THE IMPACT OF TRADE LIBERALIZATION ON THE COMPARATIVE EFFECTIVENESS OF MONETARY AND FISCAL POLICIES IN PROMOTING ECONOMIC GROWTH IN NIGERIA

CHAPTER 1

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Trade liberalization policy is based on the principle of non-interference by the government in the foreign trade. Specifically, it entails the removal of the various barriers to trade that countries around the world have erected. Goods and services can be freely imported from and exported to the rest of the world. That is, trade liberalization policy allows countries to export those goods and services that they can produce efficiently, and import the goods and services that they produce inefficiently (Echekoba et al., 2020). The aim of trade liberalization policy is to stimulate production (especially domestic production), protect efficiency and helps reduce the cost of production (investment). Thus, increase international confidence in market mechanism of the economy.

Supporting the above, Jhingan (2007) submitted that trade liberalization has several advantages. These advantages include optimum utilization of resources. Since trade liberalization leads to international specialization and division of labour, resources are employed more productively and the allocation of resources becomes more efficient. In addition, trade liberalization leads to wide extent of markets for goods and services. As a result, the demand for goods is not confined to one country but to a number of countries. Thus, the entire world market becomes the market for all types of goods. Strictly speaking, trade liberalization prevents the establishment of monopolies and leads to the maximization of output. However, liberalization is seen as the best policy for economic growth and development.

Moreover, the role of trade in economic growth and development is significant. The Classical and Neo-classical economists attached so much importance to international trade in a country’s development that they regarded it as an ‘engine of growth’. International trade increases savings and investment, reduces unemployment and under-employment, enhances greater backward and forward linkages in the economy and ensures a larger inflow of factor inputs into the economy and outflow of goods and services. Put succinctly, the issue of whether trade and increased openness of trade would lead to higher rates of economic growth is an age-old debate between pro-traders and anti-traders over the years. Early proponents of free trade have lauded the gains from trade through the specialization of countries in the production of goods in which they have comparative advantage and engage in trade and exchange to meet their other needs (Ahmed et al., 2019).

Although, anti-traders see trade to be the main cause of dumping of goods that have affected the developing countries adversely. New development theorists contend that openness to trade stimulates technological change by increasing domestic rivalry and competition, leading to increased innovation; and that trade liberalization by allowing new goods to flow freely across national borders increases the stock of knowledge for technological innovations which spur growth (Ahmed et al., 2019).

According to Iheanacho (2017) the major channels through which trade liberalization affects economies include imports and exports (or openness of the economy). Imports of capital and intermediate goods can contribute to the growth process of an economy by enlarging the productive capacity of the economy. The goods produced can be exported to other countries to enhance revenue base of the country and move the economy on the path of growth and economic progress. Through export, there will be sufficient foreign capital inflow to drive the country’s growth process. However, as foreign earnings increase due to export expansion, domestic production capacity tends to expand, employment level increases, unemployment falls and aggregate demand is boosted and domestic investment expands further (Omojolaibi et al.,).

Furthermore, Moussa (2016) opined that African countries including Nigeria depend heavily on international trade and this dependence has increased significantly over the past two decades. This is because, trade is an important source of foreign exchange needed to import the intermediate goods required by local industries. It also enlarges consumer choice, provides access to new technology, and has the potential to enhance productivity and to contribute to employment creation and growth. Some of the factors accounting for the increasing dependence of African countries on trade include: reduction in tariff barriers to trade; developments in information and communication technologies which reduced the transactions costs associated with trade; a global paradigm shift from trade protectionism as a development strategy to trade as an engine of economic growth; and the increasing roles of large developing countries in the global economy. The commodity price boom that started at the beginning of the last decade and began waning at its end is another driving factor for the increasing trade openness experienced by African countries over the past few decades.

Consequently, to enjoy the benefits of trade liberalization policy, the government of Nigeria adopted several trade policies including Import Substitution Strategy (ISS) of 2011, Export Promotion Strategy (EPS) of March 1977 and Structural Adjustment Programmes (SAP) of 1986. Since the introduction of trade liberalization, the performance of the domestic investment with regards to its contribution to the gross domestic product has been fluctuating (CBN, 2020). Put simply, since the adoption of liberalization policy in 1980s there have been conflicting views on whether or not the liberalization policy has stimulated domestic investment and hence impacted on the growth of the Nigerian economy positively. Nigeria’s participation in free trade was expected to assist Nigeria increase her export by increasing her domestic investment and achieve sustainable growth at the rate needed to make a visible impact in the reduction of poverty, unemployment, etc. but this has not been the case because the share of Nigeria’s contribution to world trade is still very low and her exports are predominantly primary products which do not contribute much to Gross Domestic Product (GDP) when compared to trade on manufactured or finished goods of the developed countries. Put differently, a key feature of Nigeria’s participation in international trade is that Nigeria is exporter of primary products and importer of services and manufactured goods.

Furthermore, every economic system irrespective of its political arrangement has to identify its economic goals. The major economic goals include adequate economic growth, full employment, price stability and equilibrium in the balance of payments. These goals are usually achieved through the formulation and implementation of economic policies, especially fiscal and monetary policies. Thus fiscal policy is concerned with how the agencies responsible for the conduct of fiscal policy manipulate a set of macroeconomic variables to achieve some desired objectives of policy. Fiscal policy comprises taxation, public expenditure, reliefs, concessions and fiscal incentive policies. Government fiscal measures can be categorized into two which include Automatic Stabilizers and Discretionary Fiscal Policy Measures. The Automatic stabilizers are government spending or tax actions that take place without deliberate government control which tend to affect the business cycle (Okigbo, 2018). Whereas, discretionary fiscal policy are government spending and tax actions that are taken to achieve specified macroeconomic goals (Johnston, 2009). According to Adekunle (2017) the argument about fiscal policy is dated back to Keynesian times, which predicted that expansionary fiscal policy (increasing government expenditure or decreasing taxes) will increase disposable income, and raise the private consumption.

Also, various administrations has taken deliberate actions designed to influence the quantity and cost of money supply. This action is usually taken by the central bank which is the highest monetary authority of a country. According to Anyanwu, (2015), monetary policy involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macroeconomic policy objectives. Supporting this, Gbosi (2018), submitted that monetary policy aims at controlling money supply in order to check undesirable trends in an economy. These undesirable trends in the economy may include inadequate economic growth. In Nigeria, as in other countries, it is the responsibility of the central government and the monetary authorities to initiate policies that will help to achieve basic macroeconomic objectives, including adequate economic growth.

Thus, over the years, different governments in Nigeria have articulated and executed a myriad of macroeconomic policy options especially monetary and fiscal policies in an attempt to tackle the inadequate economic growth crisis. Monetary policy instruments adopted include minimum rediscount rate (MRR), Open market operations (OMO), Reserve requirements (RR), Cash and Liquidity ratio, the exchange rate and moral suasion. While the central government in the pursuit of sustained economic growth and development have over the years spent huge amount of money through the enunciation and implementation of a myriad of programmes including National Accelerated Food Production Programme (NAFPP) in 1973, Nigerian Bank for Commerce and Industry (NBCI) in 1973, Operation Feed the Nation (OFN) in 1976, the establishment of Agricultural Credit Guarantee Scheme (ACGS) Fund Act in 1977,Structural Adjustment Programme (SAP) in 1986, the establishment of Primary Health Care Centres in 1988, Polio Eradication Programme in 1988, Early Childhood Care & Education (ECCE) in 1999; and in May, 2005, the establishment of the National Economic Empowerment and Development Strategy (NEEDS) in order to improve the performance of the various sectors of the economy including the agricultural, educational, health, transport and communication sectors of the economy for growth and development.

It is pitiable that despite numerous governmental interventions, the Nigeria’s economy still records inadequate economic growth and employment as pointed out by the studies of, Gbosi (2017), Agiobenebo (2003), Medee et al., (2011) and Ekpo (2017). The trouble of inadequate economic growth has persisted because of the pitiable non-oil export performance, persistent decline in the country’s foreign exchange, foreign reserve, accelerating debt to gross domestic product ratio, high import, preference for foreign goods and services over domestic goods and services, stagnated agricultural output, pressure of inflation, inefficiency of the manufacturing sector and falling oil prices in the foreign oil market.  Hence, this research work is a conscious effort towards X-raying the overall influence of trade liberalization, relative effectiveness of monetary and fiscal policies on economic growth in Nigeria from 1980-2021.

1.2       STATEMENT OF THE PROBLEM

The introduction and implementation of various economic measures by different democratic administrations in Nigeria is bent on the singular inclusive objective of spurring greater economic activities propagated by improvement on the activity sector performance in Nigeria over the years, however the Nigerian economy has remained grossly agrarian and import dependent despite vast economics policies, such as – National Accelerated Food Production Programme (NAFPP) in 1973, Nigerian Bank for Commerce and Industry (NBCI) in 1973, Operation Feed the Nation (OFN) in 1976, the establishment of Agricultural Credit Guarantee Scheme (ACGS) Fund Act in 1977,Structural Adjustment Programme (SAP) in 1986, the establishment of Primary Health Care Centres in 1988, Polio Eradication Programme in 1988, Early Childhood Care and Education (ECCE) in 1999; and in May, 2005, the establishment of the National Economic Empowerment and Development Strategy (NEEDS) all  aimed at re-structuring the economic fortunes and Fras-tracking economic growth in Africa’s most populous black Nation on earth. It decimally pitiable and gruesomely worrisome that, despite all the strategies and economic revamp programs established to this effect, the Nation remains world poverty capital with simultaneous decline in foreign reserve, accelerating domestic and international debt ratio to gross domestic product, exacerbating youths unemployment growth rate, declining revenue and industrial activities in the country. 

Also, the terrain of Nigeria’s economic activities that should enhance economic growth and translate government economic policies and strategies to revamp the agrarian nature of the economy has been marred with incessant bloodshed resulting from unending terrorism, communal conflict and gross discontent among ethnic Nationalities in the country, that has brought to bear if the center can still hold, as the country begins to exemplify the attitudes and attributes of a failed state, one continues to wonder if the country can really make significant economic progress amidst all these issues. The continuous decline in gross domestic product has is attributed to all macro and micro shocks the economy receives annually, the country gross domestic product grew by 3.6% in 2021 from a 1.8% contraction in 2020, underpinned on the supply side by 4.4% expansion in the non-oil sector against 8.3% contraction in the oil sector; non-oil growth was driven by agriculture (2.1%) and services (5.6%). On the demand side, public and private consumption were contributors to GDP growth. Per capita income grew by 1.0% in 2021. The fiscal deficit narrowed to 4.8% of GDP in 2021 from 5.4% in 2020, due to a modest uptick in revenues, and was financed by borrowing. Public debt stood at $95.8 billion in 2021, or about 22.5% of GDP. While Poverty and unemployment remained high, broadly unchanged from 40% and 33.3%, respectively, in 2020 (National Bureau of Statistics Report, 2022).

If we look at the functional study of the growth structure of the Nigerian economy from 1981 to 2022, we can see that there are two distinct experiences in the economic history of Africa's most populous black nation on earth: the first is the period in which the economy grew below it potential, or better still the moment of negative growth, as shown above between 1980 and 1984 and another negative growth rate was witnessed between 1993 and 1994, while the most recent under potential growth occurred between 2008 and 2012. The second phase, however, was marked by above-potential economic growth from 1985 to 1992 and from 1993 to 2015, with positive growth in the economy in 2017, 2018, 2019, 2020, and 2022.

However, this country has an abundance of natural resources and a large labour force. Other years have been characterised by severe volatilities that trends downward all through the year, making 1990 and 2002, when the Nation witnessed a large growth rate, seem out of reach for a change in the narrative in Nigeria.

In addition, the nation has engaged in massive economic reforms over the past few decades in an effort to remove or substantially reduce market distortions brought about primarily by government intervention in the productive sector since independence through increased trade liberalisation, thereby boosting the economic growth trend. However, Usman (2011) argues that international trade has not been effective in fostering economic growth in emerging nations like Nigeria because their economies still experience some element of economic volatility and because it has converted the countries into import reliant economies.

Okowa (2005) argues that in order for African countries to develop at the same rate as other developed nations, "they have no alternative but to embrace the imperialist and his capitalist. Simply put, trade restrictions need to be loosened. However, there are many who believe that protectionist policies are the best way to boost the U.S. economy, arguing that indigenous industries often have a comparative edge over their international counterparts (Nnadozie, 2003). For this reason, we provide a graphical explanation of the severe issue posed by the discrepancy between expert opinion and empirical evidence about the effect of trade liberalisation on economic growth.

Although, it has been stated theoretically and proven empirically that economic openness contributes to the level of the economy. This is because in a competitive environment prices get lower and the products become diversified through which consumer surplus emerges. Gains from specialization and efficiency are also further advantages of economic openness. It is against this theoretical and empirical assertions that economies generally desires increased openness, however in the Nigerian context as graphically proven above, increased trade liberalizations in the economy has not translated to increased economic growth in the country, following the gross dependency ratio of local consumption expenditure of both government and private individuals on foreign goods and services import, which has further ploughed the Nation into a consumption oriented economy, where the industrial sector remains unproductive and inadequately financed.

Also, trade liberalization indicated a significant effect on the Nigerian economic terrain in the early 1980’s as proven by the trend above, when the growth rate of the economy was below potential, especially between 1980 through 1983. During this period, we see that increasing the degree of trade openness in Nigeria resulted to increased local economic activities that facilitated economic growth during this same period, especially the sharp economic rise in 1983, while the contraction on the degree of trade openness from 1984 through 1991 shows that this variations reflected to variations on economic growth rate during this same period, thus the government could really manipulate the degree of economic growth in the country during this period by influencing trade liberalization degree, while going further from 2001 through 2021, we see that, despite the expansion and contraction noticed in the degree of trade openness between 2001 and 2021, economic growth rate trend remained practically flat. This period is characterized by efforts to promote economic growth through expansionary approaches to trade openness, but never translated to the desired economic growth in the economy.

Furthermore, the question of whether changes in government revenue, expenditure, borrowing and fiscal deficit can affect growth especially in the Nigerian economy that has been plagued with several challenges over the years. Nigeria’s potential for growth and poverty reduction are yet to be realized. A key constraint has been the recent conduct of macroeconomics, particularly fiscal policies which led to rising inflation and decline in real incomes. Other challenges includes gross mismanagement/misappropriation of public funds, corruption and ineffective economic policies, lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies; inappropriate and ineffective policies. Furthermore, imprudent public spending and weak sectorial linkages and other socioeconomic maladies constitute the bane of rapid economic decline. 

Despite the substantial oil resources that have been spent during the last thirty years, there is little to show in terms of economic growth and poverty alleviation strive. This reflects the key challenges to fiscal management from the inefficient use of public resources. The overriding concern now must be to break this pattern; however, this will remain a challenge since the fundamental drivers of the process remain the same and unchanged.

The trend depicted above is indicative of the movements of fiscal policy instruments in Nigeria between 1981 through 2021 in Nigeria as one of the major policy dimensions aimed at facilitating economic growth and development in the country. Following the structural position of the major instruments of fiscal policy with total debt, recurrent expenditure and capital expenditure showing slight increment through 1981 until 1986. This period could further be described in the economic terrain of Nigeria as the duration when fiscal adjustments aligned perfectly with the macroeconomic objective of inclusive growth, as the trend were collectively following similar trend. It appeared the fiscal policy in Nigeria between 1981 and 1986 had a bi-flow of causality with economic growth in Nigeria until 1987, when total debt sharply rose above the terrain with no corresponding increase in the Nation’s economic growth trend. Generally speaking, the trend is indicative that, while total debt in Nigeria is on the rapid rise, recurrent expenditure growing at it own pace and government capital expenditure growing relatively lower than total debt and recurrent government expenditure in Nigeria, economic growth remained unchanged.

This trend proves that, government borrowings, increased recurrent and capital expenditure as fiscal tools in Nigeria has not significantly translated to increased economic growth in the country for the period reviewed.

Also the federal government of Nigeria tries to engender economic growth through the manipulation of monetary policy instruments in the country to achieve clearly stated economic objectives domiciled within the confinement of – poverty alleviation, insured security, and income equality. However, the achievement of adequate economic growth is considered one of the major goals of monetary and fiscal policies. To tackle the problem of inadequate economic growth, the Nigerian, government had adopted various economic policies over the years. For instance, the introduction of Structural Adjustment Programme (SAP) by the Babangida Administration in 1986 is a case in point. The major objective of SAP was to restructure and diversify the productive base of the economy. But looking at the Nigerian economic experience analytically from 1981 through 2021 with use of monetary instruments to influence changes on economic fortune of the country proving more abortive than additive or being of an advantage to the economic system practiced in the country. 

As clearly proven above, with the graphical trend indicating the relationship inherent between monetary policy instruments – inflation rate (INFR), monetary policy rate (MPR), exchange rate (EXR) and interest rate (INTR) and economic growth in Nigeria, showing a slight better relationship than was witnessed with fiscal policy instrument in Nigeria for the same period, while monetary policy instruments reflects some degree of adjustment’s to economic growth trend, represented by gross domestic product growth rate (GDPGR), which was not witnessed with fiscal policy instruments in the country for the same period. It is still obvious that, despite the importance of monetary policy in the maintenance and establishment of economic stability and even growth in the Nation, monetary policy instruments are often left unchecked as depicted above with exchange rate skyrocketing from 1997 to it all time high in 2021.

These macroeconomic issues becomes worrisome hence the Nation is domiciled within the confinement of consumption and importation for sustainability and cannot afford to have loose exchange rate and expect better performance in inflation trend, interest rate and monetary policy rate as is the case in Nigeria, where inflation rate for 2019 was 11.40%, a 0.7% decline from 2018 and for 2018 was 12.09%, a 4.43% decline from 2017, but currently on the rise with inflation rate for 2021 being 16.95%, a 3.71% increase from 2020 and inflation rate for 2020 being 13.25%, a 1.85% increase from 2019.  These economic terrains in Nigeria has got economist, government and policy analyst wondering the sustainability of the Nigerian economy in the long run.

1.3       RESEARCH QUESTIONS

Based on the above discussion, this study addressed the following research questions

                        i.         What is the effect of Trade Liberalization (Trade Openness), Monetary policy and Fiscal policy on Economic Growth (GDPGR) in Nigeria?

                       ii.         Which of the Monetary and Fiscal policies has a better effect on Economic Growth in Nigeria?

                     iii.         Is there a sustainable long run relationship between Trade Liberation, Monetary Policy, Fiscal Policy and Economic Growth in Nigeria?

1.4       OBJECTIVES OF THE STUDY

The broad objective of the study was to examine the effect of trade liberalization, monetary and fiscal policies on economic growth in Nigeria, and analyse relative effectiveness of monetary and fiscal policies on economic growth

The specific objectives were to:

                        i.         examined the effect of Trade Liberalization (Trade Openness), Monetary policy and Fiscal policy on Economic Growth (GDPGR) in Nigeria..

                       ii.         Determine the relative effects of Monetary and Fiscal policies on Economic Growth (GDPGR) in Nigeria

                     iii.         Estimate the long run relationship between Trade Liberation, Monetary Policy, Fiscal Policy and Economic Growth in Nigeria.

1.5       RESEARCH HYPOTHESES

The research hypotheses for this study are stated in null form and will be judged using 0.05% statistical criterion for acceptance.

H0₁: Trade Liberalization (Trade Openness), Monetary policy and Fiscal policy have no significant effect on Economic Growth (GDPGR) in Nigeria.

H0₂: None of the Monetary and Fiscal policies has a better effect on Economic Growth in Nigeria.

H0₃: There is no long run relationship between Trade Liberation, Monetary Policy Instruments, Fiscal Policy and Economic Growth in Nigeria.

Where:  

That is, Trade Liberalization (Trade Openness), Monetary policy and Fiscal policy have no significant effect on Economic Growth (GDPGR) in Nigeria.

1.6       SIGNIFICANCE OF THE STUDY

The findings of this study will be beneficial to the following major stakeholders in the management of the Nigerian economy: 

Researchers and academicians will benefit from the findings of this study as it will provide them both theoretical and empirical foundation in understanding the effect of fiscal policy on economic growth. Also, this research will undoubtedly be a wealth of knowledge to students of economics and other disciplines as well as lecturers. It will surely impart learning, contribute to knowledge and serve as a base for further research works in areas relating to trade liberalization, relative effectiveness of monetary policy and fiscal policy in Nigeria and how these mix influence economic growth in the country.

Also, policy makers in the Nigeria Senate and House of representatives will benefit from the enlightenments the study brings. The importance of these policy mix in attaining sustainable economic growth in Nigeria, would expose to law makers the most important or economically viable tool in Nigeria between fiscal and monetary policy instruments in gingering economic growth in Nigeria.

In addition, the findings of this study will help the government at both the state and national level to devise means of mitigating the adverse effect of dwindling oil revenue as a result of Covid-19 pandemic currently ravaging the world and the attendant global economic recession thereof. This has affected the ability of the government to meet up with its maturing obligations especially the provision of social goods to the citizenry. Therefore, a study of this nature will help government to understand how fiscal policy affects economic growth. It will help them to understand the fiscal policy measures that will contribute more to economic growth.

1.7       SCOPE OF THE STUDY

The scope of the study is discussed under the following:

Based on the structural disposition of this empirical analysis, the content of this study encapsulates evaluating the inherent relationship between trade liberalization, relative effectiveness of monetary policy, fiscal policy and economic growth in Nigeria between the fiscal year 1981 and 2021.

The independent variables are fiscal policy (proxied by capital expenditure, recurrent expenditure, domestic debt, external debt) and fiscal deficit, while the dependent variable which is economic growth is proxied by real gross domestic product. The independent variables were selected because they are the core fiscal policy variables that may have direct relationship with economic growth within the Nigerian context.   

The study covers a period of forty years (1981 to 2021). The period selected marks the events that lead to the introduction of the Structural Adjustment Programs and financial liberalization in the Nigerian economy. Also the period was selected because of the availability of data from credible sources like Central Bank of Nigeria and World Bank development indicators financial result.

1.8       ORGANIZATION OF THE STUDY

The organization of the work highlights the content of each chapter as follows: Section One contains the introduction to the study, statement of the problem, objectives of the study, research questions, research hypotheses, and scope of the study, significance of the study and organization of the study.

Section two generally embodies the review of literature, but carefully distilled into the conceptual framework, theoretical literature review, empirical literature review, summary of empirical literatures reviewed and the identified gap in empirical literature reviewed.

Section three contains the research methodology with brief introduction, study area, research design, theoretical framework, model specification, estimation techniques, diagnostic tests, sources of data, description of data and software used for the study. 

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