Impact of trade openness on Nigeria’s economy

CHAPTER ONE

INTRODUCTION

  • Background of the Study

The openness rate of a country is generally calculated as the proportion of foreign trade volume to GDP besides the usage of the proportion of import to GDP (Romer, 2009) and the rate of export increase (Chow, 2010.) Openness also indicates the dependence of the country on the foreign trade. The size of openness rates indicates the importance level of the foreign trade for economy of the country. With the openness of the country, an increase can be seen in foreign currency revenues and expenditures at the export and import volume increase results. The share of foreign trade in GDP will increase with the foreign trade volume increase.

Economists generally see the concept of trade openness as the integration among the nations of the world. It is likened to openness of the world economy where nations link together to the extent that they have free trade, free movement of capital and financial activities (Igudia, 2004). Economic analysis informs that openness to trade, flow of factors, ideas and information stimulate economic and political progress (Aboagye, 2006). Thus, openness to trade can be said to be the platform of globalization while trade, finance, investment and entrepreneurs constitute the heart (Obadan, 2004). It also involves economic liberalization that has generated new markets for various economic actors within the global space and it has simultaneously brought about intense competition among them.

International trade has been a major driver of global growth and prosperity over the last four decades. As trade has expanded, global incomes have grown. However, international trade cannot exist without the economic openness of the countries involved. Open economies have been able to harness the power of trade to boost competitiveness and productivity, helping improve living standards and sustain economic growth.

The Nigerian economy in recent years has been characterised by trends towards increased liberalisation, greater openness to world trade, higher degree of financial integration, and greater financial development. The increased liberalisation and openness have motivated high rate of increases in cross-border capital and direct investment flows. Both inflows and outflows of private capital have been sharply increasing since the early 1980s. Also direct investment flows to the country have significantly increased during this period (CBN, 2010).

The inability of developing countries to fully embrace trade openness in their economic and developmental process is making them to participate somewhat marginally in the world economy. The modes and indicators of trade openness include the rapid growth of international trade, foreign direct investment (FDI) and international flows of capital and information. This could be one of the reasons for the formation of various regional economic groups around the world such as European Union (EU), Organization of Economic Co-operation and Development (OECD), Organization of Petroleum Exporting Countries (OPEC), with a view to harmonizing policies in order to reap the gains of economies of scale.

The role of trade openness in economic development is considerable. The classical and neo-classical economists attached so much importance to foreign trade in a nation’s development that they regarded it as an engine of growth. Over the past several decades, the economies of the world have become greatly connected through international trade and globalization. Foreign trade has been identified as the oldest and most important part of a country’s external economic relationships. It plays a vital and central role in the development of a modern global economy. Its impact on the growth and development of countries has increased considerably over the years and has significantly contributed to the advancement of the world economy.

The impact of trade on a country’s economy is not only limited to the quantitative gains, but also structural change in the economy and facilitating of international capital flow. Trade enhances the efficient production of goods and services through allocation of resources to countries that have comparative advantage in their production. Foreign trade has been identified as an instrument and driver of economic growth (Frankel and Romer, 2007).

The basis for foreign trade rests on the fact that nations of the world do differ in their resource endowment, preferences, technology, scale of production and capacity for growth and development. Countries engage in trade with one another because of these major differences and foreign trade has opened up avenues for nations to exchange and consume goods and services which they do not produce. Differences in natural endowment present a case where countries can only consume what they have the capacity to produce, but trade enables them to consume what other countries produce. Therefore countries engage in trade in order to enjoy variety of goods and services and improve their people’s standard of living.

Given that the economic growth rate in Nigeria has increased to warrant attention of why there has not been development and reduction in poverty, the interest in this paper is to investigate the role played by trade openness since the impact of trade varies from country to country depending on the level of social, economic and political development. Since no country lives in isolation, trade becomes the need of Less Developed Countries (LDCs), who have gained as well as suffered from trade in the growth of their economies (Afzal, 2007).

  • Statement of the Problem

Over the past decades the volume of trade between nations of the world has increased considerably. Particularly, Nigeria has witnessed a sharp rise in the volume and value of trade with other nations of the world. Foreign trade statistics according to EIU Country Report of 2009 reveals that in 2007, total export was valued at $61.8 billion (free on board) while import was valued of $38.7 billion (free on board). Further breakdown of the composition of import and export shows that fuel and mining products, agricultural products and manufactures account for 97%, 2.2% and 0.8% of total export respectively while machinery, agricultural products and fuel and mining products account for 72.3%, 23.7% and 4% of total import respectively.

According to statistics released by the National Bureau of Statistics, Nigeria’s total trade figure for the second quarter of 2009 was N 2, 210.3 trillion. Though, this figure reflects a decline of 37.9 % when compared with the corresponding period in 2008, it indicates an increase of 11.9% over that of the first quarter of 2009 and this trend is expected over the long term due to the persistent call for increased trade liberalization to foster economic growth across the world.

Nigeria had experimented two distinct trade regimes, the control (restricted trade) and the open trade. The philosophy of controlled trade regime embodied a regime of regulation that has both direct and indirect instruments of control in the conduct of external trade and payments. The basic rationale for control regime is to achieve efficiency stability and firmness in the face of market failure (Olomola 1995), as the condition for competitive equilibrium is not satisfied.

The proponents of the open regime often argue that openness enhance the standard of living and prosperity to the participating countries. The situation however with Nigeria over the last three decades, is that, foreign trade and the cross-border movement of technology, labour and capital have been massive and irresistible. In recent years, the negative pressure which the volatile capital market of the advanced capitalist economies exerts on the developing countries has given rise to counter opinion which supports the negative aspects of openness and questions are being asked as to whether developing countries actually share in its benefits.

In line with the spirit of openness for instance, the trade and exchange rate policies of Nigeria were conclusively reviewed at the close of 1986. Export duties were reduced and export prohibition was cancelled out. Import licensing for many imports were abolished. All of these measures resulted in uninhibited access of imported goods to the Nigerian market without obvious positive impact on domestic production in the industrial sector. For instance, between 1985 and 2003, the real exchange rate of the Naira had depreciated by more than 95% thereby further worsening the terms of trade. The food export-import gap which had reduced in the early part of 1980s has since been widened.

According to the Manufacturers’ Association of Nigeria’s Economic Review 2001-2002, average capacity utilization in the manufacturing sector only showed marginal improvement of 41.9 percent in 2011 and 52.5 percent in year 2002 as against 29.7 percent in year 2000. In spite of this marginal improvement, the balance of payments was under severe pressure in year 2002 as a result of adverse external stocks, particularly the reduction in Nigeria’s crude oil production quota by OPEC and increase in the external service burden. In Nigeria, despite the implementation of trade liberalization measures and despite the persistent signs of economic recovery (reduction in external debt and external debt service and reduction in final consumption), some macroeconomic indicators show a 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, low degree of savings accompanied by liquidity trap, capacity underutilization and low rate of capital formation.

Until recently, there has been a general consensus that every country benefits from trade. However, recent empirical investigation has shown that less developed countries has not benefitted from trade as much as their developed counterparts. Besides, the poor state of these economies in terms of gross domestic product, per capita income, unemployment, human capital and poverty level despite several decades of participation in trade has further heightened the trade-development debate. Therefore, the researcher wishes to examine the impact of trade openness and economic growth of Nigeria from 1981 to 2012 by exploring the theoretical links between trade liberalization policy and economic growth in Nigeria.

  • Research Questions

The research work seeks to answer the following questions.

  1. Has trade openness significantly impacted Nigeria’s economic growth?
  2. Is there causal relationship between trade openness variables and economic growth in Nigeria?
  3. Is there any long run relationship between trade openness variables and Nigeria’s economic growth?
    • Objectives of the Study

Similarly, the general objective of this research is to investigate the impact of trade openness on Nigeria’s economy while the specific objective includes;

  • To ascertain if there is any significant impact of trade openness on Nigeria’s economic growth.
  • To ascertain the extent to which long-run relationship exists between trade openness and Nigeria’s economic growth.
  • To determine if there is any long-run relationship existing between trade openness and Nigeria’s economic growth.

1.5       Hypothesis of the Study

H0: There is no significant impact of trade openess on Nigeria’s economic growth.

H0: There is no bi-directional relationship between trade openness and Nigeria’s economic growth.

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

1.6       Significance of Study 

Being motivated by the argument that more trade stimulates economic growth, developing countries including Nigeria, at one point or the other have embarked on trade reforms designed to boost economic growth in their economies. More recently, Nigeria has been fully integrated into the global economic system as a member and signatory to many multilateral and regional trade agreements.

This study therefore is imperative at this time when the Federal Government is embarking on these trade policies as it seeks to test the hypothesis that openness to trade is capable of generating the much needed economic growth in Nigeria. More so, findings from the research work would assist in redirecting government trade policies towards effective economic performance. In general, the research is of immense benefit to the following:-

  • This study will be essential to policy makers to know more about the performance of trade and economic growth.
  • Policy makers of the central bank of Nigeria who issue the guideline of governments’ international trade practice.
  • The general public who has a right to contribute and be informed of the activities of the country’s external and internal trade.
  • It will also add to the existing knowledge on the impact of trade openness in Nigeria.

1.7       Scope of the Study 

This research project which is on the impact of the trade openness on Nigeria’s economic growth of for the period of 1981 to 2012 will be guided by the objective stated above. Annual time series data will be employed by this study to conduct the investigation.

1.8       Limitation of the Study

During the course of this research the researcher experienced a number limitations and constraints. The researcher was faced with the already known problem of gathering materials from the Nigerian organizations. Gathering of information from public organization such as federal ministry of finance, federal of statistics and central Bank of Nigeria was also a problem. This research work is also limited to the use of secondary data gotten from secondary sources, as such if there are any errors made by those who generated these data; this research work incorporates such errors. Other constraint include; financial and time.

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