CHAPTER ONE
INTRODUCTION
1.1: BACKGROUND OF THE STUDY
In our economy today we are privileged to make use of the advanced world countries’ products having risen from improved or advanced technologies of the world. We even eat their type of food, wear their type of cloth, and drive in their kind of cars etc. without having to do all these in their country. Also we enjoy the best of products from neighboring countries without having to travel there to get or use it. All these are made possible by international trade. International trade has a direct effect on the economy of any country as the country sees the need for the exchange of ideas, products and technologies. This effect could either be positive or negative at each given point in time.
International trade can be interchangeably referred to as ‘foreign trade’ or ‘global trade’. It encompasses the inflow (import) and outflow (export) of goods and services in a country. A country’s imports and exports represent a significant share of her gross domestic product (GDP); thus, international trade is correlated to economic growth. In an open economy, development of foreign trade greatly impacts GDP growth (Li, Chen & San, 2010). Countries would be limited to goods and services produced within their territories without international trade. International trade is directly related to globalization because increase in trade activities across border is paramount to the globalization process. The globalized nature of an economy enhances its direct participation in the world market consequently leading to market expansion. According to Adam Smith, expansion of a country’s market encourages productivity which inevitably leads to economic growth.
International trade can be traced back to the need for exchange which evolved from the barter system to the money system. International trade became popular with the advent of the colonial rule that brought their wares and made Nigerians their middle men (Nick 2008). The classical and neo-classical economists have attaches so much importance to international trade in an economy’s growth that they even regard it as an engine of economic growth (Jhingan 2006) and so we can say that the performance of any economic in terms of growth rate of output and per capita income is not only based on the domestic production and consumption activities but it can also be based on the international transaction of goods and services. One of the major reasons why countries engage in international trade is to obtain the goods and services which they cannot produce in the home country or commodity which its cost of production is very high. To solve this problem, the classical economist, David Ricardo suggested that countries should specialize on the production and exportation of goods whose cost of production is low and import the product whose cost of production is high for the country. This is what Ricardo referred to as ‘the theory of comparative advantage’.
Virtually improvements in transportation and the expansion of world markets have made possible this large scale of economic production. The world is now a ‘global village’ because of the continuous flow of goods in and out of nations and the dependence by every nations upon foreign sources for variety of goods, which are of special importance. These nation economics, financial and cultural activities have boundaries. Trade between nations was formerly carried out by private individuals, however in recent times government has increasingly engaged in international trade transactions directly with each other on the basis of governmental decisions.
Government earns revenue through international trade activities. International trade, as a major factor of openness, has made an increasingly significant impact to economic growth (Sun and Heshmati, 2010). The openness of a nation influences a country’s growth rate by impacting upon the level of economic activities and facilitating the transfer of resources across borders. Nigeria is basically an open economy with international transactions constituting a significant proportion of her output (Emeka, Frederick & Peter, 2012). Nigeria’s trade openness has increased the participation of foreigners in the economy by allowing the inflow of foreign capital and expertise, thereby impacting on her economic growth.
From the little write up above, we can see that international trade is actually a catalyst or speed up for economic growth and thus international trade has been of a great concern to policy makers in the country. For developing countries like Nigeria, its participation in international trade is high as most of the essential facilities for growth e.g. capital goods, technical know-how, raw materials are entirely imported because of inadequate domestic supply of these goods. Increased domestic demand sure reduces the expansion of exports, thus to enhance export capacity, improved technology must be imported which in turn raises the demand for imported goods. There is every tendency that import would be raised far above export which would result to an unfavorable balance of trade. Prolonged pressureon the country’s balance of payment shrinks economic growth and so appropriate economic policy measures have to be put in place to streamline international trade for the achievement of a desirable economic growth.
Nigeria’s tariff and trade policies has been characterized by uncertainty and counter policies; to which the government established a market determined nominal exchange rate using the interbank foreign exchange market (IFEM), the autonomous foreign exchange market (AFEM), and the Dutch auction system (DAS) at different times to avoid overvaluation of the Naira exchange rate and boost non-oil export. At the foreign exchange market, the naira depreciated consistently against major foreign currencies which in theory should improve export performance as witnessed in china. Findings by Caballero and Corbo (1989) of the effect of individual European Union country currency depreciation on individual country export trade support this thought: national currency depreciation affecting export trade positively. In addition, Chukwu (2007) observed the instability exchange rate as a determinant of trade in Nigeria: having a positive influence on the dependent variable, export trade; and at other times a negative influence. This suggests an erratic change in its value having a long-run effect on export and economic growth. Studies conducted by (Osuntogun et al, (1993); and Obadan, (1994) on the naira exchange rate impact on export trade focused on the effect of stable exchange rate on Nigeria’s export performance.
1.2 STATEMENT OF PROBLEM
Before Nigeria’s political independence in October 1960, Nigeria was actively involved in international trade. Nigeria’s main export was primary agricultural commodities which accounted for 70.8% of the total export and its relative contribution to GDP was almost 64% during that period. This agricultural commodity comprises of groundnut, cocoa, palm oil cotton and rubber. At that time, the oil sector accounted for only 2.6% of the total export and its relative contribution to GDP was 1.6%. This story is no longer the same starting from the 1970s. Why? The discovery of oil in commercial quantities in Olobiri in the year 1956 made Nigeria to become a “hot cake” and an important player in the world market. In the first half of the 1970s, there was an increase in the price of oil in the world market which made Nigeria to experience oil boom. The proceeds from oil were so high and this showed a great sign to a start of a prosperous economic development in the country. This made the government’s focus to move from the non-oil sector almost fully to the oil sector causing other sectors of the economy to suffer setback. The agricultural, industrial, manufacturing sector’s relative contribution to GDP and export fell so much as a result of over-dependence on the oil sector. Nigeria is Africa’s largest producer of crude oil producing about 2.2 million barrels per day. This has made Nigeria to be the 4th world exporter of oil and 7th largest producer of oil in the Organization of Petroleum Exporting Countries (OPEC). In the early 1980s, there was an oil price shock in the world market which caused an oil glut for Nigeria and since other productive sectors were abandoned, Nigerian government could not meet up with the needs of its populace thus resulting to external borrowing. This did not tell well on the overall welfare of its citizens. Nigeria could be said to be suffering from the syndrome called “Dutch Disease” as a nation abundantly blessed with natural resources especially crude oil still have over 60% of her population still living below the poverty line. Nigeria can also be said to be suffering from the “Resource Curse Syndrome (also known as the paradox of plenty)” (Soludo 2005). This means that countries and regions with an abundance of natural resources specifically point source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This was hypothesized for reasons including a decline in the competitiveness of other sectors caused by the appreciation of the real exchange rate as resource revenue enter the economy, volatility of revenue from the natural resource sector due to exposure to the global commodity market swings government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions possibly due to the easily diverted actual or anticipated revenue stream from the extractive activities (Auty 1993). With the collapse of the global oil price in 2008, Nigeria was severely affected by a global economic meltdown. There has been large proceeds obtained from the domestic sales and export of petroleum product, its effect on the growth of the Nigeria economy as regard returns and productivity is still questionable, hence the need to evaluate the relative impact of crude oil on the economy.
The oil sector contributes about 11% in 2012 and15% in 2013. This shows that other sectors of the economy are rising up and contributing immensely to the country’s economic growth (CBN 2013). But still yet it is this oil which constitutes 95% of our export earnings and 75% of the government revenue. Marco economically, in examining a country’s economic growth, its external transactions are examined, also the government expenditure as a result of its revenue is examined. There is a problem of determining the overall effect of international trade on Nigeria’s growth. This study helps to address this problem.
1.3: OBJECTIVES OF THE STUDY
The specific objectives of this study are;
- To examine the effect international trade and its impact on Nigeria’s economy growth and to see if it impacts positively or negatively.
- To examine the factors that hinders the success of international trade and their effect on economic growth.
- To examine also the impact trade policies i.e. restrictions Nigeria has imposed on international trade and how favorable such policies has been.
- To examine the impact of the exchange rate system on economic growth in Nigeria.
1.4: RESEARCH QUESTIONS
The following research question guided this study;
- To what extent does import rate affect the economic growth in Nigeria?
- To what extent does export rate impact on the growth process in Nigeria?
- To what extent has the use of trade policies been beneficiary to the growth of the Nigeria economy?
- What degree does international trade affect the economic growth in Nigeria?
1.5: RESEARCH HYPOTHESIS
The following research hypothesis were formulated and tested. They include;
HYPOTHESIS 1
H0: There is no significant relationship between import rate and the
Economic growth process in Nigeria.
HYPOTHESIS 2
H0: There is no significant relationship betweenexport rate and economic growth in Nigeria.
HYPOTHESIS 3
H0: There is no significant relationship between trade policies and economic
growth of the Nigeria.
HYPOTHESIS 4
H0: There is no significant relationship between international trade and economic growth in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This study is significant because international trade is important in any economy as it is seen as one of the engine of economic growth and so it is important for us to view the ways on how we can maximize the benefits and minimize the loses from international trade. Also this study will be beneficiary to the following groups;(a)Policy Makers; This research topic gives the policy makers an insight of the volume of trade thus assisting them to make policies which will exert positive influence on the balance of trade.(b)Manufacturers, Exporters And Importers; It helps them to be aware of the policies on international trade, exchange rate and the degree of openness of an economy, also how they cause growth in a countries economy, the factors necessary for such degree of growth etc. (c)Foreign Partners; This provides information on our resources and it presents us to them as an economy that is doing well internationally and this will help increase foreign investment which will aid economic growth. (d)Researchers; It provides an econometric evidence of the impact of international trade on the growth of the Nigerian economy. Finally the study would also statistically enrich and add to the existing body of knowledge in the area of international trade and its contributions to the economic growth of Nigeria.
1.7 SCOPE AND LIMITATION OF THE STUDY
For us to get a full insight into the study, we have to make use of economic data ranging from 1980-2016 as we tend to view the era of oil boom, oil glut, Nigeria’s external trade performance, her economic growth performance over the years and her recent participation at the world market. This study will be broad as possible as various articles and journals will be used to examine the volume of trade, exchange rate, degree of economic openness, inflation rate and gross domestic product. The research would like to examine all factors that contribute to international trade but due to time constraint which is a major constraint of this study, the researcher had short time and inadequate fund within the period to complete this study also, problem of consistent and accurate data.
1.8 ORGANIZATION OF THE WORK
This paper is organized as follows; section one is the introduction while section two reviews the empirical and theoretical literature on impact of international trade on economic growth of Nigeria; section three discusses the models and methodology while section four provides data and empirical evidence and the final section which is section five will provides the summary, conclusion and recommendations of the study.
