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TRADE
OPENNESS AND OUTPUT GROWTH IN NIGERIA: AN ECONOMETRIC ANALYSIS (1970-2007)
ABSTRACT
This
research work studies the international competitiveness of the Nigerian economy
in the global market by analyzing the relationship between trade openness and
output growth in Nigeria. Using time-series data over the period 1970-2007, we
show that output growth of the Nigeria economy is a function of two sets of
shocks; (i) external shocks (openness and real exchange rate) and (ii) internal
shocks (real interest rate and unemployment rate). A non-monotonic and an
ANCOVA econometric models are postulated in order to capture the structural
pattern of the relationship between openness and output growth as well as the
policy effect of structural Adjustment program (SAP). The result shows that
there is an inverted U-shape (no-monotonic) relationship between openness and
output growth in Nigeria and the optimum degree of openness for the economy is
estimated to be about 67%. Also, the liberalization policy of the SAP has
positive economic effect on the output growth. The ECM reveals that 79% of the
equilibrium error is being corrected in the next period. We concluded that
unbridled openness may have deleterious effect on the real growth of output of
the Nigerian economy.
CHAPTER ONE
INTRODUCTION
BACKGROUND
OF STUDY
The current
period in the world economy is regarded as period of globalization and trade
liberalization. In this period, one the crucial issues in development and
international economics is to know whether trade openness indeed promotes
growth. With globalization, two major trends are noticeable: first is the
emergence of multinational firms with strong presence in different,
strategically located markets; and secondly, convergence of consumer tastes for
the most competitive products, irrespective of where they are made. In this
context of the world as a “global village”, regional integration constitutes an
effective means of not only improving the level of participation of countries
in the sub-region in world trade, but also their integration into the
borderless and interlinked global economy. (NEEDS, 2005).
Since 1950, the world economy has
experienced a massive liberalization of world trade, initially under the
auspices of the General Agreement on Tariffs and trade (GATT), established in
1947, and currently under the auspices of the World Trade Organization (WTO)
which replaced the GATT in 1993. Tariff levels in both developed and developing
countries have reduced drastically, averaging approximately 4% and 20%
respectively, even though the latter is relatively high. Also, non-tariff
barriers to trade, such as quotas, licences and technical specifications, are
also being gradually dismantled, but at a slower rate when compared with
tariffs.
The liberalization of trade has led
to a massive expansion in the growth of world trade relative to world output.
While world output (or GDP) has expanded fivefold, the volume of world trade
has grown 16 times at average compound rate of just over 7% per annum. In fact,
it is difficult, if not impossible, to understand the growth and development
process of countries without reference to their trading performance.
(Thirlwall, 2000).
Likewise, Fontagné and Mimouni (2000)
noted that since the end of the European recovery after World War II, tariff
rates have been divided by 10 at the world level, international trade has been
multiplied by 17, world income has quadrupled, and income per capita has
doubled. Incidentally, it is well known that periods of openness have generally
been associated with prosperity, whereas protectionism has been the companion
of recessions. In addition, the trade performance of individual countries tends
to be good indicator of economic performance since well performing countries
tend to record higher rates of GDP growth. In total, there is a common
perception that even if imperfect competition and second best situations offer
the possibility of welfare improving trade policies, on average free trade is
better than no trade.
From the ongoing discussion, it is
evident that trade is very important in promoting and sustaining the growth and
development of an economy. No economy can isolate itself from trading with the
rest of the world because trade act as a catalyst of growth. Thus Nigeria,
being part of the world, is no exemption. For this reason, there is a need to
thoroughly examine the nature of relationship between trade openness and output
growth in Nigeria.
TRADE
OPENNESS AND OUTPUT GROWTH: HISTORICAL EXPERIENCE OF THE NIGERIA ECONOMY
Today,
Nigeria is regarded to have the largest economy in sub-Saharan Africa,
excluding South Africa. In the last four decades there has been little or no
progress realized in alleviating poverty despite the massive effort made and
the many programmes established for that purpose. Indeed, as in many other
sub-Saharan Africa countries, both the number of poor and the proportion of
poor have been increasing in Nigeria. In particular, the 1998 United Nations
human development report declares that 48% of Nigeria’s population lives below
the poverty line. According to the report (UNDP, 1998). The bitter reality of
the Nigerian situation is not just that the poverty level is getting worse by
the day but more than four in ten Nigerians live in conditions of extreme
poverty of less than N320 per capita per month, which barely provides for a
quarter of the nutritional requirements of healthy living. This is approximately
US 8.2 per month or US 27 cents per day.
Doug Addison
(unpublished) further explained that the Nigeria economy is not merely
volatile; it is one of the most volatile economies in the world (see figure 1
below). There is evidence that this volatility is adversely affecting the real
growth rate of Nigeria’s gross domestic product (GDP) by inhibiting investment
and reducing the productivity of investment, both public and private. Economic
theory and empirical evidence suggest that sustained high future growth and
poverty reduction are unlikely without a significant reduction in volatility.
Oil price fluctuations drive only part of Nigeria’s volatility policy choices
have also contributed to the problem. Yet policy choices are available that can
help accelerate growth and thus help reduce the percentage of people living in
poverty, despite the severity of Nigeria’s problems.
Figure 1:
growth rate of real GDP
Nigeria real
GDP Growth Rate .
DIAGRAM
During the
period 1960-1997, Nigeria’s growth rate of per capital GDP of 1.45% compares
unfavorably with that reported by other countries, especially those posted by
china and the Asian Tigers such as Hong Kong, Singapore, Taiwan, and south
Korea, viewed in this comparative perspective, Nigeria’s per capita income
growth has been woefully low and needs to be improved upon. (Iyoha and Oriakhi,
2002). In like manner, ogujiuba, Oji and Adenuga (2004) wrote that the Nigerian
economy has severally been described as a difficult environment for business
with a population growth of about 3%, it has been acknowledged that the current
average output growth rate of less than 4% will see the country being poorer in
the next decade.
A study
conducted by Iyoha and Oriakhi (2002) on Nigeria’s per capita GNP from 1964 to
1997 show that it rose steadily from US$120 to US$780 in 1981. Thereafter, it
fell almost steadily to US$280 in 1997. Thus, between 1964 and 1981, income per
capita increased by 550% or at an annual average rate of 32.3% while between
1981 and 1997, it fell by 64.1% or at an annual average rate of 4%. It is worth
noting that if income per capita had continued to increase beyond 1981 as it
did before then, Nigeria’s GDP per capita would have equaled US$1,279 in 1997.
The difference between US $280 and US$1,279, i.e, approximately, US$1,000.00,
is a rough measure of the cost to the average Nigerian of domestic macro
economic policy mistakes and adverse international economic shocks. Likewise in
1960 agricultural exports accounted for only 2.6%. Exports of other commodities
like tin and processed goods amounted to 26.6% of total exports. By 1970
agricultural exports only accounted for 33% of total exports while petroleum
exports had started to establish dominance by exceeding 58% of total exports.
By the time the oil boom began in earnest in 1974, petroleum exports accounted
for approximately 93% of all exports. The relative share of agricultural
exports in total exports had shrunk to 5.4% while other products accounted for
the remaining 1.9%. Since 1974, with the exception of 1978 when the relative
share of petroleum in total exports has exceeded 90%. In deed, since 1990, the
relative share of petroleum in total exports has exceeded 96%. Agricultures
contribution has fluctuated between 0.5% and 2.3% while the share of other
products has fluctuated between 0.5% and 1.7%. Thus petroleum exportation has
totally dominated the economy and indeed government finances since the
mid-1970s.
Meanwhile, a puzzling and disturbing
aspect of Nigeria export boom is that the growth it generated did not seem to
be lasting or to have had a significant effect in changing the structure of the
economy. For instance, in the 1970’s there was a major increase in measured GDP
but the structure of the economy remained basically unchanged (see figure 2
below). This led professor Yesufu (1995) to describe the Nigerian economy as
one that had experienced “growth without development’’.
DIAGRAM
During the
period of 1970 – 1985, import substitution industrialization (ISI) strategy was
a dominant feature of trade policy in Nigeria. The trade policy was generally
inward oriented. Under this ISI strategy, “Infant” manufacturing industries
were protected using high tariffs, import quotas, and other trade restrictions
like import licensing. Non-tariff barriers to trade such as import prohibitions
were also utilized. During this period, trade policy was also adjusted in
response to the exigencies of the balance of payments.
Also, Nigeria was operating a fixed
exchange rate regime under which the value of the Naira was essentially tied to
US dollar and gold. It is worth noting that the trade policy pursued during
this period resulted in a rapid increase in manufacturing production and
employment, particularly during the era of the oil boom (1975 -1980) and that
led to a rise in the share of manufacturing in Gross Domestic product (GDP)
from 5.6% in 1962/63 to 8.7% in 1986. (Iyoha and Oriakhi, 2002).
In 1986, Nigeria adopted the
structural adjustment programme (SAP) of the IMF/World Bank. With the adoption
of SAP in 1986, there was a radical shift from inward-oriented trade policies
to out ward –oriented trade policies in Nigeria.
These are policy measures that
emphasize production and trade along the lines dictated by a country’s
comparative advantage such as export
promotion and export diversification, reduction or elimination of import
tariffs, and the adoption of market-determined exchange rates some of the aims
of the structural adjustment programme adopted in 1986 were diversification of
the structure of exports, diversification of the structure of production,
reduction in the over-dependence on imports, and reduction in the
over-dependence on petroleum exports. The major policy measures of the SAP
were:
· Deregulation of the
exchange rate
· Trade liberalization
· Deregulation of the
financial sector
· Adoption of appropriate pricing
policies especially for petroleum products.
· Rationalization and
privatization of public sector enterprises and
· Abolition of commodity
marketing boards.
However, as
a result of trade liberalization gospel of the SAP, the Nigeria external sector
really experience dramatic growth. For instance, the total domestic exports of
Nigeria in 2006 amounted to N755141.32 million against N6621303.64 million in
2005 showing an increase of 14.10%. Domestic exports recorded negative growth
rates in 1993 (7.70%), 1994 (45.5%), 1997 (2.03%), 1998 (38.48%) and 2001
(27.06%); while it recorded positive growth rates in other periods. The largest
increase in domestic exports was witnessed in 1995 (448.42%). Total imports
(C.I.F) stood at N2922248.46 in 2006 as against N1779601.57 million in 2005
recording an increase of 64.20%. Total imports also recorded negative growth
rates in 1994(45.72%),1998(9.41%) and 2004(18.07%) while it is positive all
through other years. The value of total merchandise trade amounted to
N10477389.78 million in 2006 as against N45272.24 recorded in 1987. External
trade was dominated by domestic exports between 1987 and 2006 averaging 67.17% while imports (C.I.F) averaged
32.82% (see figure 3 below), consequently, the trade balance was positive
between 1987 and 2006. Oil export remains the dominant of export trade in
Nigeria between 1987 and 2006 accounting for about 93.33% of total domestic
exports. On the other hand, non oil exports accounted for a small value of
6.67% over the same period. (NBS report, 2008).
DIAGRAM
Therefore,
it could be understood that the SAP involved the deregulation and
liberalization of the Nigerian economy. This policy thrust of this program
dovetailed nicely with the emerging international orthodoxy to the effect that
deregulation and economic liberalization would yield the optimal allocation of
scarce resources, reduce waste, and promote rapid economic growth in developing
countries. Unfortunately, there has been no significant progress made in the
achievement of these objectives. The openness of the economy has significantly
increased in the past four decades, with the trade-GDP ratio rising from 31.54%
in 1970, to 46.91% 1980, 57.23% in 1990, 88.16% in 1995, 85.26% in 2003 and
57.63% in 2007 (see figure 4 below) indeed, in the 1990s the ratio of trade to
GDP has averaged 70%. This extreme openness of the economy could be
disadvantageous in that it makes the country highly susceptible to
internationally transmitted business cycles, and, in particular international
transmitted shocks (like commodity price collapse). A good example of this effect on the Nigerian
economy is that of the global food crisis of 2007 and the current global economic/financial
crisis.
FIGURES 4:
THE DEGREE OF OPENNESS
NIGERIA
IMPORT AND EXPORT
(DIAGRAM)
ATEMENT OF
THE RESEARCH PROBLEM
Nwafor Manson (unpublished) not that
the Nigeria’s trade policy over the years has been determined by one/ more of
the following.
· Need to protect and stimulate domestic
production (import capital goods at low prices etc)
· Need to ameliorate/prevent balance of
payment problems.
· Need to boost the value of the naira
· Need to be competitive and enjoy the
benefits of openness.
· Need to increase revenue and
· International agreements
Today, as
part of moving with the trend of globalization and trade liberalization in the
global economic system, Nigeria is a member of and sygnatory to many
international and regional trade agreements such as international monetary fund
(IMF), world trade organization (WTO), economic community of West African
States (ECOWAS), and so many others. The policy response of such economic
partnership on trade has been to remove trade barriers, reduce tariffs, and
embark on outward-oriented trade policies. Despite all her effort to meet up
with the demands to these economic partnerships in terms of opening up her
border, according to the 2007 assessment of the trade policy review,
Nigeria’s trade freedom was rate 56%
making her the worlds 131st freest economy while in 2009, it was ranked 117th
freest economy, the country’s GDP was also ranked 161st in the world in
February, 2009. The economy has struggled vigorously to stimulate growth
through openness to trade, In fact, it seems that as the country put greater
effort to boost her economic growth by opening up to trade with the global
economy the more she becomes worse-off relative to her trading partners in
terms of country output growth.
Having
reviewed the related literatures and considering the structure of the Nigerian
economy as related to trade openness and output growth, we may then ask the
following questions.
· Does trade openness have any
significant impact on out put growth in Nigeria?
· Is there any other macroeconomic
variable that has significant impact on output growth in Nigeria?
· Is there any linear association
(correlation) between trade openness and output growth in Nigeria?
· Is there long run relationship between
trade Openness and output growth in Nigeria?
· Has there been any significant
structural change in output growth between the pre-SAP and post-SAP period in
Nigeria?
OBJECTIVES
OF THE STUDY
The broad
objective of this research work is to study, in its entirely, the relationship
between trade openness and output growth in Nigeria. This broad objective can
be subdivided into the following smaller objectives:
· To examine the impact of trade openness
on output growth in Nigeria.
· To identify other internal and external
macroeconomic shocks that determine output growth in Nigeria.
· To identify other international and
external macro economic shocks that determine output growth in Nigeria.
· To determine the linear association
(correlation) between trade openness and output growth in Nigeria.
· To ascertain the possibility of long
run relationship between trade openness and output growth in Nigeria.
· To determine the possibility of structural
changes (if any) in output growth between the pre-SAP and post-SAP period.
STATEMENT OF
THE RESEARCH HYPOTHESES
In view of the foregoing study, with
respect to trade openness and output growth in Nigeria, the following null
hypothesis will be tested:
Ho: Trade openness does not have any
significant impact on output growth in Nigeria.
Ho: There is no other macroeconomic variable
(internal and external) that have significant impact on output growth in
Nigeria.
Ho: There is no linear association (correlation)
between trade openness and output growth in Nigeria.
Ho: There is no long run relationship between
trade openness and output growth in Nigeria.
Ho: There is no significant structural change in
output growth between the pre-SAP and post-SAP period.
JUSTIFICATION
OF THE STUDY
Nigeria is currently undergoing a
series of transformation in every sector of the economy, including the external
sector of the economy. The country’s economic policy in the last two decades
had one dominating theme which is an integral part of the structural Adjustment
programme (SAP) – trade liberalization. This policy was espoused on the
argument that it enhances the welfare of consumers and reduces poverty as it
offers wider platform for choice from among wider variety of quality goods and
cheaper imports. Today, there are many existing literature on the topical issue
of trade openness and growth of which some support the axiom that openness is
directly correlated to greater economic growth with the main operational
implication being that governments should dismantle the barriers to trade. The
focal point of this research work is to identify the short comings and benefits
of this argument as well as check the validity of this mainstream axiom I
Nigeria in the presence of various internal and external shocks.
SIGNIFICANCE
OF THE STUDY
The role of international trade in
the developmental journey of an economy can not be over emphasized, especially
with the current trend of globalization. Nigeria. Being part of the global
village, is not left out of this world development. This research work is
carried out to study how trade openness has influenced the performance of the
Nigeria economy through output growth in the presence of other internal and
external shocks. The findings of this research work transcend beyond mere
academic brainstorming, but will be of immense benefit to federal agencies,
policy makers, intellectual researcher and international trade think tanks that
occasionally prescribe and suggest policy options to the government on trade
related issues. It will also help the government to see the effectiveness of
trade liberalization policy on the economic growth of the nation over the
years. This research work will further serve as a guide and provide insight for
future research on this topic and related field for students who are willing to
improve it. It will also educate the public on various government policies as
related to trade issues.
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