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.
Equation 1 indicates the determinants of tradable prices, Qt, which are the nominal exchange rate, e, the international price of tradable goods, Q*t, and the trade policy represented by a tariff, h. Equation 2 captures the general level of prices, which is assumed to be a linearly homogenous function of the prices of tradables, Dt, and non-tradables, Qn. Equation 3 defines the RER, E, as the relative price of non-tradables to tradables. Equation 4 and 5 represent excess demand of non-tradable and tradable goods. These equations also carry two public policy variables; the public spending, G, and the RER, E. Equation 4 indicates that any appreciation of the RER results in the decline of the excess demand of tradables as they become relatively expensive. On the other hand, an increase in public spending leads to higher excess demand for non-tradables. Equation 5 shows that an appreciation of RER, by both boosting the demand and restricting the supply of tradables, increases the excess demand of this particular good. The same equation suggests that an increase in government expenditures or an augmentation in absorption widens the excess demand of tradable goods. read more