Impact of Trade openness on economic Growth of Nigeria

The impact of trade openness on Nigeria economic growth within the sample period of 1981-2016 PDF. Download the full materials from chapter one to five with reference and abstract. Trade openness on Nigeria economic growth was tested using VECM and Granger causality test to estimate the relationship.

CHAPTER ONE

 INTRODUCTION

1.1       Background of the Study

With globalization and trade liberalisation, economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth (Ehinomen & Damilola, 2014). One of such factors is trade openness. One of the basic interests in development and international economics is to check if trade openness promotes economic growth and development or whether it hinders economic growth through capital flight and fierce competition from the multinational corporations (Zahonogo, 2017). With regards to globalization, two major trends are visible: first is the emergence of multinational firms with strong presence in different, strategically located markets; and the second is the convergence of consumer tastes for the most demanded products, not minding from which country they are produced. Considering the world as “one united community”, regional integration becomes a way of not only improving the level of participation of countries in the sub-region in global trade, but also their integration into the world economy (Mayo et al, 2017).

As at 1950, the world trade was 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 (World Bank, 2015). By this development, Tariff levels in both developed and developing countries have reduced drastically, averaging approximately 4% and 20% in the respective cases. Furthermore, it is noted that non-tariff barriers to trade such as licenses, quota, etc, have also been reduced but at a slower pace when compared with tariffs (Mayo et al, 2017).

Due to trade liberalisation, there has been a huge increase in growth of world trade when compared to that of world output. While world output has expanded five folds, the volume of world trade has grown 16 times at an average compound rate of over 7% per annum (World Bank, 2015). Thus, trade performance re-enforces the understanding of growth and development process of countries (Mangir et al, 2017). They noted further that tariff rates have been reduced to 10% of the former rate since the end of the World War II, at the global level, international trade increased by 17 times, while global income increased by 4, and income per capita doubled. Furthermore, countries with high trade performance have recorded higher rates of GDP growth than others. Following from the above, it is obvious that trade is essential in promoting, improving and sustaining the growth and development of economies.

This is why we need to examine the relationship between trade openness and output growth in Nigeria. Today, as part of moving with the trend of globalization and trade liberalisation in the global economic system, Nigeria is a member of, and signatory to, many international and regional trade agreements such as International Monetary Fund (IMF), World Trade Organization (WTO), World Bank, Economic Community of West African States (ECOWAS), and others. The overriding objective of this economic partnership on international trade has been to create a free trade zones by removing the barriers on trade, lessen tariffs, and embark on outward-oriented trade policies. Despite Nigeria’s great attempt to meet up with the demands to these economic partnerships, as reflected in the 2007 assessment of trade policy review, Nigeria’s trade freedom was rated 56% making her the world’s 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 (UNCTAD, 2017). The economy has thrived to arouse growth through openness to trade; in reality, 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 (see World Bank, 2015; Ehinomen & Damilola, 2014; Mayo et al, 2017).

Before her political independence, Nigeria has been an active player on the field of foreign trade, initially with predominantly agrarian products, but presently dominated by petroleum products.  Prior to the discovery of oil in 1960s, the Nigerian government was able to execute investment projects through domestic savings and earnings from agricultural product exports and foreign aids. However, the capacity of the economy to accumulate domestic savings to finance investment was limited.

According to standard international trade theories, adopting reforms for liberalizing trade, launching multi-trade agreements and participating free trade by lowering trade barriers are the main trade policies to improve efficiency and increase economic growth. Innovation and adaptation of technology are two basic channels through trade may affect growth. They also boost the economy`s rate of total factor productivity growth (see Proudman et al., 1998; Mangir et la, 2017). Economies of scale and differentiated goods may lead to lower prices and create gain for consumers according to new trade theory developed by Krugman (1979, 80 cited in Mangir et la, 2017).

However, recently, the protectionist economists have criticized mentioned arguments of standard trade theories. Rodrik (2001) argues that the excessive emphasis on trade liberalization can backfire if it diverts scarce energies and political resources of government leaders from growth fundamentals (Zafar, 2005:3). According to the protectionist views, restrictions on trade may help countries in dealing with trade deficit. Increased export may lead to better growth. In addition, opponents of free trade claim that removing restrictions on trade may cause the decline of domestic production and domestic employment. Free trade also may lead to decrease government revenue by reducing tariffs (Zahonogo, 2017). In this world of globalization, each country tries to increase its share on the international market through trade. For this reason, these countries rapidly open their economies to world trade by negotiating trade agreements and lowering trade barriers.

Since 1970s economist are investigating whether trade openness is a good thing for an economy. This is due to the growth differences between Latin America and East Asian countries. While East Asian countries have been accepted miracle due to the high economic performance based on trade-led growth, Latin America could not attain high growth with the Import substitution growth. There is also no consensus about the role of trade on economic growth among economic growth theories and empirical studies. Solow growth theories state that trade liberalization might affect growth in short time without technological progress. On the other hand, trade foster growth in the long run according to the endogenous growth theories (Romer 1986, 1990; Grossman and Helpman, 1990, 1994; Zahonogo, 2017).

1.2 Statement of the Problem

Various factors have been adduced for Nigeria’s poor economic growth, the major problem has been the country’s continued and excessive reliance on the fortunes of the oil market and the failed attempt to achieve any meaningful economic diversification (Oshountogun, 2007), reflecting the effect of the so called ‘Dutch Disease. The need to correct the existing structural distortion and open up the Nigeria’s economy to the path of sustainable economic growth is therefore compelling. Nigeria, being fully integrated into the global economic system, is a member and signatory to many multilateral and regional trade agreements. The policy response of such economic partnership agreements on trade policy has been to remove trade barriers, reduce tariffs and embark on outward oriented trade policies. However, the policy measure arguably giving the trend of economic growth in Nigeria particularly after SAP has not been encouraging.

Thus, in spite of the openness of the economy and the implementation of trade liberalization measures, some macroeconomic indicators show poor performances of the economy generally (Kalu et al, 2016). For instance, the economy has been characterized by infrastructure inadequacy, high interest and inflation rate, inefficiency in the public sector and low degree of private sector participation in economic activities, low degree of savings accompanied by liquidity trap, capacity underutilization and low rate of capital formation all this leading to capital flight and further escalation of unemployment in the country (see Noko, 2016).

The relationship between trade openness and economic growth has been theoretically controversial. While conventional wisdom predicts a growth-enhancing effect of trade, recent developments suggest that trade openness is not always beneficial to economic growth. Increased international trade can generate economic growth by facilitating the diffusion of knowledge and technology from the direct import of high-tech goods (Baldwin et al., 2005; Almeida and Fernades, 2008). Trade facilitates integration with the sources of innovation and enhances gains from foreign direct investment. By increasing the size of the market, trade openness allows economies to better capture the potential benefits of increasing returns to scale and economies of specialization (Alesina et al., 2000; Bond et al., 2005).

Given the above fact, inadequate evidence to conclude the relationship between economic growth and trade openness in Nigeria and the fact that the economy has not been on the path of growth and development. This, as revealed by the declining of major macroeconomic indicators like employment, private sector investment, improved social amenities through corporate social responsibility has generate necessity to carry a further research on the relationship between trade openness and output growth in Nigeria.

1.3 Research Question

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 Nigeria’s output growth?
  • Is there any long-run relationship between trade openness and Nigeria’s output growth?

1.4       Objectives of the Study

The broad objective of this research work is to study, in it’s 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 Nigeria’s output growth.
  • To examine the long-run relationship between trade openness and Nigeria’s output growth.

1.5       Statement of the Hypothesis

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 Nigeria’s output growth.

Ho:      There is no long-run relationship between trade openness and Nigeria’s output growth.

1.6       Significance of the Study

The role of international trade in the developmental journey of an economy cannot 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. It will 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 of the Study

This research work span through the period of 1981-2017, and is within the geographical zone of Nigeria. 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. 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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