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.

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.

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.