IMPACT OF TRADE LIBERALIZATION ON NIGERIA ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Historically, trade has acted as an important engine of growth for countries at different stages of development, not only by contributing to a more efficient allocation of resources within countries, but also by transmitting growth from one part of the world to another. Over the past several decades, the economies of the world have become increasingly linked, through expanded trade. International trade has often played a central role in the historical experience of the developing world.  Because of the economic impact that trade has always had on civilizations, governments often become involved in trade with the goal of producing a particular economic outcome for their countries. There are, however, static and dynamic gains from trade between countries, but there is nothing in the theory of trade that says that the gains are equitably distributed.

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Trade liberalization started in 1947, after the 2nd World war, with the inception of the General Agreement on Tariffs and Trade (GATT). The GATT was negotiated in 1947 by 23 countries of which 12 are industrialized countries and 11, developing countries. The main focal point of the GATT was to lower trade barriers. GATT was later replaced by the WTO (World Trade Organization) in 1994.

Basically, the main purpose of trade liberalization is to allow countries to export those goods and services that they can produce efficiently, and import the goods and services that they produce inefficiently. The above statement refers to the theory of comparative advantage. Traditional explanations of trade as “the engine of growth” and the impact of trade on economic development are rooted in the principles of comparative advantage.

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Essentially, the theory of comparative advantage arose from nineteenth century free trade models associated with David Ricardo and John Stuart Mill, which were later modified by trade theories embodied in the factor proportions theory of Hecksher – Ohlin (1933), Stolper-Samuelson (1941) and Rybzsnski (1955) effects.

As a matter of fact, Nigeria has been romancing with the idea of ‘openness is good for growth.’ Key government officials, as expected, see trade as ‘an indispensable engine for economic growth’. Given the predictions of trade theory and observations, the important point to make in this introduction is that the issue for developing countries in general, and Nigeria in particular, is not so much whether to trade, but what to trade, and the terms on which trade should take place with the developed countries of the world (or between themselves). Another question to be asked is; at what level of growth/development should a country adopt trade liberalization to ensure sustainable economic development? The focus of this work shall therefore be on determining if a relationship exists between trade liberalization and economic growth, the nature of that relationship and the impact of trade liberalization on economic growth in Nigeria.

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The Nigerian main trade policy instrument shifted remarkably away from tariffs to quantitative import restrictions, particularly import prohibition and import licensing from the mid 1970’s. This gave rise to the Nigerian customs legislature establishing an import prohibition list for trade item and an absolute import prohibition list for non trade items, Oyejide (1975). The customs legislation empowered the government to modify this list at its discretion by adding or subtracting items through customs and excise notices and government announcement. And over the years there have been several modifications on this list targeted to protect existing domestic industries and reducing the country’s dependence on imports.

There are three international organisations that have expressed views on Nigerian’s import prohibition policy, these are the World Trade Organisation, the World Bank and the International Monetary Funds. They have advisory role with respect to trade and other policy matters in Nigeria and had advised a more liberal trade policy regime in Nigeria which was initiated in the 1980s. The World Bank and the International Monetary Funds did support this via its lending programme Prior to the introduction of the structural administration programme (SAP) in 1986 in Nigeria, imports were subjected to quantitative controls implemented through a combination of ban on agricultural and some manufactured goods and a licensing system. But under the SAP, import and export licensing was abolished, price and distribution control on agricultural exports was removed and the prohibited list of imports was reduced.

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This issues of whether trade liberalisation would lead to economic growth has become a debate for both pro-traders and protectionists. This has led to a growing change in the trend of world trade. Mostly, African countries have become more careful in embarking in liberalisation of policies.

1.2 Statement of the Problem (Will be attached in the full project)

1.3 Research Questions

Given the aforementioned problem prevalent in external borrowing, hence this research work on trade liberalization and Nigeria economic growth tries to answer the following specific research questions:

To what extent does trade liberalization on economic growth of Nigeria? Is there any observed long-run relationship between trade liberalization on Nigeria economic growth?

1.4 Objectives of the Study

The main objective of the study is to investigate the relationship between  trade liberalization on Nigeria economic growth. The specific objectives of study are to:

(i) Empirically investigate the impact of  trade liberalization on Nigeria economic growth.

(ii) Examine the long-run relationship between trade liberalization and Nigeria’s economic growth.

1.5 Statement of Hypothesis

In order to have a framework for the study and also to answer the research questions above, the following hypotheses were formulated:

H0: Trade liberalization has no significant impact on Nigeria’s economic growth. H0: There is no long-run relationship between trade liberalization and economic growth of Nigeria.

1.6 Significance of the Study

This study will be significant to the following stakeholders:

Researchers: It is expected that this study would contribute to the advancement of the existing literature on trade and economic growth especially in the Nigerian case. Thus, forming a veritable source of reference for researchers.

Government: It is also expected that the empirical results and recommendations of this work would be useful to policy makers as it would help in adopting suitable trade policies that will promote trade in Nigeria.

Investors: Investors will benefit immensely from this research work as it will expose them to the benefits and harmful effects of trade liberalization and help them know how to invest their funds wisely.

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General public: The general public would find this study very useful because it will serve as a spring board for continuation of research as well as for detailed information as regards trade activities in Nigeria.

And finally, the research will serve as a reference guide to other researchers who will find the research helpful in conducting further research on the topics.

1.7 Scope and Limitation of the Study

The study seeks to analyze  trade liberalization on Nigeria economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 34 years i.e. 1981-2015. This period was chosen to cover the period after the oil collapse and also the post debt-relief era. This study is limited by the following factors; Paucity of Materials: Materials for the study were not adequate and consistent thereby resulting to extra effort by the researcher to validate the data.

Inaccessibility of Data: Difficulty in accessing data for the study was yet another limitation. This had its own toll on the research work because it limited the data that was used for the study.

Financial Constraint: Lack of adequate funds on the part of the researcher constituted another problem. However, amidst all these enumerated constraint faced by the researcher, effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advance econometric test to fish out any possible spuriousity of result among others.