IMPACT OF FOREIGN TRADE ON ECONOMIC GROWTH IN NIGERIA (1981-2010)

CHAPTER ONE

1.0 INTRODUCTION 1.1 BACKGROUND OF THE STUDY

International tradeis the exchange of goods and services across borders or territories. Through international trade countries supply the world economy with the commodities that they produce relatively cheaper and demand from the world economy the goods that are made relatively cheaper elsewhere. The positive effects of international trade on economic growth were first pointed out by Smith (1776). This idea prevailed until

World War II, although with relative hibernation during the “Marginalist Revolution”. Economic theories have argued that countries engage in international trade to reap the gains that arise from specialized production with each country concentrating on producing those goods and services that involve the least opportunity cost.

Economic growthis the increase in the amount of the goods and services

produced by economy overtime, it can also be said to refer to growth of potential output, that is, production. It is measured as the percent rate of increase in real GDP. Various literatures on international trade recognize trade as a catalyst for economic growth. To act as an engine of economic growth, trade must lead to steady improvements in human conditions by expanding the range of people‟s choice, a notion that the concept of human development tries to capture.

             Foreign trade plays a vital role in reforming economic and social attributes of countries around the world, particularly; the less developed countries because no country is self-sufficient. Before the discovery of oil in 1960‟s, the Nigerian government was able to carry out investment project through domestic savings, earning from agricultural product exports and foreign aids. Since the discovery of crude oil in 1956 and its exploration in commercial quantity in 1958 however, the oil sector gradually became the dominant sector in the economy, and almost the sole source of export earnings. For instance in 1970‟s petroleum constituted of about 78% of Federal Government revenue and more than 95% of export earnings (World Bank, 2002). With the oil boom in 1973, the country‟s foreign exchange earnings rose immensely, which translated into higher economic growth.

Since the advent of oil as a major source of foreign exchange earning Nigeria in

1974 the image has been almost that of general stagnation in agricultural exports. This led to the loss of Nigeria‟s position as an important producer and exporter of palm oil produce, groundnut, cocoa and rubber (CBN annual report, 2006). Between the year 1960 and 1980, agricultural and agro-allied exports constituted an average of 60% of total export in Nigeria. Furthermore, by 1977, export stood at N7, 881.7million. Between 1960 and 1977, value of export grew by 19%. It should be noted that before 1972, most of the export were agricultural commodities like cocoa, palm produces, cotton and groundnut. Thereafter, minerals, especially crude, petroleum, became significant export commodities. Imports also increased in values during the period. By 1960, imports were valued at N432 million. They increased to N758.99 million and N813.2 million in 1970 and 1978 respectively, rising to N124, 162.7 million in 1992 and N681, 728.3 million in 1997. Non-oil GDP recorded a growth rate of 8.9%, compared with 8.5% in 2010. 

The improved performance in the sector was driven largely by the agricultural sector, which grew by 5.7%, underpinned by robust growth in all its components. However, from 1974, food import became obvious in Nigeria‟s foreign trade. The country had an unfavorable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence. Thereafter, export of crude petroleum guaranteed a favorable trade balance. The oil sector dominates export while the non-oil sector dominates import. In 1960 – 1970 oil export grew by 31.6% and 44.6% respectively. Also, for this period, nonoil export showed marginal growth of 1.2% and 6.6%. (Annual Performance Report of The Nigerian Economy by national planning commission (NPC 2011).

Nigeria experienced a growth transition in 2011, which highlighted a gradual shift away from primary production to secondary and tertiary activities. Primary production activities, comprising agriculture, crude petroleum and natural gas, and solid minerals dominated economic activities in 2011 with a share of 55.30% of GDP, compared with 57.09% in 2010. By contrast, secondary production activities of manufacturing, building and construction that have a greater potential to expand the country‟s productive base recorded a share of 6.25% of real GDP in 2011. The tertiary sectors have shown an upward trend in the last five years, accounting for about 39% of the GDP during 2011 compared with about 37% in 2010. The development of secondary and tertiary sectors showed a gradual expansion of the productive base, resulting in reduction in the dominance of primary activities in the economy. In the merchandise trade, crude oil export continued to dominate total exports, accounting for 92% by end 2011 as against 93% in 2010. Equally, crude oil exports amounted to US$79.81 billion compared to US$63.73 billion during the period (Annual Performance Report of The Nigerian Economy by NPC 2011). 

 It was equally noted that the United States of America was the dominant

destination of Nigeria‟s exports, accounting for 53% of total exports, while Europe and Asia accounted for 23% and 12%, respectively during the period (Annual Performance Report of The Nigerian Economy by NPC 2011). 

The positive relationship that exists between global trade and economic growth

may be as a result of the likely positive externalities due to the involvement of different countries in the international trade. Many empirical studies have argued in favour of the importance of global trade on economic growth using the degree of trade openness, terms of trade, tariff and exchange rate as variables to explain the claim that open economies grow faster than closed economies (Edwards, 1998).

On the contrary, some economists have argued that the practice of protectionism is better means for domestic economic growth because in some instances the domestic economy may have comparative advantage over the foreign economy (Nnadozie, 2003). Nevertheless, the overwhelming evidence of positive impact of international trade on economic growth cannot be overemphasized. 

Against the foregoing background, this study shall examine the impact of foreign

trade on economic growth in Nigeria from 1980 to 2010.

1.2 STATEMENT OF PROBLEM

Although various factors have been adduced to Nigeria‟s poor economic

performance, the major problem has been the economy‟s excessive reliance on the fortunes of the oil market and the failed attempts to achieve any meaningful economic diversification (Osuntogun et al, 1997), reflecting the effect of the so called “Dutch disease”.  The need to correct the existing structural distortions and put the economy on the path of sustainable growth is therefore compelling. This raises the question of what else need to be done in order to diversify the economy and develop the non-oil exportation in order to realize the potentials of the sector. 

Foreign trade has not helped in promoting economic growth because the Nigeria economy still experiences some elements of economic instability and this has also turned the country into an import dependent economy.  By 1960, imports were valued at 432 million. They increased to N756.0 million and N8.132 million in 1970 and 1978 respectively, rising to N124, 612.7 million in 1992 and N681, 728.3 million in 1997. 

The bulk of the imports were finished and semi-finished goods. However, from 1974, food imports became noticeable in Nigeria's external trade. The country had an unfavorable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence.

Furthermore, most African countries engage in the exportation of primary products and not manufacturing exports. The need to diversify the export of their economies is important because not all countries desire a particular product and also if such country desires to grow, it ought not to specialize in one line of production. 

Also one of the reasons why foreign trade has not translated to economic growth

in Nigeria is the direction of external trade. Nigeria's export to U.K. declined from 14.1 per cent in 1975 to almost 2 per cent in 1988. It rose to about 3 per cent in 1990 and declined to 1.4 per cent in 1992. Also, U.K's import of Nigeria's crude has declined steadily over time.  The analysis of the direction of trade also reveals that, for the U.K., Nigeria had a trade deficit for the period 1984-1992.

Nigeria's exports to Japan are very marginal. From 1975 to 1988, the country's

exports to Japan amounted to about 0.1 per cent of total exports.  In the 21st Century, it is necessary to find ways and means to ensure that Japan imports some of its raw material requirements and crude petroleum from Nigeria. Apart from the fact that Japan is an industrial giant, it is also vital for Nigeria to enlarge her trading partners.  

 Nigeria exports both raw materials and finished products to other African countries (excluding ECOWAS) and Eastern European countries. However, the magnitude of exports to these regions is quite insignificant. 

Furthermore, the direction of trade seems to confirm Nigeria's dependence on Western Europe, North America and Japan. Nigeria's exports go to the same sources where her imports come from. There is need to open up new markets especially in the Far East, Pacific and the Caribbean as well as in promising African countries like South Africa. 

Against this background, the main thrust of this research is to take an objective

view regarding the controversy of the role of foreign trade, in the progress of a country in terms of economic growth of Nigeria. It has been eluded by the dissenting voices in the 21st century that trade could be negative in terms of acting as catalyst of economic growth, being a retrogressive force, in the journey to economic independence. But ironically, past experience has proven the potency of trade as a catalyst of economic progress, with regards to growth.

1.3 OBJECTIVES OF THE STUDY

International trade has been an “Engine of growth” for the global economy and Nigeria in particular. The main objective of this study is to examine the effect of foreign trade on economic growth in Nigeria. Specifically the study hopes to: 

(i)                 Evaluate the relationship between foreign trade on economic growth in Nigeria. 

(ii)               To access the degree of impact both Oil and Non- oil Export have on the growth of Nigerian economy.

1.4 RESEARCH QUESTIONS

Stemming from the specific objectives above, this research work attempts to

provide answers to the following questions:

(i)                 What is the relationship between foreign trade and economic growth in Nigeria?

(ii)               Do Oil and Non –oil Exports have impact on economic growth in Nigeria?

1.5 RESEARCH HYPOTHESIS

In consonance with the research questions above, this study attempts to test the

following research hypotheses with their attendant alternate hypotheses;

Hypothesis 1

H There is no positive or significant relationship between foreign trade and economic growth in Nigeria

H  There is a positive or significant relationship between foreign trade and economic growth in Nigeria

Hypothesis 2

H Oil and Non –oil Exports do not have positive impact on economic growth in Nigeria

HOil and Non –oil Export have positive impact on economic growth in Nigeria

1.7 SIGNIFICANCE OF THE STUDY

The study focuses on the impact of international trade on Nigeria‟s economic growth. This study will be essential to policy maker to know more about the performance of foreign trade and economic growth. It will also assist in providing the framework of where work has been done by earlier researchers. It will also provide a framework on which further research in foreign trade could be carried out.

Stakeholders will find this study very relevant and important because it will

assist them in their deliberations and discussions on non-oil exports issues and in proffering possible policy recommendations that will help both the government and the administrators of policies. Government will also benefit from the study because it will guide in effective policies to implement in Nigeria.

It also helps other scholars in conducting research on this topic. This study will be an invaluable tool for students, researchers of high citadels of learning, research institutions and the general public that partake in international trade who wants to know more about the impact of international trade on economic growth of Nigeria.

Above all, the significance of this research work will find solutions to the

identified problems related to this topic and will also contribute to the body of knowledge and be useful as reference material for scholars and researchers in the field of study.

1.8 SCOPE AND LIMITATION OF THE STUDY

This project work focuses on the impact of foreign trade on economic growth in Nigeria (1981 – 2010). The causes and consequences of the neglect of non-oil export shall be discussed as well as the trends of foreign trade in Nigeria since 1981 – 2010. Besides, the contribution of foreign trade to the economic growth of Nigeria shall be investigated empirically with data spanning from 1981 – 2010.

The limitations encountered during this research work were; inadequate funds,

accessibility of data and materials, information inadequacy and limited time frame.

1.9 ORGANIZATION OR PLAN OF THE STUDY 

This research work is structured as a five-chapter work, such that Chapter one

which is the general introduction of the entire study comprises of the statement of problem, objectives of the study, hypothesis of the study, and organization of the study. 

Chapter two is the literature review, which covers conceptual, theoretical and empirical framework. Chapter three consists of the research methodology, which shows the model specification, sources of data, econometrics techniques. 

Chapter four presents the data and show the analysis and interpretation of

findings as well as hypothesis testing and discussion of results. 

Chapter five consist of the general conclusion and necessary recommendation on

the project been researched. 

1.10 DEFINITION OF TERMS

During the course of study some words were recurrent. These are the words and

their definitions.

International trade: is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of the gross domestic product (GDP).

Economic growth: an increase in the capacity of an economy to produce goods and services per head of the population over a period of time 

Import: A form of international trade whereby goods or services are brought into one country from another.

Export: A form of international trade whereby goods produced in one country are shipped to another country for future sale or trade 

Oil Export: this constitutes products of oil that are exported and exported respectively by

Nigeria to other countries. „Oil export‟ implies goods from crude oil.

Non-oil export: this constitutes products of agriculture, industry and services that are exported and exported respectively by Nigeria to other countries. „Non-oil‟ implies goods apart from crude oil.