THE EMPERICAL STUDY ON THE DETERMINANTS OF TRADE OUTFLOW INTO THE LOWER MIDDLE INCOME ECONOMY IN AFRICA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Trade and capital flows are both integral processes of globalization, yet until recently, there has been little study on how they interact. The conventional separation of international trade and international macroeconomics forecloses the possible impact macroeconomic dynamics exert on the structure of trade and the aggregate feedback effect of commodity trade. In the standard workhorse, open-economy, macroeconomic framework, either only intertemporal trade is present or an exogenously-rigged structure of trade is assumed. Recent works have suggested that the separation is not always innocuous. Trade and capital flows jointly determine the global allocation of capital, and give markedly different predictions on the way shocks impinge on the world. The interest in the relationship between commodity trade and capital flows harks back to the fundamental insights of the Hecksher-Ohlin framework. Under certain conditions, in a two-country, two-factor model, trade and capital flows are perfect substitutes: commodity trade is sufficient to ensure factor price equalization, and factor price equalization is sufficient to ensure commodity price equalization.2 In other words, the ability to engage in commodity trade can eliminate the need for capital to flow from the capital-abundant countries to the capital-scarce countries, since rate of return differences can be eliminated through trade alone. The implication is that trade liberalization reduces the need for capital to flow towards developing countries characterized by capital-scarcity. Mundell (1957) puts this substitutability of trade and capital flows in a different way: an increase in trade impediments stimulates factor movements, and an increase in impediments to factors stimulates trade. An example helps illustrate these points. Suppose that Home is capital-abundant and Foreign is labor-abundant. If factors (labor and capital) are internationally immobile but trade impediments are absent, Home exports the capital-intensive good and Foreign the labor-intensive good. With factor price equalization, no capital flows will take place once barriers to capital mobility are removed. But now suppose that Foreign imposes a tariff on the capital-intensive good, causing its relative price to rise. Factors will move out of the labor-intensive sector and into the capital-intensive sector. At constant factor prices, the shift in production structure creates an excess supply of labor and an excess demand for capital. Consequently the marginal product of capital rises in Foreign compared to Home, and capital flows from Home to Foreign. This simple example points at the possible interaction between trade and capital flows: changes in the structure of trade, in this case led by an exogenous increase in tariffs, creates incentives for capital to move across borders.

STATEMENT OF THE GENERAL PROBLEM

The current poor investment in Africa has been a cause for major concern to all interested parties as it has further deepened the under development of the continent when compared with her contemporaries. This sad development has resulted to increase in unemployment or under development, political instability and general wellbeing of the continent.

 OBJECTIVES OF THE STUDY

The main objective of this research is to empirically examine the determinants of trade outflow on economic growth between the years 1981 to 2013.

Specifically, the study also seeks:

1. To examine the trend in trade outflow vis a vis economic growth in Africa.
2. To examine the extent at which trade outflow can generate employment.
3. Proffering appropriate framework based on the policy recommendations made.

RESEARCH QUESTION

This study aims at answering the following research questions:

i       Does a long or short run relationship or both exist between trade outflows and the economy?

ii. To what extent is Africa’s total economic growth rate attributed to domestic factors and external factors?

iii. What are the factors that hinder trade outflow in Africa?

RESEARCH HYPOTHESIS

The following hypothesis will be tested in the course of this study:

H0:   Trade outflow has no significant impact on economic growth.

H1:   Trade outflow has significant impact on economic growth.

SIGNIFICANCE OF THE STUDY

The findings of this study will provide an insight as to whether trade outflow has any significant impact on Africa’s economic growth. Hence, policy makers will be able to formulate an articulate and comprehensive policy with respect to trade outflow management in Africa.  This research will also provide an objective view to the relevance of trade outflow on economic growth. The findings of this research will also serve as a useful reference material for further research on the impact of trade outflow on economic growth.

SCOPE OF THE STUDY

The study is restricted to the study on the determinants of trade outflow into the lower middle income economy in Africa using Nigeria as the case study.

LIMITATIONS OF THE STUDY

Finance is one of the elements that assist a good research. Financial constraint created difficulties in the process of this research work; however, it did not hinder the research.

The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of trade outflow on the economy of Africa.

DEFINITION OF TERMS

The following words are operationally defined as they would be used in this research study.

Trade liberalization: The removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other requirements).

Foreign Trade: This is a trade between two or more countries. It is also referred to as international trade or external trade. It is a trade outside the national boundaries of countries. Foreign trade could be bilateral trade, which is trade between two countries or multilateral trade, which is trade between more than two countries.

Employment: This is astate of having a legitimate paid work. This is the opposite of unemployment.

Economic Growth: This refers to the increased over time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizens in increasing number and diversity. It is the study of the process by which productive capacity of the economy is increased over time to bring about rising level in national income.

Economic Development: This is a multi-dimensional process involving the provision of basic needs, acceleration of economic growth, reduction of inequality and unemployment, eradication of poverty as well as changes in attitude, constitution and structure in the economy.