An Analytical Study Of International Trade And Poverty Reduction In Nigeria

Project and Seminar Material for Economics

An Analytical Study Of International Trade And Poverty Reduction In Nigeria


Many developing countries are competing to attract foreign direct investment with a belief that it can be a tool for poverty reduction because it serves as supplements to domestic savings and it is often accompanied with technology and managerial skills which are indispensable in economic development. Foreign direct investment can contribute in significant ways to breaking of growth – poverty vicious circle and there lies Nigerian hope. The Nigeria government has opened several economic sectors to foreign investors and issued several investment incentives. Since the market oriented economic reforms took place in Nigeria emphasis has been given to attracting FDI. In this study, the relationship between FDI and poverty reduction is analyzed empirically. It is based on secondary data which was collected from the central Bank of Nigeria and the World Bank’s world development indicators. The period covered in the study is 1980-2012. The model was estimated using the Ordinary Least Square Estimation Approach. The results show that FDI has a positive but not significant impact on real per capita income and hence does have the potential of reducing poverty in the country. The insignificant impact on the Nigerian economy may be due to the under development of human capital, backward institutions, crowding out of domestic investment or other reasons which require further investigation, the fact that FDI does not have a significant impact on poverty reduction has an important implication for policy markers, especially trade and FDI policies must be checked in order to make FDI growth enhancing in Nigeria.

Chapter One


1.1 Background of the Study

The incident of poverty within the Nigerian economy has been on the increase for the past two decades and the scourge has particularly been high especially within the 1980s. The need to employ all available economic parameters towards linking economic growth with poverty reduction thus becomes important. The state of the development in sub-Saharan Africa is such that recent economic performance appears to be on the downward trend and in spite of the strides that have been made by a few African countries, the overall picture is that it is not likely that many of them will meet the targets and goals set in the Millennium Declaration

The possibility of linking poverty reduction with the practice of trade policy is built on the premise that the efficacy of trade via import and export facilitation is aimed at sustained economic growth, as well as the development of productive capacities elucidating the importance of pure international trade theory. Trade is often referred to as the engine of growth, and the capacity of trade is so expected to rebuild the African economies. This will thus require the establishment of an indirect linkage between the practice of trade policy and poverty reduction. That is, the process by which openness to trade via the instrumentality of trade policies brings about the facilitation of increased productivity that allows countries to use more of their factor abundant endowment to enhance economic growth and thus bring about poverty reduction.

It is important to note that there exists no straightforward relationship between the practice trade policy and poverty reduction. The reason for this being that Nigeria like other developing countries is solely dependent on primary products in an imports-substituting industrial sector to facilitate international trade. Also, it is only through the development of a range of new institutional and infrastructural economic facilities, which includes new agricultural technology developed and adapted to conform to the country’s agro-climactic and soil conditions, the establishing and strengthening of schools, universities, hospitals, technical training centre and research and development institutions coupled with the maintenance of a good network of roads as well as other transportation and communication facilities aimed to promote the agrarian community. There is need also, to enforce a free and transparent legal system that promotes the rule of law very importantly within a modernized economy. This would no doubt bring about sustained economic growth towards alleviating poverty via trade by the expansion of export, import and economic parameters.

The improvement of Nigeria’s economic production agents by promoting the positive role of export in increasing the import capacity capable of improving the domestic capacity such that huge external debts overhang is unable to neutralize such improvement is one of the positive roles international trade can play in improving the growth of the economy via export expansion. This is seen in the light of resources expended in the servicing of external debt annually. Otherwise it will serve as a negative signal to donor agencies in the light of the opportunity for increased future trade relationship.

The Nigerian economy as a national entity though linked to the global economy through trade has been deficient in linking the welfare, lives and livelihood of the Nigerians majority to the conditions obtainable within the international economy. A good example is thus observed in the agricultural sector where although it engages over 60% of the Nigerian labour force, this statistic is not proportionally reflected in terms of agricultural export ratio to welfare. (Aremu, 2004).

It can however thus be seen that export expansion has not been solely able to bring about economic growth. This has been the approach of the petroleum sector of the economy which has only yielded an “enclaved-led growth” in few parts of the nation sectorially and geographically. The revenue so generated is also observed to accrue more to transnational corporations (TNCs) in the sector. The promotion of an inclusive form of economic growth with capacity to alleviate poverty via export expansion must be geared towards economy-wide income earnings opportunity expansion via export and import competing economic activities. It would be involved in both tradable and non tradable commodities and services.

This would need to take place at an increasing rate of economic activities exceeding the growth rate of the productive labour force within the economy. This above explanation thus highlights export expansion as a necessary condition that requires a wholistic developmental linkage of the entire economy simultaneously experiencing expansion as a sufficient condition. It is with these considerations that this study makes the attempt to examine a trade policy practice-poverty relationship towards the development of the Nigerian economy.

This is so aimed considering the possibility of poverty reduction through the practice of trade policy given the fact that the Nigerian economy as at present has a weak export performance seemingly concentrated on one product, i.e. petroleum. The above sector gives little or no guarantee also considering the unstable price of crude oil, that export would influence growth rate in such a way that economic growth so attained would bring about poverty reduction. It thus questions the ability of trade policy to bring about the institutionalized propagation of the enrichment of poor nations.

1.2 Statement of Research Problem

This study thus attempts to make in depth research toward indentifying solutions that conceptualize a relationship given the practice of international trade policy issues which encapsulates poverty and inequalities within the Nigerian economic frame work towards a possibility of economic development and growth indicative of poverty alleviation reduction.

This creates a problem of how to identify allowances within literature that highlights linkage between the practice of trade policy and poverty that promotes the above relationship. It involves studying the impact of international specialization towards economic progress on one hand that would not result into a negating effect reducing household welfare on the other hand.

Also, considering state of the multilateral trading environment in which Nigeria is situated, as governed by the World Trade Organization (WTO), this study attempts to proffer answers as to how the above trade-poverty relationship would be best able to alleviate poverty within the country’s context.

1.3 Justification of the Study

Earlier studies done on international trade have majorly emphasized the individual effect of trade openness and liberalization on the following: macroeconomic indicators in different sectors of the economy worldwide; the roles of national governments; the overall influence on world trade; and the sectorial impact within national economies. However, increasing incidence of poverty is yet to receive adequate attention from the international trade policy perspective With the present drive of the Millennium Development Goals (MDGs) in Nigeria, it may appear that the first and eighth goals would simultaneously benefit from a fore mentioned international trade perspective to poverty reduction.

These goals are thus stated below:

  1. Eradication of extreme poverty and hunger.
  2. Developing of global partnership for international development (Nigeria MDG report, 2006).

This is because by 2015, MDGs are expected to have halved the 1990 US Dollar per day poverty rate, on time (World Bank 2000) and probably ahead of time ( Ravallion, 2003) Considering the Nigerian context especially, this study attempt to examine possible restructuring of trade liberalization and policy in such a way that would be beneficial to the incidence of poverty reduction in the country.

This study attempts to examine the Nigerian trade policy and the formulation processes, and how trade policy has been embedded in the mainstream of national development strategies towards poverty reduction.

Thus this study derives its justification on the premise of resolving some of the problems the nation faces with the implement of WTO provisions.

1.4 Objectives of the Study

The major objective of this study is to examine of how trade policy and the policy formulation process has effectively been streamlined into overall national development strategy. This will possibly explain a relationship between the practice of international trade policy and poverty reduction. However the specific objectives of this study include:

  1. To determine the effect of international trade practice on economic growth
  2. To determine the effect of economic growth on poverty reduction.
  3. To examine the effect of trade policy effect on poverty reduction.

1.5 The Research Questions

Theoretical and analytical literature on the relationship between international trade, poverty reduction and welfare is aimed towards analyzing pertinent issues which are best expressed by the following questions:

  1. Is there a direct relationship (or indirect) between the practice of international trade policy and economic growth?
  2. Is there a relationship between economic growth and foreign direct investment towards poverty reduction?

1.6 ​Research Hypotheses

The research hypothesis that would be analyzed and tested during this study includes:

  1. H0; There is no relationship between poverty reduction and practice of international trade policy in Nigeria.
    H1; There is a relationship between poverty reduction and practice of international trade policy in Nigeria.
  2. H0; There is no relationship between international trade policy practice and economic growth in Nigeria.
    H1; There is a relationship between international trade policy practice and economic growth in Nigeria.
  3. H0; There no relationship between economic growth on poverty reduction.
    H1; There a relationship between economic growths on poverty reduction.

1.7 Significance of the Study

Given the above objectives this study will be guided towards arriving at possible conclusions for averting the inherent limiting factors related to poverty incidence within the Nigerian economy. Research within this study is directed towards maximizing the advantages of an economy wide expansion of income earning opportunities. This would involve exports and import competing economic activities. Thus, it is expected that further research in this and other related areas would find the results of this study a useful source for welfare improvement, economic growth and policy recommendation guideline.

1.8 The Scope of the Study

This study covers analysis of poverty incidence within the Nigerian context highlighting selected sectors of the economy. It would be carried out through a descriptive/qualitative and quantitative analysis on the impact of the practice of international trade policy so far on poverty reduction in Nigeria.

The process would be by estimating the variables of poverty reduction in line with economic growth rate changes due to trade policy activities on investment, government expenditure, welfare improvement and real income improvement.

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This study is an analytical study of international trade and poverty reduction in Nigeria and whether there exists a causal relationship between FDI (which was used the proxy for international trade policy)and poverty reduction in Nigeria. The study was based on time series data which were collected from secondary sources and cover the period from 1980-2012.the OLS estimation technique has been applied to estimate the mode and Co integration as well as Error Correction mechanism test were also carried out. Estimation results reveal that FDI responds positively to real per capita GDP both in the long run and short run but with no effect. Thus, we concluded that this may be a result of profit repatriation of foreign firms, crowding out of domestic investment because of FDI or low level of human capital in the country. Despite how desirable the inflow of FDI is to developing countries, care should be taken when attracting foreign investments and they should be directed to the productive sectors of the economy.

Also government should create a competitive environment so as to maximize the benefits of FDI because by exposing foreign investors to an even playing field with indigenous investors, this will enable domestic companies to upgrade their management and technology. Finally, the revenue fortune accruable to federal government by way of taxes paid by foreign investors should be directed to productive activities in the real sectors of the economy, especially agriculture.

It is expository from this study that the economic benefits of FDI are real and numerous. FDI can assist a country like Nigeria to achieve the higher growth rates that generally emanate from a faster pace of gross fixed capital formation which in turn brings about improvement in real per capita GDP and reduces poverty level in the country.

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