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IMPACT OF EXTERNAL TRADE ON NIGERIA’S ECONOMIC GROWTH (1980 – 2012)

IMPACT OF EXTERNAL TRADE ON NIGERIA’S ECONOMIC GROWTH (1980 – 2012)

 

 

ABSTRACT

This work empirically investigated the impact of external trade on economic growth in Nigeria using Secondary data on gross domestic product (GDP) export (EXP), import (IMP), and exchange rate (EXR) sourced mainly from CBN publications.  The study was guided by two objectives: To ascertain if there is long relationship between external trade and economic growth and to evaluate the impact of external trade on economic growth of Nigeria.

The Augmented Dicey Fuller (ADF) unit root test conducted on the variables shows that they are integrated of the order one while the Johansen cointegration test indicated one cointegrating equations. The ECM result showed that there existed a positive relationship between export and real gross domestic product, import and real gross domestic product, and exchange rate and real gross domestic product.

The computed R2 shows that 62.33% of the total variations in RGDP are adequately accounted for, by the explanatory variables. The study recommended among other things that in the attempt to achieve economic growth, wider trade openness should be embraced by the Nigerian government as it will improve her external trade and concluded that the assertion that the less developed countries (LDCs) were in a disadvantageous situation due to their reduced dimension and sophistication of their markets, as well to the weak capacity for technological innovation and to the commercial intervention in what concerns the developed countries’ consumers holds  true in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Trade is generally accepted as a major engine of economic growth of countries. This has been the experience of Nigeria since 1960s even though the composition of trade has changed over years. Economists have been long concerned with what causes different countries to grow at different rates and achieve different level of economic growth and development. One of such factors is external trade in the work of Edwards (1992) external trade is referred to as buying and selling of goods and services between nationals of different countries, or trade agencies of the government of different counties.

According to Adewuyi (2000) external trade is the exchange of capital goods and services between countries. External trade allows a country or nation to expand her markets for both goods and services that may otherwise not have been available to her citizens.

External trade consists of export and import trade. Export trade involves sale of goods and services to other countries while import trade consists of purchases from other countries. When goods are traded by ways of imports and exports, the transactions are regarded as visible trade. External trade in service is referred to as invisible trade. Thus, for example, if Nigerian exporters avail of British shipping services for transportation of goods, they have to pay for transport services. Hence, services used may be called invisible import by Nigeria sale of services would also regarded as invisible exports. Likewise other services such as banking, warehousing, insurance and railway services are also required in external trade.

Nigeria is basically an open economy with international transactions constituting a significant proportion to her aggregate outputs. To large extent, Nigeria’s economic development depends significantly on the prospects of her export and import trade with other countries. Trade provides both foreign exchange earnings and market stimulus for accelerated economic growth of countries.

Several countries achieved significant increase in their economy through an export-led strategy. Small economics in particular have little opportunity to attain productivity and efficiency gains to support growth without tapping into larger domestic markets through external trade. Nigeria’s relatively large domestic market can support growth but alone cannot deliver sustainable growth at rates needed to make a visible influence on poverty reduction. Hence Nigeria has continued depend on foreign markets as well (World Bank, 2002).

Many economists widely agree that openness to foreign trade accelerates economic development. The more rapid growth may be a transition  effect rather than a  move or a change to different steady state growth rate. Clearly, the transition takes a couple of decades or more, so that it is reasonable to speak of trade openness accelerating growth rather than merely leading to a sudden adjustment in the real income (Dollar and Kraay, 2001).

External trade is an issue that cannot be over-emphasized in the context of international economics and the world economy. Foreign trade has been enhanced through since 1950; there has been a massive liberalization of world trade first under auspices of the General Agreement on Tarriff and Trade (GATT) established in 1497 and now under the auspices of the World Trade Organization (WTO) which replaced the general Agreement on Traiffs and Trade (GATT) in 1993.

Traiff in high-income developed countries have dramatically come down, and now average approximately 4%. Traiff level in developing countries have also been reduced, although they still remain relatively high averaging 20% in the low and middle income countries. Non tariff barriers to trade such as quotas, licences and technical specification are also being gradually dismantled, but rather more slowly than tariffs.

The liberalization of trade has led to massive expansion in the growth of world trade relative to world output. While world output (GDP) has expanded fivefold, the volume of the world trade has  increased 16 times at an average compound rate of just over 7% per annum. In some individual countries, notably in South-East Asia, the growth of exports has exceeded 10% perannum. Exports have tended to increase fastest in countries  with more liberal trade regimes, and these countries have experienced the fastest growth of Gross Domestic (GDP).

1.2 Statement of the Problem

Trade especially international trade has acted as an important engine of growth for countries at different stages of development, not only by contributing  to a more efficient allocation of resources within countries, however, necessarily share equally in the growth of trade its mutual benefits. This will defend on: The Production and demand characteristics of the goods that a country produces and trades: the domestic economic policies pursued, and the trading regime it adopts. For example, taking the developing countries as a whole, the volume of exports have grown slower than for developed countries since 19950 to 5% per annum compared to 8% because developing countries  still largely  produce and export primary commodities and low value-added manufactured goods with a relatively low income elasticity of demand in world mark.

In Nigeria, the trade and exchange rate policies were conclusively reviewed at the close of 1986 to encourage foreign trade. Export duties were reduced and export prohibition was removed. Import licensing for many imports were eradicated. All of  these measures resulted in uninhibited access of imported goods to the Nigeria market without obvious  positive influence on domestic production in the industrial sector of the economy for instance, between 1985 and 2003, the real exchange rate of the naira has depreciated by more than 95% thereby further worsening the terms of trade.

The food export-import gap which has reduced in the early part of 1980s has since been increased. According to the manufacture’s Association of Nigeria’s Economic Review 2001-2002, the average capacity utilization in the manufacturing sector only showed marginal improvement of 41.9% in year 2000. In spite of this marginal improvement, the balance of payment was under critical pressure in year 2002 as a result of adverse external stocks precisely the reduction in Nigeria crude oil production quota by OPEC and increase in the external service burden.

In Nigeria, despite the implementation of trade liberalization measures and persistent signs of economic recovery, that is, the reduction in the external debt and reduction in final consumption, some macroeconomic  indicators show poor performances of the economy generally, for instance, the economy has been characterized by infrastructure inadequacy, widespread corruption, inefficiency in the public sector and low degree of private sector  participation in economic activities, inadequate capital formation, capacity underutilization, poor living standard, and high rate of unemployment. Some previous empirical studies have shown that foreign trade has a significant influence on the economic growth in Nigeria (GNP) (Adewuyi, 2002).

IMPACT OF EXTERNAL TRADE ON NIGERIA’S ECONOMIC GROWTH (1980 – 2012)

He is of the view that trade results to steady improvement in human status by increasing the standard of living of people and preference, since no country has grown or advanced without trade. External trade plays a significant role in restructuring economic and social attributes of countries around the whole world, particularly the less developed countries. While Usman (2011) posits that international trade has not been of help in promoting economic growth of Nigeria because her economy still experience some element of economic instability and this trade has also changed the country into an import dependent economy.

Based on this argument, the study is motivated to evaluate the influence of external trade on Nigeria economic growth.

1.3 Research Questions

  1. Is there any relationship between external trade and economic growth of Nigeria?
  2. Does external trade have significant influence on the economic growth of Nigeria?

1.4 Objectives of the Study

The general objective of this study is to evaluate the influence of external trade on economic growth and development with Nigeria as a case study for the period (1980-2012) while the specific objectives are:

  1. To determine whether there is a relationship between external trade and economic growth in Nigeria.
  2. To evaluate the influence of external trade on Nigeria’s economy.

1.5 Statement of Hypotheses

The following null hypotheses will be tested at 5% level of significance.

Ho1 = There is no relationship between external trade and economic growth in Nigeria.

Ho2  =  External trade does not have significant influence on economic growth in Nigeria.

1.6 Significance of the Study

Since no country can stay in isolation, hence the need for “international collaboration and international trade is perceived to be a main tool for economic growth and development. It is hoped that this study will add to the existing wealth of literature of the significance of external trade in Nigeria’s economy. The organization that will benefit from this research will be general public, the government, the department of economics and also the vast majority of the nation. The impact of external trade is since qua non to economic growth, development and for employment generation and self-reliance.

1.7 Scope of the Study

The scope of this study takes into account the influence of external trade on the overall economic growth and development in Nigeria for the period under review (1980-2012). The scope will thus be to evaluate the trends of external trade and commercial practices in Nigeria for the above mentioned period.

1.8 The Limitation of the Study

This research is limited by some factors such as time constraint, time available for this work is grossly inadequate considering the extent of coverage the researcher has in mind. There is also difficulties in obtaining relevant data this study will be limited in the scope of material due to poor documentation method in  Nigeria. There will equally be impediments getting relevant data from the government officials and other holders of some vital information needed by the researcher for the success of this research work.

IMPACT OF EXTERNAL TRADE ON NIGERIA’S ECONOMIC GROWTH (1980 – 2012)

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