TRADE OPENNESS AND OUTPUT GROWTH IN NIGERIA: AN ECONOMETRIC ANALYSIS

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.

CHAPTER ONE

 INTROUDCTION

BACKGROUND                                                                                                                                      The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one the crucial issues in development and international economics is to know whether trade openness indeed promotes growth. With globalization, two major trends are noticeable: first is the emergence of multinational firms with strong presence in different, strategically located markets; and secondly, convergence of consumer tastes for the most competitive products, irrespective of where they are made. In this context of the world as a “global village”, regional integration constitutes an effective means of not only improving the level of participation of countries in the sub-region in world trade, but also their integration into the borderless and interlinked global economy. (NEEDS, 2005).

          Since 1950, the world economy has experienced a massive liberalization of world trade, initially 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. Tariff levels in both developed and developing countries have reduced drastically, averaging approximately 4% and 20% respectively, even though the latter is relatively high. Also, non-tariff barriers to trade, such as quotas, licences and technical specifications, are also being gradually dismantled, but at a slower rate when compared with tariffs.

          The liberalization of trade has led to a massive expansion in the growth of world trade relative to world output. While world output (or GDP) has expanded fivefold, the volume of world trade has grown 16 times at average compound rate of just over 7% per annum. In fact, it is difficult, if not impossible, to understand the growth and development process of countries without reference to their trading performance. (Thirlwall, 2000).

          Likewise, Fontagné and Mimouni (2000) noted that since the end of the European recovery after World War II, tariff rates have been divided by 10 at the world level, international trade has been multiplied by 17, world income has quadrupled, and income per capita has doubled. Incidentally, it is well known that periods of openness have generally been associated with prosperity, whereas protectionism has been the companion of recessions. In addition, the trade performance of individual countries tends to be good indicator of economic performance since well performing countries tend to record higher rates of GDP growth. In total, there is a common perception that even if imperfect competition and second best situations offer the possibility of welfare improving trade policies, on average free trade is better than no trade.

          From the ongoing discussion, it is evident that trade is very important in promoting and sustaining the growth and development of an economy. No economy can isolate itself from trading with the rest of the world because trade act as a catalyst of growth. Thus Nigeria, being part of the world, is no exemption. For this reason, there is a need to thoroughly examine the nature of relationship between trade openness and output growth in Nigeria.

1.2 STATEMENT OF THE PROBLEM

There are problems associated with the development of the Nigerian economy in her different sectors based on liberation of trade. These problems may be economic problems based on the rate of instability, policy barriers to capital flows, inappropriate economic policies and political instabilities. There may also be problems like market liquidity. In using liquidity as a measure of stock market development, it seems that the Nigerian capital market is illiquid to an extent and it has contributed very little to the growth of the Nigerian economy (Ibrahim, 2002).

Therefore, this research work shall answer the following questions

1. Does trade openness produce a rapid flow of foreign capital for the Nigerian economy?
2. Does trade openness significantly improve management techniques for firms operating in Nigeria?
3. To what extent has globalization brought about an advancement of new technologies in the Nigerian economy?

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.