures were expected to fall back further
in 2007 as debt relief to Nigeria and Iraq tapered off (OECD, 2006). The
world’s poorest countries are thus receiving lamentably low percentages of
reduced aid – a smaller share of a smaller cake (Randel et al., 2000).
After
this sharp decline in the 1990s, total ODA volume has experienced a major
increase in recent times. However, available data show that CPA has not enjoyed
such a turn of good fortune. Available CPA was actually lower in 2005 than it
was in 1985 in absolute terms; the same pattern holding true both for
multilateral and bilateral agencies disbursements. The share of CPA in total
aid has correspondingly declined to 37 per cent in 2005 from corresponding
levels of 59 per cent in 1975. It has emerged that the $12.1 billion which
accrued to sub-Saharan Africa as CPA in 2005 was only marginally higher than
the $11.6 billion which those countries received in 1985. Some scholars view
this decline as a clear indication of a complete lack of will among rich nation
governments to make the poorest people in the poorest countries a priority
(Randel et al., 2000).
Kharas
goes on to show that, taking all the official aid flows together (in excess of
$100 billion), poor country governments receive just about $38 billion in net
CPA. Of this amount, it is conservatively estimated that only $19 billion
actually got to the final beneficiaries (the citizens of poor countries);
although the percentage of it that actually filters down to the poor among them
remains as yet unknown. This is because of the $38 billion provided, some funds
are invested in administrative overheads and other reporting required by
donors, some funds are illegally siphoned through corruption and some portion
captured by rich citizens in poor countries. The 2005 revision of the Cotonou
Agreement presses donors for ‘upstream co-ordination’ and for the delivery of
recipient programmable aid (funds partner countries can use at their own
discretion). To check aid volatility, the agreement also commits donors to a
multi-annual financial framework from 2008 to 2013 (Hermias and Kharas, 2008).
Judging by information available in literature, it will appear that donors are
taking their time in heeding this advice. Instructively, a 2003 review of the
distribution patterns by the six main bilateral donors (the US, Japan, Germany,
the UK, France and the Netherlands) show that the three countries which
together account for 64 per cent of the world’s poor (India, China and
Nigeria), each receive considerably less aid than would be merited by their
populations and absolute poverty levels (Baulch, 2003). So what does this
portend for poor people in poor countries? What is clear is that the amounts
that are actually received by poor people for development purposes are a small
fraction of what gets financed initially. That only about $12.1 billion of the
overall ODA takes the form of funds that sub-Saharan African (SSA) countries
can use to invest in social and infrastructural development programmes
certainly does not compare well with the $107 billion spotlighted by donor
governments (Birdsall, 2005; Kharas, 2007). It is also clearly indicative of
the growing reluctance of rich countries to funnel their assistance in the form
of programme or project support to developing countries (Kharas, 2007). Even
though the leaders of the Organisation for Economic Co-operation and
Development (OECD) argue that the solution to getting the aid dollar to go the
full development mile is not to reduce aid, but rather to link it better to
local priorities; to help countries build competent systems over time; and to
ensure the harmonisation and simplification of the aid delivery systems (Johnston
and Manning, 2005); the challenge remains on how to structure the aid delivery
system to ensure that resources flow through the most efficient organisations,
to countries with the greatest need; where the corresponding capacity to
programme and implement projects is highest, and where development concerns are
pre-eminent (Kharas, 2007).
2.7.1
DEVELOPMENT AID AND POVERTY IN AFRICA
Africa
is the only region in the world where the number of extreme poor has risen over
the past fifteen years (UN, 2007a). It is also the only region where not even a
single country (particularly for sub-Saharan nations) is on the track to meet
the MDGs (UN, 2007b). At the September 2007 inaugural meeting of the MDGs
African Steering Group (ASG), the UN Secretary General Banking Moo expressed
grave concern over the status report on Africa and the MDGs target date and
called for global assistance to help these countries to join the track.
Development
is complex and multi-faceted and the challenge facing the governments of theworld’s
poorest countries is formidable. For the daunting challenge of poverty
elimination to be achieved among these nations constrained by limited
resources, there must be a dynamic balance between policies and actions aimed
at promoting human development, sustainable livelihoods and a better management
of the natural and physical environment (DFID, 1997). Aid has been shown to be
a tool that could be instrumental in addressing the challenge facing developing
nations but the reality of poverty in the 21st century is considered an
indictment of the global order. At the end of the last century, the world was
not only overproducing food, but also a wide variety of luxuries and
amusements. Yet 1.3 billion people continued to wallow in poverty, being denied
their basic human rights and needs. This state of affairs demonstrated - not
the lack of generosity on the part of the comfortably off majority – but the
failure of political leadership on a grand scale (Randel et al., 2000). Aid to
sub-Saharan Africa has been falling steadily since 1994 (Randel et al., 2000).
Table
1: Human Poverty in Developing Countries (millions of people)
|
Region
|
Illiterate
adults
|
People
lacking
access
to
health
services
|
People
lacking
access
to
safe
water
|
Malnourished
children
under
5
|
People
not
expected
to
survive
to
age 40
|
Maternal
mortality
rates
(per
100,000
live
births
|
|
All
developing
countries
Of
which:
|
835
|
766
|
1202
|
157
|
503
|
471
|
|
Arab
States
|
59
|
29
|
54
|
5
|
26
|
380
|
|
East
Asia
|
167
|
144
|
398
|
17
|
81
|
95
|
|
Latin
America
and
the
Caribbean
|
42
|
55
|
109
|
5
|
36
|
190
|
|
South
Asia
|
407
|
264
|
230
|
82
|
184
|
554
|
|
South-East
Asia
and the
Pacific
|
38
|
69
|
162
|
20
|
52
|
447
|
|
Sub-Saharan
Africa
|
122
|
205
|
249
|
28
|
124
|
971
|
Source:
DFID, 1997 (adapted by the researcher)
2.8
THE NIGERIAN CONTEXT
Nigeria
presents a paradox. The country is rich but the people are poor (World Bank,
1996). Nigeria is one of the biggest and poorest countries in Africa and has
immense development needs (UNDG, 2006). The majority of the population lives in
the rural areas. Following years of political and economic stagnation, Nigeria
embarked on a comprehensive reform programme during the second term of the
democratic administration (Okonjo-Iweala and Osafo-Kwaako, 2007). The reform
was based on the National Economic Empowerment and Development Strategy
(NEEDS); Nigeria’s home-grown Poverty Reduction Strategy Paper (PRSP). The
document focuses on the Nigerian people – their health, education, employment,
happiness, sense of fulfilment and general wellbeing. In articulating Nigeria’s
poverty challenges, the NEEDS document acknowledges that poverty in Nigeria
varies widely by sector, gender and region; and that the social exclusion of
and continued discrimination against women inhibits their ability to fully
participate in the development of the nation (NPC, 2006).
The
conceptual issues addressed in the NEEDS document are predicated on four goals:
1.
Poverty reduction
2.
Wealth creation
3.
Employment generation and
4.
Value re-orientation
The
actualization of these goals is anchored on three pillars, the first of which
is: Empowering people and improving social delivery. With the return of a
democratic government in Nigeria in 1999, measures were subsequently put in
place to review past poverty alleviation programmes, harmonize sectoral efforts
and streamline poverty-related institutions. Reasons advanced for the limited
success (or outright failures in some instances) of past government efforts at
poverty reduction were listed as including:
•
Poor coordination
•
Absence of a comprehensive policy framework
•
Excessive political interference
•
Ineffective targeting of the poor
•
The unwieldy scope of programmes
•
Duplication of functions
•
Lack of sustainability mechanisms
•
Lack of involvement of beneficiaries in project design, implementation,
monitoring and evaluation (NPC, 2004).
The
challenge in Nigeria is significant particularly with respect to the MDGs. In
2000, the World Health Organization (WHO) ranked Nigeria’s overall health
system performance in the 187th position out the 191 Member States. Primary
health care facilities only serve about 5 – 10% of their potential load.
Partnerships between the public and private sectors are largely non-existent or
ineffective. The activities of donors and other development partners were
poorly coordinated. In response, the Nigerian Federal Ministry of Health (NFMH)
in 2003 developed the Health Sector Reform Programme (HSRP) to set the tempo
and direction for strategic reforms and investments in key areas of the
national health system, within the overall framework of NEEDS (FMOH, 2004).
The
HSRP rightly views the rates of maternal and child mortality in the country as
being unacceptably high and concedes that widespread poverty impedes the
capacity of citizens to access medical care. Data and statistics from surveys
and research in Nigeria also show that development is a gendered exercise,
impacting differently on women and men, girls and boys. This factor, in
addition to the ruling social norms endemic in any particular society determine
how different groups in the society benefit from development gains (FME, 2007).
As obtains in most developing countries, women in Nigeria are found to be more
likely than men to be poor and the opportunities open to them for escaping
poverty are fewer (NPC, 2006).
2.8.1 Poverty and human well-being in Nigeria
Rather
than suffering from a lack of food, poverty in Nigeria relates more to a lack
of infrastructure, opportunities, and access to services. The wantok system (a
clan-based support system) helps to protect almost everyone from outright
destitution in rural areas. Poverty and well-being indicators identified by the
participants of the PPA include a lack of employment/cash, land, education,
basic infrastructure (including proper health, living conditions and safe and
regular water supply); communications, a fear of crime, and a breakdown of the
family unit. The PPA defines poverty in Nigeria as “a result of weak
governance, weak social support systems, inefficient use of natural resources,
the lack of economic and financial growth opportunities, a poorly maintained
infrastructure network and the inefficient delivery of, and lack of access to
basic services”, (ADB, 2002, p. iv). The situation in Nigeria can be described
in greater detail using poverty indicators, and income-based, social and
composite indicators of well-being.
2.8.2 Poverty Indicators
The
headcount index measures the proportion of the population living below a
certain poverty threshold. The measure provides information on the distribution
of poverty and the index is broken down by region. The 1996 household survey
indicates that almost two million people or 37.5 per cent of the population
live in households where the real value of consumption per adult equivalent is
below the poverty line of US$ 1 per day. Large inequalities exist, with the
rural poverty rate almost three times that of urban areas. There are also
significant differences between regions and 94.7 per cent of the poor live in
rural areas (World Bank, 1999).
This
has important implications for the targeting of donor aid programmes. Rural
areas which have played host to mining projects are sometimes better off in
terms of access to health and education services since the mining companies
often assume responsibility for such activities during the lifetime of the
project. Other areas have been neglected. The north region, covering much of
the north coast is the poorest region with 45.8 per cent of the population
living below the poverty line. The Highlands also host a large proportion of
the poor, indicating that foreign aid should be targeted to these areas. The
Southern region has the least poverty with 33.2 percent of the population
living below the poverty line.
2.8.3 Income-based measures of well-being
Per
capita income levels in Nigeria exhibit large year-on-year fluctuations which
are predominantly driven by output in the mining and resource sectors and by
external shocks experienced by the economy. Per capita income is, therefore,
unlikely to effectively capture changes in the living conditions of the
majority of the population in the informal sector. It also masks significant
variations of income within and between regions. “Average per capita
consumption in the urban National Capital District is almost 2.0 times that in
the (poorest) the National average, even after spatial price variations are
taken into account” (World Bank, 1999, pp. 74). Real GNP per capita has hardly
changed since independence despite large scale mining and oil projects.
2.8.4 Social indicators of well-being
Indicators
relating to education in Nigeria are low despite their gradual improvement
countries. The adult literacy has improved from 47 per cent in 1970 to 72.2 per
cent in 1995. About 30 per cent of children never enroll in school and of the
children who enter primary school, almost half drop out before they reach grade
six. Secondary school enrolment rates are particularly low in comparison to
other countries (World Bank, 2000). This is primarily due to supply side
constraints with many students unable to attend secondary schools due to a lack
of access. Again, large regional variations in educational attainment exist. 15
per cent of the National Capital District has never been to school while this
figure is 57 per cent for those living in the Highlands region (World Bank,
1999). The plethora of isolated villages, a shortage of skilled teachers and
poor infrastructure have hampered the provision of a basic education to all
children. Health indicators paint a gloomy picture of Nigeria. According to the
UN, in 1990-97 around 35 per cent of children under the age of 5 were
underweight and in 1997, life expectancy at birth was just 58. Just 31 per cent
of Nigeria had access to safe water in 1995. Once again, regional variations
are large. All of these health indicators are notably inferior when compared to
Nigeria to other neighbouring country. The country now faces a rapidly
increasing problem of HIV infection. AIDS is now the biggest single killer in
the country. An estimated 0.5 per cent of the population is believed to have
been infected (AusAID, 2001). A high incidence of unprotected sex and sexual
violence against women are the main contributory factors.
2.8.5 Composite indicators of poverty
The
United Nations Development Programme’s (UNDP) Human Development Index (HDI)
captures other measures of poverty by including information on life expectancy
at birth, adult literacy, combined primary, secondary and tertiary gross
enrolment, and GDP per capita (PPP US$) in a single composite index. In 2000,
according to the HDI, Nigeria ranked 133 out of 173 countries. Although the
country has not made dramatic improvements in the value of the HDI, it is
encouraging that the trend in this indicator is upwards. This provides the
Human Poverty Index (HPI) and the HDI by province. The HPI measures deprivation
through information on illiteracy, malnutrition among children, early death,
poor health care, and poor access to safe water. Combined, they provide a
composite index measuring the degree of deprivation in Nigeria. Inspection of
the data by region reveals that human poverty and development are at the lowest
levels in the five provinces of the country. This is in concordance with the
analysis of the headcount index. The National Capital District of Nigeria has a
HDI that is more than double the national average and almost three times that
of North. This section has highlighted some of the large inequalities which
exist in Nigeria in terms of consumption, and geographic location. The Gini
coefficient is a commonly used measure to represent the extent of income
inequality. A value of zero indicates complete equality and a value of 1
indicates complete inequality. The Gini coefficient for Nigeria is 50.9 and
this is one of the highest in world. Only 17 of 114 countries with Gini
coefficients reported in World Development Indicators 2001 have more
inequitable income distributions (AusAID, 2001, pp. 11). “Real per capita
consumption among the richest 25 per cent of the population is more than eight
times that of the poorest quartile, and caloric availability is more than twice
as high” (World Bank, 1999, pp. 74).
2.8.6 Causes of Poverty in Nigeria
The
absence of reliable data has made it impossible to give a comprehensive
analysis of the trend of poverty hi Nigeria. Although the rise hi world oil
prices and the country's oil production increased per capita consumption and
income throughout most of 1970's, the economic reverse of me early 1980's -
which was tagged the "lost decade for the poor" - has had severe
effects on the country's poor. Consumption further plummeted in the mid 1980's
than in the 1950's (World Bank 1990).
The
economic crisis of 1980's as a result of shocks hi interest rate and term of
trade, external debt crisis, instability and misallocation of scarce foreign
exchange, fiscal indiscipline, corruption and weak external demand was so
severe, thus causing an increase in poverty. The Structural Adjustment
Programme (SAP) introduced in 1986 to correct all these problems recorded
little success, and on the long run, added to the problem. This is owing to
lack of complementary infrastructure, heavy dependence on export of primary
products, lack of political will among the people and government and weak
entrepreneurial and managerial capacity.
The
rapid growth hi the country's population from 83 million people hi 1988 to 91
million in 1992 which was never commensurate with the level of economic
development also led to increase in poverty (CBN 1994). The increase in the
country's population also led to an increase in demand for goods and services,
and hi environmental damage which, over the years, have undermined
productivity. The poor become both the victims and agents of damage to the
environment. Because the poor, especially, the poor-women tend to have access
only to the more environmentally fragile resources, they often suffer high
productivity declines because of soil degradation or the loss of tree cover.
And because they are poor, they have little means to extract what they can from
the resources available to them. The high fertility rates of poor households
further strain the natural resource base.
The
lack of income and productive resources sufficient to ensure sustainable
livelihoods, hunger and malnutrition, ill-health, limited or lack of access to
education and other basic services increases morbidity and mortality from
illness. Homelessness, inadequate housing, unsafe and depredated environment,
social discrimination against women and minority tribes, and exclusion are also
causes of poverty hi the country. Urban poverty has also posed some problems,
such as overcrowding, congestion, contamination of water, bad sanitation, crime
and additional social problems. For instance, hi 1991,only about 46 percent of
the total population had access to safe water while hi 1991 only about 67
percent had access to basic health care; and where available they were in low
quality (World Bank 1995).
The
poor state of the country's education also has its turn on the poor people.
Over the years, the country's educational system has fallen, shortage of funds
continued to be a constraint to educational development at all levels. At the
primary school level, the shortage of funds resulted to delays in the payment
of teacher's salaries, and inadequate supply of books and teaching aids.
Worst
hit are girls whose parents never want to send to school because they are
usually seen as household help. Poor women, because of their lack of education,
often have too many children, and poor health conditions, frequently suffer
from hunger and malnutrition and related illness which often undermine their
productivity. Thus they continue to find themselves in poverty.
The
poor in Nigeria are usually confronted with lack of assets, as well as income
in local economies in which wealth and status come from the land. Disadvantaged
households are typically land poor and those that own land, it is often
unproductive and frequently lies outside the irrigated areas. The poor are
usually unable to improve such plots, since they lack income and access to
credit.
Given
these situations, the incidence of poverty in Nigeria in 1992 was 34 per cent,
with 16 percent of the population suffering extreme poverty. Poverty incidence
in rural areas was 36 percent, compared to the 30 percent hi urban areas, with
the equivalent figures for extreme poverty being 15 and 11 percent
respectively.
The
incidence of poverty was highest in the northern agro-climatic zone, at 45 per
cent, compared with- the middle and southern zones, at 38 and 24 percent
respectively. (Francies et al, 1996:6). The analysis of caloric intake between
1952 and 1993 also shows no improvement. In 1993 it was 2200 calorie per day,
which is below the universal nutritional intake of 2500 calorie per day. Income
per capita was also $275 and $310 in 1993, which falls between the universal
poverty line of $275 and $370 per person a year for the extremely poor and for
the poor respectively as given by the World Bank (World Bank 1990, 1994).
These
situations not only affected the income and nutritional intake of the poor, but
also affected their ability to acquire assets, most especially landed property
and also their quest for better social amenities, such as education, health
care services food, water, etc. which in turn has increased child mortality,
maternal mortality and decreased life expectant of die poor in the country. For
instance, in 1992, infant mortality rate was about 84 death per 1,000 under 5
years, expectancy at birth was 52 years and maternal mortality rate was about
800 death per thousand live bulb (World Bank 1995).
2.9 CONCLUSION
Available
literature shows that poverty is more than just a lack of material things.
Foreign aid is one of the instruments available to the international community
in addressing the development needs of the poor nations. Development Assistance
Countries (DAC members) from rich country to poor countries topped $100 billion
in each of the last two years, reaching a record high; but curiously this has
also been accompanied by increasing levels of poverty among developing nations
of the world. Possible explanations have been advanced for this phenomenon,
which include issues arising from dwindling aid volumes to the poorest nations,
donor and recipient characteristics and shrinking percentage of country
programmable aid.
CHAPTER
THREE
3.0 METHODOLOGY
3.1. INTRODUCTION
A
study which attempts to assess the extent to which development aid has been
effective in addressing the poverty challenge in a nation as large, as populous
and as poor as Nigeria can be a complex process. Assessing the effectiveness of
development aid through document review by its nature can turn out to be a
political undertaking, given that the documents reviewed are initially produced
with a given objective in mind. It requires a method which takes into account
these complexities. This chapter outlines the methodology that was adopted in
assessing the extent to which progress towards the targets of the MDGs in
Nigeria that has been supported by development aid and its related programmes.
This chapter covers the methods, selection of data, analysis and limitations of
the study.
The
research methodology is very important to the study because it provides us with
empirical evidence, which consequently form the basis for accepting or
rejecting theoretical relationships between the dependent and the independent
variables.
3.2 RESEARCH DESIGN
The
research work employs econometric techniques. In order to facilitate the
application of the mentioned tools, this study made use of secondary data. The
secondary data were obtained from Worldbank. The data were structured in such a
way to provide sufficient information on how foreign aid has improved the level
of poverty in Nigeria.
3.3 TYPES AND DATA SOURCE
Data
is the most important materials for any economics research or analysis, and
very much indispensable to the field of the econometrics indeed. The research
study makes use of secondary data. The foreign aid is proxy by ODA, poverty is
proxy by GDP per capita, other variables are INV, INF, FDI, POP and the data
for this study is sourced from the Worldbank website. This study will cover a
period of thirty (30) year’s ranging from 1982 to 2012.
3.4 MODEL SPECIFICATION
Contrary
to many of the earlier studies which simply concentrated on a specification of
panel analysis on impact of foreign aid on poverty level, this study extends
its tentacle by examining the relationship between foreign aid and poverty
level.
Therefore,
following Furuoka (2008), it is hypothesized that Overseas Development
Assistance (ODA) (FOREIGN AID) depends on National Income per capita (GNI),
Total Debt Service payment (TDS), Net Barter Term of Trade (BTT) and Population
(POP). However, to argue the Furuoka specification based on the hypothesis,
poverty rate included in the model, which previous studies ignored. Thus, the
subsequent equation to be estimated is outlined thus:
POV
= (ODA, INV, INF, FDI, POP) ---------- equation (i)
POV
= βo + β1 ODA, + β2, INVt + β3INFt,
β4 FDIt, β5 POPt + µ --------
equation (ii)
I
adopted the model of Furuoka (2008) which stated that ODA depend on National
Income per capita (GNI), Total Debt Service payment (TDS), Net Barter Term of
Trade (BTT) and Population (POP), I am adding some variables which is poverty
rate, investment, foreign direct invest and inflation.
Where:
POV
refers to Poverty Rate which is proxy by GDP per capita
ODA
refers to Overseas Development Assistance as a proxy for Foreign Aid
INV
refers to Investment
INF
refers to Inflation
FDI
refers to foreign direct investment
POP
refers to population
µ
refers to Error term
Note
that βo, β1, β2, β3 are the
parameter
The
studies referred above estimate the impact of foreign aid and poverty reduction
on Nigeria economy. The data was from 1982 to 2012. Also, in order to avoid a
spurious regression, I subject each of the variables used to stationary test so
as to determine their orders of integration, since unit root problem is a
common feature of most time series data.
3.5
DESCRIPTION OF VARIABLES
As
per literature the major determinants of aid are macroeconomic factors like
inflation and foreign exchange rate, govt. infrastructure, corruption or rule
of law, efficient government, policy variable like openness and other factors.
Ideally all these data are required for analysis but due to limitations this
study is confined with few of them. The major variables are described below.
Foreign
aid:
The components of foreign aid are bilateral and multilateral official
development assistance. This study considers total aid represented by official
development assistance as (ODA) for purpose of capturing the totality
effectiveness of aid.
Poverty:
Poverty
here is used to capture the number of people spending below US$1 in a day and
it is proxy by the GDP per capita.
Investment:
Investment
mean the production of goods that will be used to produce other goods. This
definition differs from the popular usage, wherein decisions to purchase stocks
orbond are thought of as investment.
Inflation
Rate:
The inflation rate is used as a measure of overall macroeconomic stability of a
country (Asiedu 2002). High inflation rate (INF) can serve as disincentive on
foreign aid to a country as it increases the user cost of capital.
Foreign
Direct Investment (FDI): This is a direct investment into
production or business in a country by an individual or company of another
country, either by buying a company in the target country or by expanding
operation of an existing business in that country.
Population:
This
is to total of people including other things living in a geographical area
3.6
METHOD OF DATA PRESENTATION ANALYSIS
The
relationship between foreign aid and
poverty, the research work adopts the econometrics technique of the Ordinary
Least Square Method (OLS) as the estimation technique. The method of OLS is
extensively used in regression analysis primarily because it is initiatively appealing
and mathematical much simpler than any other econometric technique (Gujarati,
2003).
3.7
SIGNIFICANCE OF THE ESTIMATION
TECHNIQUE
The
significance of the change in the deviance scores can be assessed through the
calculation of the F-statistic using the equation provided above (these are,
however, provided as a matter of course by most software packages) example
E-view. As with the multiple OLS regression, it is a simple matter to compute
the R-square statistics.
CHAPTER
FOUR
4.0 DATA
PRESENTATION AND ANALYSIS OF DATA
4.1 INTRODUCTION
The need for aid in a developing economy
cannot be overemphasized, in view of the different theories and literature
reviewed in previous chapters of the study and different opinions and findings
from various authors relating the impact of aid on poverty in the Nigerian
economy and otherwise, this chapter of this study will take a step into
checking this issues following methods stated in the previous section. The data
collected on the relevant variables will be put to test accordingly for the
different hypotheses stated.
4.2 DATA
PRESENTATION
The table below shows the dependent
variable Poverty which is proxy by GDP per capita and the independent variable Oversea
Development Assistance, Investment, Inflation rate, Foreign Direct Investment,
and Population. The data are presented below:
|
YEAR
|
POV
proxy by GDP per capita
|
ODA
|
INV
|
INF
|
FDI
|
POP
|
|
1982
|
661.232351
|
34950000
|
20.87
|
6.2
|
430,611,256
|
77,729,805
|
|
1983
|
444.649081
|
16750000
|
18.51
|
3.2
|
364,434,580
|
79,729,313
|
|
1984
|
348.526317
|
32390000
|
22.6
|
4.3
|
245,768,345
|
81,775,217
|
|
1985
|
344.141076
|
31710000
|
21.87
|
3.6
|
354,231,567
|
83,901,572
|
|
1986
|
240.617388
|
58120000
|
23.27
|
1.9
|
369,654,763
|
86,118,046
|
|
1987
|
272.507722
|
67620000
|
19.84
|
3.6
|
276,876,756
|
88,412,920
|
|
1988
|
256.37583
|
118080000
|
19.06
|
4.1
|
178,765,342
|
90,773,617
|
|
1989
|
260.047556
|
344000000
|
19.88
|
4.8
|
1,884,249,739
|
81,775,217
|
|
1990
|
321.668354
|
255080000
|
20.99
|
5.4
|
587,882,971
|
83,901,572
|
|
1991
|
279.275962
|
258320000
|
22.05
|
4.2
|
712,373,362
|
86,118,046
|
|
1992
|
291.28411
|
258820000
|
22.81
|
3.0
|
896,641,282
|
88,412,920
|
|
1993
|
153.076176
|
284420000
|
29.34
|
3.0
|
1,345,368,587
|
90,773,617
|
|
1994
|
171.02527
|
189660000
|
23.98
|
2.6
|
1,959,219,858
|
93,179,760
|
|
1995
|
263.288026
|
210960000
|
15.15
|
2.8
|
1,079,271,551
|
95,617,350
|
|
1996
|
314.735488
|
188750000
|
13.82
|
3.0
|
1,593,459,222
|
98,085,373
|
|
1997
|
314.287645
|
199750000
|
16.48
|
2.3
|
1,539,445,718
|
100,592,242
|
|
1998
|
273.854143
|
201350000
|
25.44
|
1.6
|
1,051,326,217
|
103,144,749
|
|
1999
|
299.342634
|
151800000
|
27.7
|
2.2
|
1,004,916,719
|
105,752,796
|
|
2000
|
377.500257
|
17370000
|
20.19
|
3.4
|
1,140,137,660
|
108,424,827
|
|
2001
|
350.287821
|
176170000
|
24.04
|
2.8
|
1,190,632,024
|
111,166,210
|
|
2002
|
457.47365
|
297930000
|
30.48
|
1.6
|
1,874,042,130
|
113,979,481
|
|
2003
|
510.416941
|
308220000
|
25.43
|
2.3
|
2,005,390,033
|
116,867,371
|
|
2004
|
645.92565
|
576940000
|
23.31
|
2.7
|
1,874,033,035
|
119,831,888
|
|
2005
|
804.152367
|
6408810000
|
22.24
|
3.4
|
4,982,533,943
|
122,876,727
|
|
2006
|
1014.75697
|
11428020000
|
23.47
|
3.2
|
4,854,416,867
|
126,004,992
|
|
2007
|
1130.87979
|
1956260000
|
26.35
|
2.8
|
6.034,971,231
|
129,224,641
|
|
2008
|
1376.01591
|
1290160000
|
22
|
3.8
|
8,196,606,673
|
132,550,146
|
|
2009
|
1090.74628
|
1657070000
|
28.64
|
-0.4
|
8,554,840,769
|
135,999,250
|
|
2010
|
1437.04891
|
2061960000
|
25.19
|
1.6
|
6,048,560,266
|
139,585,891
|
|
2011
|
1496.30332
|
1776670000
|
20.1
|
3.2
|
8,841,972,775
|
143,314,909
|
|
2012
|
1555.36061
|
1145872000
|
21.8
|
2.1
|
7,101,031,884
|
147,187,353
|
Source:
World Bank
4.3 DATA ANALYSIS
Here, I present the results of the
various estimations and consequently analysis of such findings for the purpose
of this study. The chapter examines the descriptive analysis of the data collected,
the regression analysis of static and long run regression results and
interpretation of results accordingly.
TREND ANALYSIS
Trend
between Poverty and Oversea Development Assistance
Source:
computed by the researcher 2014
The
graph above shows the relationship between poverty and oversea development
assistance it show that there is positive relationship between both variables,
but ODA increase in 2003.
Trend
between Poverty and Oversea population
Source:
computed by the researcher 2014
The graph above
shows the relationship between poverty and population it show that there is
positive relationship between both variables.
4.4 RESULT
OF REGRESSION ANALYSIS
|
Dependent
Variable: D(POV)
|
|
|
||
|
Method: Least
Squares
|
|
|
||
|
Date: 04/25/14 Time: 14:41
|
|
|
||
|
Sample
(adjusted): 1983 2012
|
|
|
||
|
Included
observations: 28 after adjustments
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
Coefficient
|
Std. Error
|
t-Statistic
|
Prob.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
-577.9101
|
237.2673
|
-2.435692
|
0.0239
|
|
ODA
|
36.52085
|
10.23020
|
3.569905
|
0.0018
|
|
INV
|
-3.567650
|
4.241868
|
-0.841056
|
0.4098
|
|
INF
|
51.42057
|
16.49124
|
3.118054
|
0.0052
|
|
D(FDI)
|
-2.70E-08
|
1.41E-08
|
-1.913433
|
0.0694
|
|
D(POP)
|
2.35E-06
|
7.43E-06
|
0.316900
|
0.7544
|
|
INF(-1)
|
-59.35400
|
12.64533
|
-4.693747
|
0.0001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-squared
|
0.703587
|
Mean
dependent var
|
19.03105
|
|
|
Adjusted
R-squared
|
0.618897
|
S.D.
dependent var
|
123.8034
|
|
|
S.E. of
regression
|
76.42821
|
Akaike
info criterion
|
11.72290
|
|
|
Sum squared
resid
|
122666.7
|
Schwarz
criterion
|
12.05595
|
|
|
Log likelihood
|
-157.1206
|
Hannan-Quinn
criter.
|
11.82472
|
|
|
F-statistic
|
8.307836
|
Durbin-Watson
stat
|
2.388088
|
|
|
Prob(F-statistic)
|
0.000109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5 ESTIMATED EQUATION
POV = -577.9101
+ 36.52085ODA -3.567650INV+ 51.42057INF-2.70E-08FDI + 2.35E-06POP -59.35400INF(-1)
t-Statistic(-2.435692) (3.569905) (-0.841056)
(3.118054) (-1.913433) (0.316900) (-4.693747)
The
emperical finding which shows the a priori expectation where INV, INF FDI, POP
conformed to the a priori expectation, while ODA does not conform to the a
priori expectation, becuase investment is negatively related to poverty but it
is insignificant, this implies that more investment will reduce the level of
poverty. Inflation is positively related to poverty and it is significant with
this result, it mean that inflation will
increase poverty level. Foreign direct investment is negatively related to
poverty and it is significant, the more our government allow foreigners to
invest in Nigeria, it will reduce the level of poverty. Population is positively
related to poverty and not significant, it means higher population will
increase poverty level. Inflation in previous year is also negatively related
to poverty and it significant, this will also reduce the levelof poverty.
From
the parameter estimates, it can be said that an increase in investment will
lead to 3.567650 reduction in poverty and it is insignificant, an increase in
inflation will lead to 51.42057 increase in poverty and it is significant, an increase in oversea
development assistance will lead to 36.52085 increase in poverty and it is
significant, an increase in foreign direct investment will to a significant
reduction in poverty, it is also significant, an increase in population will
lead toa 2.35E-06 increase in poverty, it is insignificant, an increase in
foreign direct investment for previous year will lead to 59.35400
increase
in poverty and it is significant.
4.5.1 GOODNESS OF FIT
The
OLS result shown in Table above indicates that about 70 percent of the
variations in the dependent variable (POV) were explained by the independent
variables. This is indicated by the coefficient of determination (R2)
of 0.703587, 30 percent of the changes in POV were left unexplained and this
can be attributed to the disturbance term. Also adjusting for loss in degree of
freedom, the regression has a good fit. This is confirmed by an adjusted
R-Squared of 0.618897. This leaves 39 percent of the changes in POV unaccounted
for.
4.5.2 PROBABILITY OF F-TEST
On
the basis of the overall statistical significance of the model as indicated by
the probability of F-statistics, the
overall model can be said with all certainty to be statistically significant
since the probability of F-value is
0.000109.
4.5.3
DW-STATISTICS
The
DW-statistics of 2.388088 shows there is presence of first order serial
correlation in the model. Thus, the null hypothesis of the presence of positive
or negative autocorrelation in the model is not rejected.
|
|
4.5.4 UNIT ROOT TEST AUGMENTED
DICKEY-FULLER TEST(ADF)
Time
series properties of all variables used in estimation were examined in order to
obtain reliable results. Thus, this exercise was carried out through Augmented
Dickey Fuller (ADF) test as articulated by
the least square method. This development arises from the prevalence of
substantial co-movements among most economic time series data, which has been
argued in the literature as undermining the policy implications that could be
inferred from such modelling construction. The ADF is used to determine the
order of integration, that is, the number of times a variable has to be
differenced before it becomes stationary. If a time series has to be
differenced once (i.e.take the first difference at level) to make it
stationary, we referto such a time series as integrated of order 1- I(1).
|
Variables
|
Level
|
1st
difference
|
2nd
difference
|
Level
of integration
|
|
POV
|
1.572470
|
-6.116764
|
–
|
I(1)
|
|
ODA
|
-1.682643
|
-5.549883
|
–
|
I(1)
|
|
INV
|
-4.200128
|
_
|
_
|
I(0)
|
|
INF
|
-4.298636
|
_
|
_
|
I(0)
|
|
POP
|
1.992782
|
-4.870059
|
|
I(1)
|
|
FDI
|
-1.411573
|
-8.681530
|
_
|
I(1)
|
NB: critical value: 1%=
-3.670170, 5%= -2.963972 and at 10% = -2.629906
The above results i.e. Augmented
Dickey-Fuller TestADF test shows that not all the variables are integrated at
the same order, which mean POV, ODA, POP and FDI are integrated at order 1,
while INV and INF are of order 0, which mean that not all the variavles are of
the same order. Therefore, the Augmented Dickey-Fuller TestADF method is
adopted for this quest where the results show that the overall F-statistics is stationary
and significance. Poverty is significant at both level 1, 5, and 10. Oversea
developement assistance is significant at 1, 5, and 10. Investment is
significant at 1, 5, and 10. Inflation is significant at 1, 5, and 10.
Population is significant at 1, 5, and 10. Foreign direct investment is also 1,
5, and 10. This in variably imply that each variable that is tested for the
augmented dickey-fuller are significant at all levels.
4.5.5 ANALYSIS BASED ON STATISTICAL CRITERIA
i. The Coefficient of Multiple
Determinations (R2)
This
is used to check the goodness of fit from the regression results, the value of
R2 is 0.703587 which implies that in the long run 70% of the
variations in poverty is explained by the independent variables oversea
development assistance, foreign direct investment, investment, inflation, and
population.
ii)
Test of Significance of the Parameters
(The t-statistics)
The
t-test is used to determine the significance of the individual parameter
estimates whether each variable is significant.
Decision
Rule:
Reject
H0 if t-cal > t-tab and accept if otherwise.
iii) The F-Statistics Test
The
test is carried out to determine if the independent variables in the model are
simultaneously significant or not. Hence, the analysis shall be carried out under the hypothesis below:
Ho: β1 = β2 = β3
= 0 (all slope coefficient are 0)
H1: β1 ≠ β2 ≠ β3
≠ 0 (all slope not coefficient are 0)
Decision
Rule:
Reject
Ho if fcal > ftab.
iv) Test for Auto Correlation
This
test is aimed at ascertaining if auto correlation occurred in the model. To
achieve this, we assume that the values of the random variable (ut) are
temporarily independent by employing the techniques of Durbin-Watson (d)
statistics.
v) Heteroskadasticity Test
This
test is basically on the variance of the error term. It helps to ascertain
whether the variance of the error term is constant or not.
Ho:
Homoskedasticity Test
H1: Heteroskedasticity Test
Decision
Rule
We
accept the alternative hypothesis homoskadasticity and reject the null
hypothesis of heteroskedasticity strictly showing that error term have a
constant variance.
iv)
Multi – Co linearity Test
Multi
colinearity test means the existence of an exact linear relationship among the
explanatory variable of a regression model.
Decision Rule
From
the rule of Thumb, if correlation coefficient is greater than 0.8, we conclude that
there is multi co linearity but if the coefficient is less than 0.8 there is no
multi co linearity.
4.5.5 FINDINGS AND DISCUSSION
The objective of
this study is to examine the impact of foreign aid on poverty level in Nigeria
economy. Several findings from the study of concern to policy makers deserve
amplification. Some of the findings in this study are as follows:
The
analysis on the impact of aid on poverty in the Nigeria economy is presented in
the table above. The result obtained from the dynamic model indicates that the
overall coefficient of determination (R2) shows that 70 percent of
poverty is explained by the variables in the equation. As the adjusted (R2)
tends to purge the influence of the number of included explanatory variables,
the (R2) of 0.703587 shows that having removed the influence of the
explanatory variables, the dependent variable is explained in the equation by
70 percent. The Durbin Watson (D.W) statistics of 2.388088 as it is
insignificantly below the bench mark, we can conclude that there is auto-
correlation or serial correlation in the model specification; hence the
assumption of linearity is not violated. In terms of the signs and magnitude of
the coefficients which signify the impact of aid to Nigeria economy, it can be seen
that the variables POV, INV, INF, FDI and POP
are concur with the a priori theoretical expectation while only ODA does
not concur to the a priori expectation. The significant coefficients of all
dependent variables clearly state that poverty level depends on growth of
investment, foreign aid and savings in the long run. Above all aid has a
positive impact on poverty, and still significant.
CHAPTER FIVE
5.0 SUMMARY
The main objectives of this quest are to
examine the impact and relationship of foreign aid on poverty in Nigeria
economy. Empirically, the quest succeeds in
providing an analysis of these objectives in Nigeria. Considering the
various theories which postulates that foreign aid has either positive impact
on poverty in Nigeria, the ordinary least square estimates the true impact
relationship between foreign aid and poverty in Nigeria. From the results, it
has been shown that oversea development
assistance does not reduces poverty in Nigeria to the spending of the aid
donoted by the donor country, rather the reduction in the living standard of
the 1980’s which overflowed into the 1990’s was attributable to the structural
adjustment programs, corruption, institutional failure, mismanagement,
administration failure and incompetence and lots more which arose to the
adherence to the donor policies. Basically, it is noticed that foreign aid is
designed to serve the strategic aid economic interest of the donor countries,
thus making development and poverty reduction of the recipient countries count
ineffective. More so, these aid is often wasted on priced goods and services
from donor countries and as such discourages local production, disrupts
economics of scale and increase the poverty rate in the country.
Ideally, one would expect that poverty
should reduce in Nigeria, to have a positive with its population growth rate,
but my empirical shows otherwise and thus could be explain by the fact that
increase in population would lead to increase in labour force and thus increase
in output. Hence, the increase in output reduces the level of poverty among the
people who has made them to make end meet despites the odds they faced in
country. Furthermore, the regression results showed a negative relationship
between poverty and capital expenditure and this indicate that the amount
invested by the government on infrastructural facilities and other social
amenities does not reduce poverty in the country. This could be attributed to
the fact that the capital expenditure is mostly devoted to cities and not inculcating
the rural, thus causing rural-urban migration and this leads to the neglection
of agricultural production for life in the cities. It could also be attributed
to the level of corruption in the country, where contracts are inflated and
also competence is neglected in the award of contracts. In addition, the
regression results show that the past level of poverty in the country affects
the current level of poverty positively.
5.1 POLICY
RECOMMENDATION
Bearing
in mind that the evidence of aid on poverty in developing countries, this quest
sought to critically assess the impact of ODA on poverty in Nigeria. Along the
line it also attempts to empirically examine the macroeconomic implications of
ODA flows on GDP per capita. This is because GDP per capita plays an
instrumental role in human development. Furthermore, it investigates the
various factors that influence development aid allocation to Nigeria. Using the
OLS, the result shows that the bases for development aid allocation to Nigeria
are on political regime, especially in favour of democracy and good governance.
The results also demonstrated a positive and significant relationship between
foreign aid and poverty in Nigeria and a similar. The results suggest that
foreign aid was not effectively utilized in Nigeria to promote poverty and
development. In a simple term the impact of ODA is not felt in Nigeria. The
international community keeps insisting on the necessity of maintaining or
increasing the volume of aid. They recognize that results fall short of
expectations and that there is need to improve the yield and effectiveness of
aid.
As
such, this study recommends that:
·
ODA must be coordinated or harmonized in
Nigeria through administrative framework that has clearly identifiable focal
point. In this regard, one coordinating body and one monitoring and evaluation
system at the highest level of government cannot be overemphasized. This is
consistent with the ownership and leadership principles contained in the
Declaration.
·
Nigerian government should sustain the
current reforms in the various sectors of the economy to encourage the inflow
of foreign aid. The reforms are based on the need to encourage rapid growth and
development, and to reverse the negative effects of foreign aid.
·
Donors should improve aid predictability
by using a multi-year framework for future aid commitments and providing
information to Nigeria and other recipient countries on the future path of aid
disbursements. Such transparency will reduce the uncertainty associated with
aid flows and improve fiscal planning.
·
The government of Nigeria should make
more development progress if it gives more attention to meeting domestic reform
obligations and ensuring that changes take root at the Federal, State and Local
government levels. Similarly, donor countries must be determined to address the
existing structural inequalities which consign one quarter of the world’s
people to live in absolute poverty; and not think that mere disbursement of aid
alone will translate to meaningful action in the global combat against poverty.
·
The government has to get committed to
poverty reduction by facing the facts that on ground and tackle corruption
which has posed a threat to poverty alleviation as well as economic
development. Hence, the poverty alleviation programs should be more purposeful
and aimed at the poor in the country rather than being used to compensate
political allies and contractors.
·
For foreign aid to be effective, the
practices of attaching harsh economic policy conditions, privatization, trade liberalisation, and
government reduction in spending must stop.
·
The level of infrastructure development
and other capital expenditure in Nigeria should be diversified with the rural
areas involved in the various projects and development plans so as to make the
life in the rural areas better and thus reduce poverty.
5.3 CONCLUSION
This study shows that despite the volume
of oversea development assistance received by Nigeria, the level of population
in poverty has not declined. More so, the capital expenditure of the government
has not effectively curbed poverty since it encourages rural-urban migration
and thus discourages agricultural production.
This study has contributed immensely in
explaining the analytical impacts of foreign aid on poverty in Nigeria and the
policy recommendation is confident that poverty which has assumed a
multidimensional aspect will be curbed if proper policy is carried out
sincerely to alleviate the poverty and growth in the country.
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