Archive for April, 2014

The contribution of human capital development to variances in poverty increased from about 2 percent in the second period to about 18 percent in the last period. The contribution of human capital development to variances in REER was about 4 percent in the first period and increased to about 9 percent in the 9th period. The contribution of absorption to variances in all the variables and that from all the variables to absorption is insignificant. Thus, the volatility of the REER has significant effect on the level of poverty in Nigeria. The implication of the result is that government policies which targets RER could play significant role in reducing the level of poverty in Nigeria. The result of the parsimonious Error Correction Model shown in the appendix had similar findings. The result showed that the coefficient of the REER is statistically significant and displays a positive sign which indicates that a RER depreciation is potentially beneficial to the poor. Our result also showed that human capital development proxied by primary school enrolment has a positive and significant impact on poverty. This is an indication that the quality of human capital development has the tendency of enhancing the positive impact of an appropriate RER policy on poverty alleviation. This result is in agreement with Oumar who found in his study on poverty and RER in some selected countries using panel data and the System General Method of Moments estimator that both secondary and primary school enrolments are positively and significantly related to the income of the poorest fifth of the population in some selected countries. The statistical insignificance of absorption does not mean a complete absence of a relationship between absorption and poverty but it rather insinuates that absorption play indirect role because of its impact on economic growth.
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An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: PovertyA comparative assessment of the error correction term (coint eq1) at the bottom of table 4 for the first vector shows that poverty has a t- value of -3.25144 with the right negative sign. The other variables except the REER either have a wrong sign or are not significant. This suggests that the poverty equation constitutes a cointegrating relationship in the first vector. The REER is also significant with a t-value of -2.27725 and coefficient of -0.265390. The results thus suggest that about 20 percent of the disequilibrium in poverty is corrected each year, while about 27 percent of the disequilibrium in the REER is corrected yearly. The error correction term for absorption has the right sign and falls within the acceptance region of -1<error term<0 but it is not statistically significant, while that of human capital development measured by primary school enrolment is statistically flawed. The result thus shows how poverty responds to variations in the REER as well as absorption and human capital development.
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The model to be estimated has poverty, measured by per capita income as the left hand variable, while the Real Effective Exchange Rate (REER), absorption (represented by government spending) and human capital development represented by primary school enrolment are the right hand variables. The model could be linearly stated as: LPCY = C0 + QREER + C2GSP + C3PE + Ut Where: PCY = Poverty, measured by per capita income, REER = Real Effective Exchange Rate GSP = Absorption represented by government spending, PE = Human capital development represented by primary school enrolment L = Natural logarithm Ut = Random variable.
The first step in the analysis was to estimate the descriptive statistic. The result of the descriptive statistic is presented in table-1. The skewness which measures the asymmetry of the distribution of the series around its mean has values greater than zero which indicates that the series is skewed to the right. This insinuates that the distribution has a long right tail. The kurtosis measures the peakedness or flatness of the distribution with an expected value of 3.0. The result in table 1 suggests that the human capital development and the REER satisfy the condition. However, that of poverty is leptokurtic (greater than 3), while that of absorption is platykurtic (less than 3). The Jarque-bera test is used to test whether the random variables with unknown means and dispersion are normally distributed. It measures the difference between skewness and kurtosis. The Jarque-bera test has the null hypothesis of normally distributed residuals. The probability values indicate a validation of the null hypothesis that the errors are normally distributed.
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An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: Econometric ProcedureKempa identified two distinct sources driving exchange rates: one arising in financial markets and the other in the real economy. Nominal shocks were measured as changes in money supply and money demand and aggregate supply shocks were measured by a series on industrial production, while the rate of domestic absorption and elasticity of the current account were used as proxies for aggregate demand shocks. The decomposition suggested that nominal shocks accounted for less than 33 per cent of overall RER variability, aggregate supply shocks explained less than 10 per cent of overall variability and the remaining variability were accounted for by aggregate demand shocks, particularly at longer forecast horizons. Thus, the evidence in this study suggested that exchange rate fluctuations appeared to be predominantly equilibrium responses to real shocks, rather than volatility in financial markets. Oumar, assessed the relationship between the RER and poverty in a group of countries using panel data and the System General Method of Moments. He found that the RER depreciation favoured the poor, provided that income is fairly distributed and institutions are sound.
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Antonopoulos tested the so-called “Shaikh hypothesis”, which states that the RER is fundamentally determined by the ratio of relative real unit labour costs (as a proxy for productivity differentials) of tradable goods between two countries. However, Antonopoulos’s model added capital flows to the “Shaikh hypothesis” and employed cointegration methodology on Greece’s data covering the period 1960-1990. The study provided evidence that RER movements cannot be explained by the PPP hypothesis, that there was a strong role of the productivity of the export sector of Greece vis-a-vis that of the rest of the world, and that there is a less important role of net capital inflows. The evidence in this study suggested that an improvement in the relative productivity of Greece’s export sector and in capital inflows appreciated the country’s RER.
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An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: Empirical LiteratureEquations 4 and 5 can be used to illustrate the conditions for internal and external balance, which requires excess demands for non-tradables and tradables to equal zero. In this regard, (E, G) which represents internal equilibrium, is represented by a curve with negative slope, (MM). This highlights the idea that a RER appreciation is key in restoring equilibrium in the non-tradable market when public spending goes up. In other words, a rise in absorption, which is the same as an increase in public expenditure, triggers an excess in the demand of non-tradables. The relative price of nontradable has to go up for the imbalance to be eradicated, implying that the RER has to appreciate. The external equilibrium is represented by an increasing curve (CC), implying that if public expenditure increases (so does the absorption), relative price of tradable must rise in order to eliminate the external imbalance. The simultaneous internal and external equilibriums are represented in point at E in Figure 1.
The point D represents a condition where there is an external imbalance, such as a trade deficit. D can also be described as a situation where the RER is below the equilibrium level, or overvalued. This is indicative of the conditions that prevailed in many African countries after the second oil shock (Oumar, 2007). One way of clearing this external imbalance, moving from D to E, consists in both reducing the absorption and depreciating the relative price of tradables to non-tradables. Economic policies are therefore designed to achieve these two objectives and such policies are usually qualified as good economic policies. These policies include prudent fiscal, monetary and exchange rate policies with the focus of avoiding the overvaluation and excessive absorption. Obviously, economic policies in the dependant economy model’s framework tend to primarily impact on the RER and absorption. As a result, analyzing the impact of sound economic policies on poverty, amounts to assessing the impact of RER and absorption on poverty.
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The aim of this paper is thus to empirically investigate the influence of the RER on the level of poverty in Nigeria. The relevance of human capital development to this relationship will also be assessed. Although the relationship between real exchange rate and output has been well canvased, same cannot be said of the link between real exchange rate and poverty in Nigeria. This paper is an attempt to fill such gap. The paper will illuminate the links between real exchange rate and income on the one hand and between income and poverty on the other. It will also reveal the implications of continuous depreciation of the naira on poverty levels in the domestic economy.
Other than this introductory section, the rest of the paper is divided into three sections. The second section presents a review of empirical literature and theoretical framework. The third section is on the econometric procedure, while section four concludes.
A Note on the Empirical Literature and Theoretical Anchorage
The inherent failure of traditional economic models (Keynesian and monetarian) to capture the reality of the developing world gave prominent role to the ‘dependant’ economy model which is adopted for this study. The dependant economy model provides the theoretical background for policies designed to reduce internal and external imbalances in developing countries, Nigeria inclusive. The dependant economy model was initially developed in the area of international trade theory (Salter, 1959, Swan, 1960) and subsequently found numerous applications in developing economies because of the ability to capture dynamics in small open economies, especially developing economies. The model is built on the assumption that the country is a price-taker, meaning that the country has no significant market power to influence world prices. Another salient feature of the model is the distinction made between tradable and non-tradable goods. The model assumed that the price of tradable goods is determined by the world market, the prevailing nominal exchange rate and trade policy, especially tariff and export subsidies, while non-tradable price depends on the domestic effective demand and domestic supply.
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An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: IntroductionThe increased awareness of the need to tackle poverty in Nigeria has directed attention towards the role of macroeconomic policy in achieving social as well as macroeconomic objectives. The preservation of macroeconomic stability is important not as an end in itself, but a necessary precondition for sustained economic growth which is the single most important factor influencing poverty reduction (Greg, 2006).
Macroeconomic policies are those that directly or indirectly impact on key variables such as the real exchange rate (RER), inflation rate, current account balance, fiscal deficit and the level of international reserves. Over the years, frequent exogenous shocks, including volatility of terms of trade and resource flows as well as capricious weather conditions have taken a heavy toll on the internal and external balances of many developing countries and as a result some of these counties, particularly those in Africa adopted Structural Adjustment Programmes (Oumar, 2007).
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