Impact Of Trade Openness On The Economic Growth Of Nigeria

Impact Of Trade Openness On The Economic Growth Of Nigeria

Abstract

The research evaluated the impact of trade openness on the economic growth of Nigeria 1988-2014. The study employed secondary time series data, sourced from Central Bank of Nigeria Statistical Bulletin 2014. A four variable model was developed comprising GDP as dependent variable and Trade Openness, Foreign Direct Investment and Exchange rate as independent variables and the Ordinary Least Squares (OLS) estimation technique of Multiple regression analysis was adopted. The findings of the research work includes: Trade Openness has a negative impact on Economic growth, Economic growth causes Trade Openness.

Based on the findings, the study amongst others recommends that The Government should analyse Export promotion policy and import substitution policy should also be examined, so that country can take benefit from trade. The fiscal authorities should boost exports, encourage domestic products by dropping Excise duties and tariffs so as to boost home industries to trade their goods and services, That structural trade oriented policy should be adopted to enhance economic growth in Nigeria via high exports flows in order to accumulate more foreign proceeds to boost output growth rate in Nigeria

KEYWORDS: Trade Liberalization, Exchange Rate, Trade Openness, Gross Domestic Product

Chapter One

Introduction

1.1 Background to the Study

The global economy is in a state of transition from a set of strong national economies to a set of interlinked trading groups. This transition has accelerated over the past few years with the collapse of communism and the blending of the world trading nations into a single market (Gillespie, Jeannet and Hennessey ,( 2004) in Adelowokan and Maku(2013)). One of the most important paths driving global development into the twenty-first century is the advanced economic integration and investment. Never before have so many economies been open to global trade and finance flow than now, after the liberalization of the former communist economies (Adelowokan and Maku 2013). The relationship between trade and productivity has not been established theoretically even though some researchers have indeed found some, if not complete, support for the view that increasing openness has a positive impact on productivity (Osei,Cephas, and Shaik2012)

The role of international trade is very crucial to the development of any economy and it is assumed that trade liberalization works as an engine for the growth of the economy.

Basically, the main purpose of trade openness is to allow countries to export those goods and services that they can produce efficiently, and import the goods and services that they produce inefficiently. The above statement refers to the theory of comparative advantage. Traditional explanations of trade as “the engine of growth” and the impact of trade on economic development are rooted in the principles of comparative advantage.

Essentially, the theory of comparative advantage arose from nineteenth century free trade models associated with David Ricardo and John Stuart Mill, which were later modified by trade theories embodied in the factor proportions theory of Hecksher – Ohlin (1933), Stolper-Samuelson (1941) and Rybzsnski (1955) effects.

As a matter of fact, Nigeria has been romancing with the idea of ‘openness is good for growth.’ Key government officials, as expected, see trade as ‘an indispensable engine for economic growth’. Given the predictions of trade theory and observations, the important point to make in this introduction is that the issue for developing countries in general, and Nigeria in particular, is not so much whether to trade, but what to trade, and the terms on which trade should take place with the developed countries of the world (or between themselves). Another question to be asked is; at what level of growth/development should a country adopt trade openness to ensure sustainable economic development? The focus of this work shall therefore be on determining if a relationship exists between trade openness and economic growth, the nature of that relationship and the impact of trade openness on economic growth in Nigeria.

The Nigerian main trade policy instrument shifted remarkably away from tariffs to quantitative import restrictions, particularly import prohibition and import licensing from the mid 1970’s. This gave rise to the Nigerian customs legislature establishing an import prohibition list for trade item and an absolute import prohibition list for non trade items, Oyejide (1975). The customs legislation empowered the government to modify this list at its discretion by adding or subtracting items through customs and excise notices and government announcement. And over the years there have been several modifications on this list targeted to protect existing domestic industries and reducing the country’s dependence on imports.

There are three international organisations that have expressed views on Nigerian’s import prohibition policy, these are the World Trade Organisation, the World Bank and the International Monetary Funds. They have advisory role with respect to trade and other policy matters in Nigeria and had advised a more liberal trade policy regime in Nigeria which was initiated in the 1980s. The World Bank and the International Monetary Funds did support this via its lending programme Prior to the introduction of the structural administration programme (SAP) in 1986 in Nigeria, imports were subjected to quantitative controls implemented through a combination of ban on agricultural and some manufactured goods and a licensing system. But under the SAP, import and export licensing was abolished, price and distribution control on agricultural exports was removed and the prohibited list of imports was reduced.

This issues of whether trade liberalisation would lead to economic growth has become a debate for both pro-traders and protectionists. This has led to a growing change in the trend of world trade. Mostly, African countries have become more careful in embarking in liberalisation of policies.

1.2 Statement of the Problem

The extent to which trade openness affects the economy remains a burning issue. The removal or reduction of restriction or barriers to the free exchange of goods and services among nations and non-tariffs obstacles such as licensing rules, quotas will in no doubt open the market and increase real value of goods and services produced by a country.

However, Nigeria is romancing with the idea that openness is good for growth, but fiery issues arise where local productivity drops as a result of excess importation of goods which could have been locally produced. In a debate in the House of Representatives sponsored by Hon. Abubakar Amuda-kannike 2015 on the motion calling for the enforcement of the ban of importation of frozen poultry ‘the economic impact to the local poultry industry is enormous given that Nigerians lose about 1 Million jobs and about N399.4 Billion annually to importation and smuggling of frozen birds. Another problem is whether Nigeria has proper institutions to manage dumping? The removal of embargo without proper management has been known to lead to dumping which can push local manufacturers out of business and negatively impact on Gross Domestic Product.

Management of the upsurge of local multiple taxations becomes a serious task where the market is opened for seamless exchange of goods and services given the drive for internally generated revenue by states and local government areas. This can lead to price increment for imported goods be it raw material or finished goods thereby leading to a downward push on the demand for them and eventually economic growth.

Some of the pertinent problems are how does trade openness relate with gross domestic product growth rate in Nigeria? To what extent does exchange rate relate with gross domestic product growth rate in Nigeria? What is the relationship between total import trade investment and gross domestic product growth rate in Nigeria? How does total export trade relate with gross domestic product growth rate in Nigeria? How does trade balances relate with gross domestic product growth rate in Nigeria?

Answering these questions is absolutely not an easy task. Therefore this study will seek to empirically analyze and evaluate using conventional and non-conventional approach to investigate a number of factors related to these problems and attempts to establish the relationship between economic growth and trade openness in Nigeria.

1.3 Research Questions

Given the aforementioned problem prevalent in external borrowing, hence this research work on trade openness and Nigeria economic growth tries to answer the following specific research questions:

1. To what extent does trade openness on economic growth of Nigeria?
2. Is there any observed long-run relationship between trade openness on Nigeria economic growth?

1.4 Objectives of the Study

The main objective of the study is to investigate the relationship between trade openness on Nigeria economic growth.

The specific objectives of study are to:

1. Empirically investigate the impact of trade openness on Nigeria economic growth.
2. Examine the long-run relationship between trade openness and Nigeria’s economic growth.

1.5 Statement of Hypothesis

In order to have a framework for the study and also to answer the research questions above, the following hypotheses were formulated:

H0: Trade openness has no significant impact on Nigeria’s economic growth.

H0: There is no long-run relationship between trade openness and economic growth of Nigeria.

1.6 Significance of the Study

This study will be significant to the following stakeholders:

Researchers:

It is expected that this study would contribute to the advancement of the existing literature on trade and economic growth especially in the Nigerian case. Thus, forming a veritable source of reference for researchers.

Government:

It is also expected that the empirical results and recommendations of this work would be useful to policy makers as it would help in adopting suitable trade policies that will promote trade in Nigeria.

Investors:

Investors will benefit immensely from this research work as it will expose them to the benefits and harmful effects of trade openness and help them know how to invest their funds wisely.

General Public:

The general public would find this study very useful because it will serve as a spring board for continuation of research as well as for detailed information as regards trade activities in Nigeria.

And finally, the research will serve as a reference guide to other researchers who will find the research helpful in conducting further research on the topics.

1.7 Scope and Limitation of the Study

The study seeks to analyze trade openness on Nigeria economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 34 years i.e. 1981-2015. This period was chosen to cover the period after the oil collapse and also the post debt-relief era. This study is limited by the following factors; Paucity of Materials: Materials for the study were not adequate and consistent thereby resulting to extra effort by the researcher to validate the data.

Inaccessibility of Data:

Difficulty in accessing data for the study was yet another limitation. This had its own toll on the research work because it limited the data that was used for the study.

Financial Constraint:

Lack of adequate funds on the part of the researcher constituted another problem. However, amidst all these enumerated constraint faced by the researcher, effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advance econometric test to fish out any possible spuriousity of result among others.

Chapter Five

Conclusion and Summary of Findings

The major aim of this study was to examine the relationship between trade openness t and economic growth in Nigeria. In view of this, the relationships between trade openness, exchange rate, total import trade, total export trade, balance of trade and gross domestic product growth rate were examined using Autoregressive Distributive Lag (ARDL) technique.

Consequently, the following major findings were made:

1. There is no significant long run association between trade openness and Economic growth in Nigeria;
2. There is no significant short run causal relationship between trade openness and gross domestic product growth rate in Nigeria;
3. There is no short run causal association between exchange rate and gross domestic product growth rate in Nigeria;
4. There is a short run causal relationship between total import trade and gross domestic product growth rate in Nigeria;
5. There is a short run causal relationship between total export trade and gross domestic product growth rate in Nigeria;
6. There is a short run causal relationship between balance of trade and gross domestic product growth rate in Nigeria;

Recommendations

Given the findings from the study, the following policy implications were provided. The study revealed a negative and significant relationship between trade openness and economic growth both in the short and long run. This result can be attributed to the fact that majority of Nigeria’s exports are primary goods (gold, cocoa, bauxite, oil etc.) which have little value on the world market. While, Nigeria’s major imports are secondary goods (cars, machines, mobile phones etc.) which have high value on the world market. Thus, this creates balance of payment deficit which is borne from having the funds spent on importation exceeding the funds generated from exportation. This results from the poor value of Nigeria’s goods on the world market.

Therefore, to avert this negative effect of trade openness on economic growth, the study recommends that policy makers and all other stakeholders should encourage increase exportation of secondary goods and minimize importation of secondary goods into the country. Nigeria’s primary goods such as gold, cocoa, bauxite, oil and others should be processed into secondary such as cocoa being processed to chocolate and exported which has more value than just the cocoa beans meaning more revenue for the country from exportation. When this is done this would minimize balance of payment deficits and boost economic growth. This is likely to ensure positive impact of trade openness on economic growth.

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