ABSTRACT
This study empirically examined the impact of external trade on economic growth of Nigeria between the period 1980-2013. The study employed Ordinary least square (OLS) regression technique to analyze the data obtained from the CBN statistical bulletin for the relevant years under study. The empirical results were on Augmented Dickey Fuller test. In the second step, Johansen co-integration test was conducted. The presence of long run equilibrium found led to the use of Vector Error Correction Model (VECM). The entire regression plane is statistically significant. This means that the joint influence of the explanatory variables [Net Exports (NEX), Degree of Openness (DOP) and Exchange Rate (EXR)] on the dependent variable (RGDP) is statistically significant. There is significant causal relationship between external trade and economic growth in Nigeria. The computed coefficient of multiple determination shows that 93.6% of the total variations in the dependent variable (RGDP) is influenced by the variation in the explanatory variables. The total variation of 6.4% in the dependent variable is attributable to the influence of other factors not included in the regression model. The study therefore recommended that the Nigerian government should adopt vibrant and workable policies that will promote export increase over imports, also Nigeria as a country should concentrate on commodities which she has comparative advantage over other countries as this measure will boost economic growth of her economy.
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
Predominantly,
in our world today nothing can be done without an exchange of some value for
value which involves money, ideas, product and technology. Trade can be traced
back to the need for exchange, which evolved from the barter system to the
money system. Trade in Nigeria however, became popular with the advent of the colonial
masters that brought in their wares and made Nigerians their middle men (Nicks,
2008). By this, Nigerians understood the need for trade both domestically and
externally. External trade has been an area of concern to policy makers and
economists. Its importance lies on the ability to obtain goods which cannot be
produced in the country or which can only be produced at greater expenses. Also
it enables a nation to sell its domestically produced goods to other countries
of the world. The performance of a given economy in terms of growth rates of
output and per capita income has not only been based on the domestic production
and consumption activities but also on external transaction of goods and
services. The classical and neo-classical economists attached so much
importance to external trade in a country‘s development that they regarded it
as an engine of growth (Jhingan, 2006), Trade is recognised as a vital catalyst
for economic development.
For developing countries like
Nigeria, the contribution of trade to overall economic development is immense
owing largely to the obvious fact that most of the essential elements for
development such as capital goods, raw materials and technical know-how, are
mostly imported because of inadequate domestic supply. However, it is important
to note that internal trade complements external trade since domestically
produced goods are collected for export, while imported goods are distributed
within the country, sometimes into remote areas. It also facilitates internal specialization
and the division of labour between the various firms and geographical areas of
the country. Therefore, the higher the level of internal trade the greater the
level of specialization. This raises the level of efficiency and productivity
of the various economic units (Anyanwuocha 1993). Economic growth is measured
by the Gross Domestic Product (GDP) in Nigeria. GDP is a total market value of
a country‘s output of goods and services, which are exchanged for money or
traded in a market system over certain periods. This indicates that trade is an
essential aspect of Economic growth. The Gross Domestic Product (GDP) of
Nigeria is $166 billion in 2007. The economy has overdependence on the capital
intensive oil sector, which provides 20 per cent of GDP, 95 per cent of
external exchange earnings, and about 65 per cent of government revenue for
2005. The largely subsistence agricultural sector has not kept up with rapid
population growth, and Nigeria, once a large net exporter of food, now imports
some of its food products. The overdependence on oil product not only leads to
unbalanced trade but has resulted in economic fluctuations. Nigeria was
severely affected by the global economic meltdown partly due to the collapse of
global oil price in 2008, the prices set by the Organisation of Petroleum
Exporting Countries (OPEC) which can be influenced by political reasons that
might not be favourable to Nigeria economy and the recent Niger Delta Crisis
which had a big role to play in slowing down Nigeria‘s economic growth.
Economic and trade diversification may serve as a strategy for reducing the
exposure of Nigeria economy to external shock associated with commodity
production and trade. However, it must be established that before any
significant benefit from trade can be gained, the domestic economy will have to
diversify away from overdependence on oil produce and concentration on the
production and export of primary commodities.
1.2
Statement of Problem
Prior to the discovery of crude oil
in commercial quantity in Nigeria, the country depended largely on the proceeds
of agriculture primary product for the generation of external exchange. The
country therefore constituted one major agrarian country in Africa. By the
mid-1960s, production and export of crude oil had become important in Nigeria‘s
export structure, ironically, the ascendancy of petroleum production and export
was accompanied by a simultaneous decline of agricultural products in the
nation‘s economic activities. Indeed, by the end of the 1970‘s, crude oil
accounted for as much as 90 per cent of the country‘s export trade. Nigeria‘s
non-oil production structure is still basically of the import-substitution
variety, being largely dependent on external technology, industrial machinery
and raw materials and negligible exports of finished products. It can therefore
be said that the pattern of Nigeria‘s trade with the rest of the world has not
undergone a structural change since the 1940s. The country had been producing
and trading consistently in natural resource products (Akano, 1995). Crude oil
production is an extractive, non-renewable activity which Nigeria had been
exploiting since the late 1950s (Akano, 1995).
For almost four decades of
commercial production, Nigeria produced and exported crude oil in its natural
state with minimal processing into higher stages of product development. While
other oil producing African countries such as Libya and Algeria have
diversified operation into more technology intensive areas such as the LNG and
petrochemicals. Nigeria is still locked essentially in the primary stages of
petroleum development (Akano, 1995). The most important implication is that
there is adverse effect of making the Nigeria‘s export sector dependent on
external factors, outside the control of Nigeria economy. Nigeria has been
diagnosed for suffering from the Resource Curse Syndrome (also known as the
paradox of plenty) (Soludo, 2005). This refers to the 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 is
hypothesized to happen for many different reasons, including a decline in the
competitiveness of other economic sectors (caused by appreciation of the real
exchange rate as resource revenues enter an economy), volatility of revenues
from the natural resource sector due to exposure to 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 extractive activities) (Auty, 1993).
1.3 Research Questions
In
other to examine the impact of external trade on economic growth in Nigeria,
Specifically the study is to be guided by the following research questions
1. Does external trade have any long-run
significant impact on economic growth in Nigeria?
2. Is there any causal relationship
between external trade and economic growth in Nigeria?
1.4
Objectives of the Study
The
main objective of this study is to evaluate the impact of external trade and
its contribution to economic growth in Nigeria. Specifically the research work
will focus on the following objectives: to,
1. Investigate the long-run impact of external
trade on Nigeria’s economic growth
2. Investigate if there is any
existing relationship between external trade and economic growth in Nigeria
1.5
Research Hypotheses
The research on external trade on
Nigeria economic growth has led to the following hypothesis.
Ho: There is no long-run significant
impact of external trade on Nigeria’s economic growth.
Ho: There is no significant causal
relationship between external trade and economic growth in Nigeria.
1.6
Significance of the Study
This study will be essential to
policy maker to know more about the performance of external trade and economic
growth. It will also assist in providing the frame work of where work has been
done by earlier researchers. It will also provide a framework on which further
research in external trade could be carried out. The study will basically cover
a period of 33 years (1980-2013). This study is limited to external trade as it
affects the growth and development of the Nigeria economy, and based on the
findings from the research work, the researcher will make recommendation to the
government and other authorities so as to ensure macroeconomic stability and
put the Nigerian economy along the path of sustainable growth and development.
1.7
Scope and Limitation of the Study
The research work is confined to
Nigerian economy. Therefore, data that were considered are those relating to
Nigeria economy on effect of external trade on economic growth in Nigeria. The
study will basically cover a period of 33 years (1980-2013); this study is
limited to external trade as it affects the growth and development of the
Nigeria economy. A major constraint of this study is the short time needed to
complete this study, problem of consistent and accurate data and inadequate
finance to fund the research work.
1.8
Operational Definition of Terms
External
Trade: that is buying and selling abroad; a country’s balance of trade is the
excess of the value of its exports of goods over its import.
Trade
Barriers: laws, institutions, or practice which makes trade between countries
more difficult or expensive than trade within countries. Some are deliberately
designed to discourage trade.
Free
Trade: means the absence of barriers to external trade, a free trade area is of
group countries with no barriers to external trade between them, at least for
most goods, though there may be exceptions.
Economic
Growth: is an increase in an economic variable, normally persisting over
successive periods. The variable concerned may be real or nominal, and may be
measured in absolute or in per capita terms. Growth in real economic variables
such as GDP for short periods or at low rates may occur by simply having
similar activities conducted on a larger scale. Rapid or persistent growth is
likely to involve changes in the nature of economic activity.