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.
TABLE OF CONTENTS
Table of contents
List of tables and figures
CHAPTER ONE: INTRODUCTION
1.1 Background of study
1.1.2 Trade openness and output growth
Historical Experience of the Nigeria economy
1.2 Statement of the research problem
1.3 Objectives of the study
1.4 Statement of the research hypothesis
1.5 Justification of the study
1.6 Significance of the study
1.7 Scope and limitation of the study
CHAPTER TWO: LITERATURE REVIEW
2.1 Theoretical literature
2.1.2 Theory of customs union and free trade areas
2.1.3Models of export-led growth
2.2 Empirical literature
2.3 Limitation of previous studies
CHAPTER THREE: METHODOLOGY
3.1 Analytical framework
3.2 Model specification
3.2.1 Test of stationarity
3.2.2 Test of co integration
3.2.3 Error correction model
3.3 Justification of the model
3.4 Estimation techniques
3.5 Evaluation Procedure
3.5.1 Economic test (a priori expectation)
3.5.2 Statistical (first order) test
3.5.3 Econometric (second order) test
3.6 Sources of data and software for estimation
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULTS
4.2 Presentations of regression results
4.2.1Test of stationarity
4.2.2 Test of co integration
4.2.3 The Error correction model (ECM)
4.3 Interpretation and Evaluation of result
4.3.1Evaluation based on economic criteria
4.3.2Evaluation based on statistical criteria
4.3.3 Evaluation based on econometric criteria
4.4 Evaluation of the working Hypotheses
CHAPTER FIVE: SUMMARY, POLICY PRESCRIPTION
5.2 Policy Recommendations
LIST OF TABLES AND FIGURES
Figure 1: Growth Rate of Real GDP
Figure 2: Trend of Real GDP
Figure 3: Growth of Export and Import
Figure 4: The Degree of Openness
Table 1: Openness Indicators
Table 2: A Priori Expectation
Table 3: Results of Model 1
Table 4: Results of Model 2
Table 5: Results of Stationarity test
Table 6: Results of Co integration test
Table 7: Results of the Error Correction Model
Figure 5: Non- Monotonic Relationship between TPN and RGDP
Table 8: Summary of the T-Test
Table 9: Pair-Wise Correlation Matrix
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 .
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
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,
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).
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
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
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
· 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.