ABSTRACT
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
Title page i
Approval
page ii
Dedication iii
Acknowledgement
iv
Abstract v
Table of
contents vi
List of
tables and figures ix
CHAPTER ONE: INTRODUCTION
1.1 Background of study 1
1.2
Statement of the research problem 14
1.3
Objectives of the study 16
1.4
Statement of the research hypothesis 17
1.5
Justification of the study 17
1.6
Significance of the study 18
1.7
Scope and limitation of the study 19
CHAPTER TWO: LITERATURE REVIEW
2.1
Theoretical literature 21
2.1.2
Theory of customs union and free trade areas 37
2.1.3Models
of export-led growth 40
2.2
Empirical literature 45
2.3
Limitation of previous studies 69
CHAPTER THREE: METHODOLOGY
3.1
Analytical framework 70
3.2
Model specification 71
3.2.1 Test of stationary 74
3.2.2 Test of co integration 75
3.2.3 Error correction model 76
3.3 Justification of the model 78
3.4 Estimation techniques 80
3.5 Evaluation Procedure 81
3.5.1 Economic test (a priori expectation) 81
3.5.2 Statistical (first order) test 83
3.5.3 Econometric (second order) test 84
3.6 Sources of data and software for
estimation 85
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULTS
4.1
Introduction 87
4.2
Presentations of regression results 87
4.2.1 Test
of stationarity 89
4.2.2 Test of co integration 91
4.2.3 The Error correction model (ECM) 92
4.3
Interpretation and Evaluation of result 93
4.3.1 Evaluation
based on economic criteria 93
4.3.2 Evaluation based on statistical
criteria 103
4.3.3 Evaluation based on econometric
criteria 110
4.4
Evaluation of the working Hypotheses 118
CHAPTER FIVE: SUMMARY, POLICY PRESCRIPTION
AND CONCLUSION
5.1
Summary 122
5.2
Policy Recommendations 123
APPENDIX
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
CHAPTER ONE
INTRODUCTION
1.1 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.
1.1.2 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.
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 without development’’.
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, 2002).
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.
1.2 STATEMENT 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 output growth.
Having
reviewed the related literature 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?
1.3 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 smaller objectives:
·
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.
1.4 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.
1.5 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.
1.6 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.
1.7 SCOPE
AND LIMITATION F THE STUDY
This research work span through the
period of 1970-2007 (38 years), and is within the geographical zone of Nigeria.
Thus, it is a country-specific research. This research exercise, like every
other research work, is really a rigorous one that consumes much time and
energy especially in the area of data sourcing, data computation and modeling.
This work is relatively limited base on time and financial constraints, data
availability precision of data and data range, and methodology adopted which
could further be verified by future research. Nevertheless, the researchers have
properly organized the research so as to present dependable results which can
aid effective policy making and implementation at least for the time
being.
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