IMPACT OF TRADE OPENNESS ON THE ECONOMIC GROWTH OF NIGERIA

ABSTRACT

The research evaluated the impact of trade openness on the economic growth of Nigeria 1988-2014. The study employed secondary time series data, sourced from Central Bank of Nigeria Statistical Bulletin 2014. A four variable model was developed comprising GDP as dependent variable and Trade Openness, Foreign Direct Investment and Exchange rate as independent variables and the Ordinary Least Squares (OLS) estimation technique of Multiple regression analysis was adopted. The findings of the research work includes: Trade Openness has a negative impact on Economic growth, Economic growth causes Trade Openness. Based on the findings, the study amongst others recommends that The Government should analyse Export promotion policy and import substitution policy should also be examined, so that country can take benefit from trade. The fiscal authorities should boost exports, encourage domestic products by dropping Excise duties and tariffs so as to boost home industries to trade their goods and services, That structural trade oriented policy should be adopted to enhance economic growth in Nigeria via high exports flows in order to accumulate more foreign proceeds to boost output growth rate in Nigeria

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

1.1       Background of the study

The global economy is in a state of transition from a set of strong national economies to a set of interlinked trading groups. This transition has accelerated over the past few years with the collapse of communism and the blending of the world trading nations into a single market (Gillespie, Jeannet and Hennessey ,( 2004) in Adelowokan and Maku(2013)). One of the most important paths driving global development into the twenty-first century is the advanced economic integration and investment. Never before have so many economies been open to global trade and finance flow than now, after the liberalization of the former communist economies (Adelowokan and Maku 2013). The relationship between trade and productivity has not been established theoretically even though some researchers have indeed found some, if not complete, support for the view that increasing openness has a positive impact on productivity (Osei,Cephas, and Shaik2012)

The role of international trade is very crucial to the development of any economy and it is assumed that trade liberalization works as an engine for the growth of the economy. The belief, that openness of trade is positively related to economic growth of the countries, has helped the trade liberalization to be a necessary part of the developing countries policy advice(Wajahat and Azrai 2015)

The issue of whether and how international trade affects economic growth has long been the subject of considerable interest and debate. The predominant message from the intensive research is that policies toward international trade are conducive to improved growth performance. Increased international trade may facilitate the diffusion of knowledge and innovations from direct imports of high-tech goods, from greater interaction with the sources of innovation, or from foreign direct investment(Baldwin, Braconier and Forslid, 2005). Trade openness, by increasing the size of the market, allows economies to better capture the potential benefits from increasing returns to scale and exploit economies of specialization (Bond, Jones and Ping, 2005). Further, trade openness may create incentives for governments to adopt less distortionary policies and more disciplined types of macroeconomic management under the pressures of international competition (Sachs and Warner (1995),Rajan and Zingales (2003). Despite so, the debate about the precise relationship between trade and growth is still far from being incontrovertible. Neither theoretical studies nor empirical analyses produce a positive and definite conclusion (Edwards (1993) and Lopez (2005).

There are so many forms of trade like the transfer of technology, education flow and ideas sharing besides the trade in terms of commodities. The restrictive trade policies were followed by the developing countries in the start but they moved towards the liberalization of trade as the world moved towards globalization. There is a strong support present in the literature of the idea that trade openness works as an engine of the economic growth and the existing literature support the positive relation between them. However, in most of the studies, concentration is on developed countries.(Wajahat and Azrai 2015).

Nigeria from the day of independence started the multilateral trading system.In the beginning years of the independence the basic tool to control economy was the tariffs, (Odusola and Akinlo 1995). There is a debate on how openness of trade can bring benefits to the developing countries like Nigeria. Excessive regulations, government interventions and uncertain economic policies play their role as constraints to growth everywhere. A developing country like Nigeria is import dependent, therefore, its import effects on the growth process should not be ignored or assumed away without any empirical basis (Saibu 2004). Also, Nigeria has experimented with different exchange rate regimes, which might have implications for the trade-growth nexus. The fact that trade volume and economic growth are in tandem revealed nothing about the causal direction (Odusola and Akinlo1995). Therefore, the issues of causality between trade and economic growth need to be investigated considering FDI and exchange rate. The analysis of the growth of exports and imports gives an indication as to the extent of the openness of an economy. However, trade flow analysis provides the basis of robust empirical investigation of the openness of an economy. Based on the foregoing, the main objective of the study is to examine the impact of trade openness on the economic growth of Nigeria

 

1.2       Statement of the problem

The new interest in the determinants of economic growth has reignited the debate on trade openness and growth. In neoclassical growth models developed by Solow (1999) and others, technological change is exogenous unaffected by a country’s trade openness to world trade. Yet the ‘new’ growth theories suggest that trade policy affect economic growth through its impact on FDI, exchange rate and technological change. In these models, trade openness provides access to imported inputs, which embody new technology; increases the effective size ofthe market facing producers, which raises the returns to innovation; and affects a country’s specialization in research-intensive production. New growth theories, however, do not predict that trade will unambiguously raise economic growth. Increased competition (as Schumpeter argued) could discourage innovation by lowering expected profits. Grossman (1992) and Helpman (1985) point out that intervention in trade openness could raise long-run growth if protection encourages investment in research-intensive sectors for countries with an international advantage in these kinds of goods. Since the theoretical literature does not provide a clear answer, empirical work is needed to help resolve the debate. Meanwhile, Rodrik (1999b) described that the advantages ofimport substitution polices were overstated in an earlier era, today the benefits of trade openness are oversold routinely in the policy relevant literature and in the publications of the World Bank and IMF. Based on the forgoing this study tends to domesticate and use current data from Nigeria to make to clear position on the issue.

1.3Research questions

To guide the research appropriately the following research questions are formulated, and they include

• to what extent has trade openness impacted economic growth in Nigeria
• what is the extent of the direction of causality between trade openness and economic growth in Nigeria
• how far has FDI impacted the economic growth of Nigeria
• how does exchange rate impact economic growth in Nigeria

1.4       Objectives of the study                                       

The broad objective of the study is to assess the impact of trade openness on the economic growth of Nigeria, while the specific objectives includes:

• To ascertain the impact of trade openness on the economic growth of Nigeria
• To identify the direction of causality between trade openness and economic growth
• To assess the impact of FDI on the economic growth of Nigeria
• To examine the impact of exchange rate on the economic growth of Nigeria

1.5       Research hypotheses

Based on the study the following research hypotheses were formulated

• trade openness has no significant impact on the economic growth of Nigeria
• economic growth does no granger cause trade openness
• FDI has no significant impact on the economic growth of Nigeria
• Exchange rate has no significant impact on the economic growth of Nigeria

1.6       Significance of the study

It is the main objectives of modern government today to attain and maintain full employment, economic growth, increase in real income, stable price level, and equilibrium in the balance of payments, the role of international trade is very crucial to the development of any economy and it is assumed that trade liberalization works as an engine for the growth of the economy. The belief, that openness of trade is positively related to economic growth of the countries, has helped the trade liberalization to be a necessary part of the developing countries policy advice.

This study will therefore increase the list of growing literature seeking to explain how the trade openness affects economic growth. The result of this study will also be useful to government and monetary authorities (especially in the formulation of economic and reform policies), financial institutions, investors, business community and others. Also the result of the study will provide and serve as literature for further research

 

 

1.7       Scope of the study

The scope of the study will cover the period between 1986- 2014. The choice of this base period was influenced based on the fact that the Nigerian economy was deregulated in 1986. The period also covered various periods which include Structural Adjustment Programme (SAP: 1986- 1993), Post Structural Adjustment Programme (Post-SAP: 1994-1998), Democratic Transition (1999-2002), National Economic Empowerment and Development Strategy (NEEDS: 2003-2007), and Global Economic and Debt Crises (2008-2011) in Nigeria.