Does growth trickle down to the poor?

Despite remarkable economic development and essential economic reform programmes, the hunt for poverty-reducing growth solutions is a recurrent challenge in many emerging countries, especially Nigeria, as there is persistent poverty.

There is a heated dispute about whether high GDP growth can help alleviate poverty more often than not. In theory, there are two opposing points of view in this dispute – namely the trickle-down and trickle-up theories. The trickle-up theory says that economic progress does not better the lives of the poor, but rather that growth processes tend to trickle up to the middle-class and the highly wealthy are on one side of the debate. This implies that mutually reinforcing factors keep the poor impoverished and prevent them from benefitting from growth.

On the other side of the debate is the trickle-down theory that argues that the benefits of strong growth rates are naturally distributed throughout all segments of society through various mechanisms such as favourable labour market conditions and enhanced government service provision. According to this belief, as the economy grows, the advantages will eventually trickle down to the poor, benefiting all segments of society. As a result, policies aiming at reducing poverty should prioritise economic growth.

Many African countries have emerged in the last three decades, with growth rates often far higher than wealthy nations. However, whether or not the poor benefit from this prosperity and whether or not this change in Africa’s wealth has reduced poverty needs consideration with the current economic situation.

For instance, Nigeria witnessed its fourth successive quarterly economic growth in Q3 2021 with a 4.03 percent year-on-year growth after a 5.01 percent growth in Q2 2021. This indicated a sustained recovery since the recommencement of growth in Q4 2020 following the recovery from the most profound economic recession recorded in the year.

Also, according to the National Bureau of Statistics (NBS) Q4 2020 projections, the unemployment rate is 33 percent, while the underemployment rate is 22.84 percent. The high unemployment and underemployment impact the population’s poverty rate.

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The official poverty rate between 1980 and 2010 increased from 27.2 to 69 percent. This is approximately a 154 percent increase despite the increase in the GDP per capita that period. Using the World Bank standard of $1.25 per day, 7 out of 10 Nigerians were poor in 2010. By June 2018, Nigeria has the most significant number of people living in extreme poverty.

COVID-19 has aggravated the poverty rate in the country. The World Bank report shows that over 100 million Nigerians will be living in poverty by 2022. This implies that despite the growth witnessed in the country, the poor did not benefit from it as poverty is still on the increase in the country.

The rising poverty is caused basically by rising unemployment, which reduces the income of people as the more significant proportion of the unemployed population relies heavily on the few people employed for survival.

The Nigeria Living Standard Survey (NLSS) report in 2018 also shows that about half of households (46.8 percent) have to share their foods with someone who is not a family member. This percentage is higher in rural areas where 50.6 percent share their meals. About 2-3 days are used during the week to share food with someone of working age. This shows that Nigeria’s poverty rate has skyrocketed in recent times despite the growth in GDP.

The rate of inflation in Nigeria has continued to fall. Inflation fell to 15.40 percent in November 2021, down from a four-year high of 18.17 percent in March 2021 and 0.51 percent points higher than the rate (14.89 percent) recorded in November 2020. The declining trend is projected to continue until the year’s end. However, food inflation increased to 17.21 percent, thereby reducing the purchasing power of the people.

The NLSS report also shows that food price increase is the shock that mostly and badly affected Nigerian households. While the majority (46.5 percent) do not have a way to cope with the shock, 11.7 percent reduce their food intake, 9.2 percent ask family members and friends for assistance, and 6.6 percent involve in activities that can generate additional income for them.

One can easily deduce that when high employment growth rates follow high rates of economic expansion, growth trickle down to the poor. Thus, the execution of the government’s Economic Sustainability Plan (ESP) and the relaxation of COVID-19-induced constraints on economic activities have fuelled growth. However, fast growth alone will not be sufficient to achieve the goal of poverty alleviation; targeted action will be necessary as well.

In conclusion, economic growth strategies that promote income and increase employment rates effectively alleviate poverty than policies that focus solely on average income levels.

Busayo Aderounmu is an economics lecturer at Covenant University, Ota, Ogun State.

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