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TRADE OPENNESS AND
OUTPUT GROWTH IN NIGERIA: AN ECONOMETRIC ANALYSIS (1970-2007)
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
Abstract
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
4.1
Introduction
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
AND CONCLUSION
5.1
Summary
5.2
Policy Recommendations
APENDIX
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
INTROUDCTION
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.
Figure 1: growth rate
of real GDP
Nigeria real GDP Growth Rate
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 |
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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’’.
Figures 2: trend of real GDP
Year
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).
FIGURES 3: GROWTH OF
EXPORT AND IMPORT
NIGERIA IMPORT AND
EXPORT
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
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 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?
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.
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