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IMPACT OF TRADE LIBERALIZATION ON NIGERIA ECONOMIC GROWTH

(Economics)

IMPACT OF TRADE LIBERALIZATION ON NIGERIA ECONOMIC GROWTH

Abstract

The impacts of trade liberalization on Nigeria economic growth 1981-2015, download the full project work with reference and abstract. Impact of trade liberalization and Nigeria economy will cover policies on trade and how it affect economic growth of a nation.The study explores the relationship between trade liberalization and economic growth in Nigeria. Two equations were estimated in which index of industrial production proxied as yearly average capacity utilization as a function of degree of openness, terms of trade and real export. Similarly, in the second equation, real gross domestic product as a function of degree of openness, terms of trade, real export and trade liberalization dummy was estimated.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Historically, trade has acted as an important engine of growth for countries at different stages of development, not only by contributing to a more efficient allocation of resources within countries, but also by transmitting growth from one part of the world to another. Over the past several decades, the economies of the world have become increasingly linked, through expanded trade. International trade has often played a central role in the historical experience of the developing world.  Because of the economic impact that trade has always had on civilizations, governments often become involved in trade with the goal of producing a particular economic outcome for their countries. There are, however, static and dynamic gains from trade between countries, but there is nothing in the theory of trade that says that the gains are equitably distributed.

Still on, impact of trade liberalization on Nigeria economic growth 1981-2015.

 

Trade liberalization started in 1947, after the 2nd World war, with the inception of the General Agreement on Tariffs and Trade (GATT). The GATT was negotiated in 1947 by 23 countries of which 12 are industrialized countries and 11, developing countries. The main focal point of the GATT was to lower trade barriers. GATT was later replaced by the WTO (World Trade Organization) in 1994. Basically, the main purpose of trade liberalization is to allow countries to export those goods and services that they can produce efficiently, and import the goods and services that they produce inefficiently. The above statement refers to the theory of comparative advantage. Traditional explanations of trade as “the engine of growth” and the impact of trade on economic development are rooted in the principles of comparative advantage. Still on, impact of trade liberalization on Nigeria economic growth 1981-2015.

Essentially, the theory of comparative advantage arose from nineteenth century free trade models associated with David Ricardo and John Stuart Mill, which were later modified by trade theories embodied in the factor proportions theory of Hecksher – Ohlin (1933), Stolper-Samuelson (1941) and Rybzsnski (1955) effects.

 

As a matter of fact, Nigeria has been romancing with the idea of ‘openness is good for growth.’ Key government officials, as expected, see trade as ‘an indispensable engine for economic growth’. Given the predictions of trade theory and observations, the important point to make in this introduction is that the issue for developing countries in general, and Nigeria in particular, is not so much whether to trade, but what to trade, and the terms on which trade should take place with the developed countries of the world (or between themselves). Another question to be asked is; at what level of growth/development should a country adopt trade liberalization to ensure sustainable economic development? The focus of this work shall therefore be on determining if a relationship exists between trade liberalization and economic growth, the nature of that relationship and the impact of trade liberalization on economic growth in Nigeria. Still on, impact of trade liberalization on Nigeria economic growth 1981-2015. The Nigerian main trade policy instrument shifted remarkably away from tariffs to quantitative import restrictions, particularly import prohibition and import licensing from the mid 1970’s. This gave rise to the Nigerian customs legislature establishing an import prohibition list for trade item and an absolute import prohibition list for non trade items, Oyejide (1975). The customs legislation empowered the government to modify this list at its discretion by adding or subtracting items through customs and excise notices and government announcement. And over the years there have been several modifications on this list targeted to protect existing domestic industries and reducing the country’s dependence on imports. There are three international organisations that have expressed views on Nigerian’s import prohibition policy, these are the World Trade Organization, the World Bank and the International Monetary Funds. They have advisory role with respect to trade and other policy matters in Nigeria and had advised a more liberal trade policy regime in Nigeria which was initiated in the 1980s. The World Bank and the International Monetary Funds did support this via its lending programmePrior to the introduction of the structural administration programme (SAP) in 1986 in Nigeria, imports were subjected to quantitative controls implemented through a combination of ban on agricultural and some manufactured goods and a licensing system. But under the SAP, import and export licensing was abolished, price and distribution control on agricultural exports was removed and the prohibited list of imports was reduced. Still on, impact of trade liberalization on Nigeria economic growth 1981-2015. This issues of whether trade liberalization would lead to economic growth has become a debate for both pro-traders and protectionists. This has led to a growing change in the trend of world trade. Mostly, African countries have become more careful in embarking in liberalization of policies.Economic growth refers to an increase in the value of goods and services produced in an economy over a period of time, usually one year. It is a measure of the performance of the real sector of the economy. The real sector is often regarded as the engine of growth and economic development largely due to its pivotal role in broadening the productive base of the economy, enhancing its revenue earning capacity, reducing the growth of unemployment and poverty as well as checking rural-to-urban migration. Adegbite (2015) defines real growth as the growth of non-financial sectors of the economy. Components of the real sectorinclude agricultural, industrial, commercial and services sectors. It is in these sectors that production of goods and services take place. To fast-track the process of economic growth and development, governments have to contend with the challenge of adopting either a protectionist or a liberalized economic policy. While a protectionist policy aims at developing the economic base of the nation by shielding domestic enterprises from unregulated competition with foreign brands which are often cheaper and of superior quality, liberalization seeks to achieve the same goal through efficiency gains from resource mobilization and utilization. Though both approaches have their up and down sides, economic liberalization policy has been widely acknowledged in development finance literature as a critical factor in economic performance. Basically, liberalization policies can impact economic performance through enhanced trade and/or finance flows. A major argument for trade liberalization is enhancement of efficiency and scale economies in the production activity. Tybout (1992) argues that entrepreneurial efforts are better rewarded through increased exposure to international competition. He posits that higher output levels associated with liberalization lower unit costs of production, an indication of efficiency in production. Liberalization removes obstacles to entry for prospective entrepreneurs thereby raising the level of competition and brings to the fore the imperative to adopt efficient methods in production. Efficiency means producing more at a given cost. The nexus between liberalization and growth has both empirical and theoretical support in literature. For instance, Brückner and Lederman (2012) find that openness to international trade increases economic growth in sub-Saharan Africa. Trade liberalization, for instance, opens up new markets, beyond national frontiers, thus enabling firms to produce and reap the benefits of largescale production. Firms seek to be more efficient in their production process in order to compete favourably with their foreign counterparts. Economic liberalization promotes the establishment of export-oriented industries to enhance the foreign exchange earning capacity of the economy and the inflow of raw materials and capital goods (including technological innovations) needed in production. Hence economic openness could lead to enhancement in technology acquisition. Grossman and Helpman (1991) argued that openness to trade can influence technological change, thereby making production more efficient and in the process enhancing productivity improvementsAdenikinju and Chete (2002) aver that opening up an economy offers immense opportunities to overcome limitations imposed by the shallow domestic markets (particularly in developing economies) which could enhance the inflow of foreign exchange required to finance essential production imports. Economic liberalization promotes the flow of factors of production, like capital (human and physical), technology andfinance across national boundaries and thus enhances the scope of economic activity in the importing country. Some academics argue however that major benefits from liberalization may not derive from enhanced capital inflow into the domestic economy but from the attendant operational efficiency arising from reduction of domestic distortions and lock-in reforms (Gourinchas& Jeanne, 2002).The recent move towards more open trade policies in developing countries, after decades of production, has sparked off lively debates. The proponents of trade liberalization argue that an open market policy will result to a permanent direct minimum increase in gross domestic product [GDP] in addition to the indirect benefits that accrue in the form of a reduced regressive tax burden and positive dynamic externalities (Odusola and Akilo 1995). Much of the controversy relates to the macro analysis of trade-growth linkages. There are many arguments explaining why more open trade regimes lead to productivity improvements in the industrial sector. Perhaps the most basic is that returns to entrepreneurial effort increases as exposure to foreign competition rises (Martin and Page 1983, and Tybout 1992). A second argument is that increasing returns to scale imply lower costs per unit as output increases (Pack 1988 and Tybout 1992). The conventional views that trade liberalization is necessary and has positive effects for development and of the growth performance of the industrial sector constitute an increasing controversial issue. According to Adenikinju and Olofin (2002), trade policy might affect industrial growth through several channels. First, a less protectionist trade regime increases scale efficiency by enlarging the domestic market which otherwise might be too small for the efficient production of goods that show increasing returns to scale. Second, a more liberal trade regime leads to increased competition from abroad forcing domestic firms to adopt more efficient technology to reduce inefficiency and waste. Thirdly, it is argued that a freer economy eases foreign exchange constraints faced by most developing countries and hence enables a country to import needed raw materials and capital goods. Finally, a more open economy results in a faster rate of technological progress. In particular, Grossman and Helpman (1991) argue that technological change can be influenced by a country’s openness to trade. Openness to trade provides access to imported inputs, which embody new technology and increases the size of the market facing producers which in turn raises returns to innovation and affects a country’s specialization in research intensive production. Thus, a country’s openness leads to improvements in domestic technology, helps the production process become more efficient and culminates in productivity improvements. Technological change has been the focus of the endogenous growth literature (Lucas 1988). Their works show how trade liberalization may raise growth rates in the long run by generating economics of scale, operating through research and development and knowledge spillover, human capital accumulation and learning by doing. Cline (1979) enumerates the classical benefits of a move towards free trade as including savings to consumers through lower prices that is an increased “consumer surplus” and the liberalization of domestic resources that were formally used inefficiently for use in more productive activities. In addition, to the static welfare benefits of free trade, Cline acknowledges the importance of economics of scale as export section increase its output, benefits accrue from a stimulus to investment as new export opportunities arises. There are additional benefits from increased domestic efficiency and technical changes provided by the new competition from abroad. Following the same line of reasoning, Haberller (1988) identified four key points in discussing the beneficial effect of international trade on participating developing countries. First, trade provides material means (capital goods, raw and semi-finished materials) indispensable for economic development. Secondly, and even more important, trade is the means and vehicle for the dissemination of technological knowledge, the transmission of ideas for the importation of know-how skills, managerial talents and entrepreneurship. Thirdly, trade is a vehicle for international movement of capital especially from the developed countries. Fourthly, free international trade is the best anti-monopoly policy and the best guarantee for the maintenance of a healthy degree of free competition. According to IMF (2010), greater openness may accelerate technological innovations in industrial countries leading to more investment in product development. Trade liberalization has led to a massive expansion in the growth of world trade relative to world output, while the world output or GDP has expanded five-fold; the volume of world trade has grown sixteen times at an average compound rate of just over seven percent per annum (Soludo and Oji 2003). In some individual countries, notably in South-East Asia, the growth of exports has exceeded ten percent per annum (Oyejide 2003). Exports have tended to grow faster in countries with more liberal trade regimes, and these countries have experienced the fastest growth of GDP. The proponents of a free trade policiy regime predict gains in manufacturing productivity from outward looking trade policies. Outwardtrade orientation brings about familiarity with new technologies, induces greater capacity utilization as well as scale benefit via production for export markets and brings about international competition. These in turn are expected to result in productivity improvements in the industrial sector. Okamoto (1994) however found no clear evidence regarding the impact of trade liberalization as measured by effective rates of protection on TFP growth. The role of foreign direct investment policies was found to be significant. Kajiwara (1994) observes that for Philippines, even though the TFP growth rates in the manufacturing sector during the 1970s and 80s were negative there were improvements brought about by trade liberalization. Kim (2000) examines dynamic impact of trade liberalization on productivity, competition and scale efficiency and found that despite the positive impact, the productivity increase was not significant because the extent of trade liberalization was not substantial enough in Korea.

1.2 STATEMENT OF THE PROBLEM

Trade liberalization, for instance, opens up new markets, beyond national frontiers, thus enabling firms to produce and reap the benefits of largescale production. Firms seek to be more efficient in their production process in order to compete favourably with their foreign counterparts. Economic liberalization promotes the establishment of export-oriented industries to enhance the foreign exchange earning capacity of the economy and the inflow of raw materials and capital goods (including technological innovations) needed in production.it is in view of this that the researcher intends to investigate impact of trade liberalization on Nigeria economic growth

1.3 RESEARCH QUESTIONS

Given the aforementioned problem prevalent in external borrowing, hence this research work on trade liberalization and Nigeria economic growth tries to answer the following specific research questions:

To what extent does trade liberalization on economic growth of Nigeria?

Is there any observed long-run relationship between trade liberalization on Nigeria economic growth?

1.4 OBJECTIVES OF THE STUDY

The main objective of the study is to investigate the relationship between trade liberalization on Nigeria economic growth. The specific objectives of study are to:

(i) Empirically investigate the impact of  trade liberalization on Nigeria economic growth.

(ii) Examine the long-run relationship between trade liberalization and Nigeria’s economic growth.

1.5 STATEMENT OF HYPOTHESIS

In order to have a framework for the study and also to answer the research questions above, the following hypotheses were formulated:

H0: Trade liberalization has no significant impact on Nigeria’s economic growth.

H1:Trade liberalization has no significant impact on Nigeria’s economic growth.

H0: There is no long-run relationship between trade liberalization and economic growth of Nigeria.

H2:There is a long-run relationship between trade liberalization and economic growth of Nigeria

1.6 SIGNIFICANCE OF THE STUDY

This study will be significant to the following stakeholders:

Researchers: It is expected that this study would contribute to the advancement of the existing literature on trade and economic growth especially in the Nigerian case. Thus, forming a veritable source of reference for researchers.

Government: It is also expected that the empirical results and recommendations of this work would be useful to policy makers as it would help in adopting suitable trade policies that will promote trade in Nigeria.

Investors: Investors will benefit immensely from this research work as it will expose them to the benefits and harmful effects of trade liberalization and help them know how to invest their funds wisely.

Still on, impact of trade liberalization on Nigeria economic growth 1981-2015. General public: The general public would find this study very useful because it will serve as a spring board for continuation of research as well as for detailed information as regards trade activities in Nigeria.

And finally, the research will serve as a reference guide to other researchers who will find the research helpful in conducting further research on the topics.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study seeks to analyze  trade liberalization on Nigeria economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 34 years i.e. 1981-2015. This period was chosen to cover the period after the oil collapse and also the post debt-relief era. This study is limited by the following factors;

Paucity of Materials: Materials for the study were not adequate and consistent thereby resulting to extra effort by the researcher to validate the data.

Inaccessibility of Data: Difficulty in accessing data for the study was yet another limitation. This had its own toll on the research work because it limited the data that was used for the study.

Financial Constraint: Lack of adequate funds on the part of the researcher constituted another problem. However, amidst all these enumerated constraint faced by the researcher, effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advance econometric test to fish out any possible spuriousity of result among others.

1.8OPERATIONAL DEFINITION OF TERMS

Trade

Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money.

Economic growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time

Trade liberalization

Trade liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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Project Details

Department Economics
Project ID ECO0086
Price N3000 ($14)
CHAPTERS 5 Chapters
No of Pages 76 Pages
Methodology Simple Percentage
Reference YES
Format Microsoft Word