Impact of External Trade on Nigeria’s Economic Growth (1980-2013)

Impact of External Trade on Nigeria’s Economic Growth (1980-2013)

CHAPTER ONE

Objective of the Study

The main objective of this study is to evaluate the performance of foreign trade and its contribution to economic growth in Nigeria. Specifically the research work will focus on the following objectives:

1. To ascertain the impact of export trade on the Nigerian economy
2. To determine the impact of import trade on the Nigerian economy
3. To assess the effect of exchange rate on economic growth in Nigeria.
4. To find out the consequence of foreign direct investment on Nigerian economic growths.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

CONCEPTUAL FRAMEWORK

Overview of the Nigerian Economy

Nigeria is a middle income, mixed economy and emerging market, with expanding financial, service, communications, and entertainment sectors. It is ranked 30th (40th in 2005, 52nd in 2000), in the world in terms of GDP (PPP) as of 2013, and the largest within Africa, on track to becoming one of the 20 largest economies in the world by 2020. Its re-emergent, though currently underperforming, manufacturing sector is the third-largest on the continent, and produces a large proportion of goods and services for the West African region (Wikipedia 2013).

Previously hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost trebled from $170 billion in 2000 to $451 billion in 2013, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion. Correspondingly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2013 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person). (Population increased from 120 million in 2000 to 160 million in 2010). These figures might be revised upwards by as much as 40% when the country completes the rebasing of its economy later in 2013(Wikipedia 2013).

Although much has been made of its status as a major exporter of oil, Nigeria produces only about 2.7% of the world’s supply (Saudi Arabia: 12.9%, Russia: 12.7%, USA:8.6%). To put oil revenues in perspective: at an estimated export rate of 1.9 Mbbl/d (300,000 m³/d), with a projected sales price of $65 per barrel in 2011, Nigeria’s anticipated revenue from petroleum is about $52.2 billion (2013 GDP: $451 billion). This accounts about 11% of official GDP figures (and drops to 8% when the informal economy is included in these calculations). Therefore, though the petroleum sector is important, it remains in fact a small part of the country’s overall vibrant and diversified economy (Wikipedia 2013).The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products, though there is a resurgence in manufacturing and exporting of food products. In 2006, Nigeria successfully convinced the Paris Club to let it buy back the bulk of its debts owed to the Paris Club for a cash payment of roughly $12 billion (USD) (Wikipedia 2013).

Nigeria’s economy is struggling to leverage the country’s vast wealth in fossil fuels in order to displace the poverty that affects about 45% of its population. Economists refer to the coexistence of vast wealth in natural resources and extreme personal poverty in developing countries like Nigeria as the “resource curse”. Although “resource curse” is more widely understood to mean an abundance of natural resources, which fuels official corruption resulting in a violent competition for the resource by the citizens of the nation. Nigeria’s exports of oil and natural gas-at a time of peak prices-have enabled the country to post merchandise trade and current account surpluses in recent years. Reportedly, 80% of Nigeria’s energy revenues flow to the government, 16% covers operational costs, and the remaining 4% go to investors. However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population (Wikipedia 2013).

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Chapter Three

RESEARCH Methodology

Introduction

Research has been variously defined in the literature as a systematic effort at gathering and analyzing data, which will aid man in understanding the world in which he lives and solve some of the problems around it (Onodugo, 2004). In the course of conducting a study on external trade and growth of the Nigerian economy, it is important to look at how foreign trade and its attendant factors have contributed to economic growth in Nigeria. Romer, (1990) and Sachs and Warner (1997) through studies on various African countries, agreed that trade restrictions impact negatively on growth. In fact, they found that lack of openness was the most significant contributor to the dismal economic growth performance in sub – Saharan Africa. Wah (2004) who also noted that the ultimate source of global poverty reduction is sustained economic growth. The study therefore set up an econometric model to test the relationship between external trade and economic growth (GDP shall be used to measure economic growth).

Research Design

According to Onwumere (2005), a research design is a kind of blueprint that guides the researcher in his or her investigation and analyses. The research design adopted in this study is the ex post facto; this is because this research relies on historical data.

However, in consonance with previous similar study on external trade and growth of the Nigerian economy, the study will employ multiple linear regression estimation to test the hypothesis postulated in the study.  Real GDP is acknowledge as dependent variable which  proxies for economic growth, while FDI, exchange rate, export, import and economic openness are the independent/explanatory variables.

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

Introduction

This section is the analysis of the panel data and the analysis was done using  the  panel  data  shown  in Table  1,  which  contains  data  on Export, Import, Foreign Direct Investment, Real Gross Domestic Product and  Real Exchange Rate. Hypothesis in chapter one will be tested here, using the techniques of analysis described in chapter three which is ordinary least square regression analysis.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

Summary of Findings

The study set out to investigate the impact of trade on the economic growth of Nigeria. Earlier contributions by scholars and various schools of thought showed supportive and contrary views that trade have positive impact on economic growth. Thus, in order to authenticate the earlier stand that trade favourably impacts on growth in the Nigerian economy; Export, import values, Foreign Direct Investment and real exchange rate  were  used  as  the  explanatory  variables  or  regressors while GDP growth rate was used as the dependent variable in an ordinary least squares regression process.

From the analysis in this work, GDP could be regarded as a term used to describe economic growth, which is one of the macroeconomic objectives. The following summary is made in respect to the findings discovered in the previous chapters.

From the above it is seen that:

1. There is a significant impact of Export trade on the Nigerian economic growth
2. There is no significant impact of Import trade on the Nigerian economic growth
3. Foreign direct investment has an impact on the Nigerian economic growth
4. Exchange rates have a positive impact on the Nigerian economic growth

The study has also thrown some light on the fact that the dependent variable are interrelated and that decisions in one variable will affect the other variable. The study had depicted the patter of non-oil export and import values Foreign Direct Investment and real exchange rate in Nigeria right from 1980 – 2013. The study also made some effort in examining the problems of foreign trade over the years. The project also provides some theories on external trade on economic growth. Since foreign trade favours countries that participate in it, this study also made mention of benefits that accrue to this participant. Despite the numerous benefits that accrue to nations as a result of trade, some countries go to the extent of restricting some irrelevant items; this also examined in this project. It could also be observed that Nigeria engages in external trade negotiation so as to stimulate the economy through foreign trade.

From this study, it could be observed that the Nigeria economy employed different strategy in stimulating its economy through foreign trade. This  strategies  span  across  different  stages  of  the  economic  lifecycle  with  different outcome.

  Conclusion

This  study  has  examined  the  performance  of  foreign  trade  in  relations  to  economic  growth.  It is therefore concluded that, conscious efforts should be made by government to fine -tune the various macroeconomic variables in order to provide an enabling environment to stimulate foreign trade.

Recommendation

Based on the findings of this research work, it is necessary that conscious efforts should be made by government to fine-tune the various macroeconomic variables in order to provide an enabling environment to stimulate foreign trade by engaging in more of export trade and in effect curtail on import trade which has a negative effect or strain the economy. First of all, there should be optimal control of trade through the borders of the economy. The underground economic activities of bunkering, smuggling, child and drug trafficking, and other related illegal activities should be properly checked. This will help the economy to fully account for every trade/transaction through the border and determine its impact on the output growth of the economy. In order to achieve this, governments trade policy must be liberal. Export promotion strategy should  be  review  and  import  substitution  strategy  should  also  be  review  so  that  import  and export will change its dimension. Also Nigeria government should strengthen the competiveness of exports by combing the imports of high technology and domestic independent research. The technological knowhow  could  be  imported  by  direct  buying  or  indirectly  through  foreign  direct  investment. However, the domestic absorptive ability in Nigeria is very weak.  Therefore,  Nigeria’s government  should try  to  import  appropriate  technology  which  can  easily  be  absorbed  and acquired  by  domestic  firms  with  their  corresponding  capability.  It  is  equally  important  to develop  strong  domestic  sector  of  competitive  firms  that  can  assimilate  and  disseminate imported technologies and to improve their own innovative capacities.

The government should encourage export diversification.  Non-oil sector exports should be encouraged and concentration on oil sector export should be minimized. Expenditure on projects and infrastructures that would facilitate trade and economic growth should be encouraged, and the monetary authority should give priority to exchange rate stability.

Nigerian should reframe from excessive consumption of foreign goods and services so that their imports might be cut-off.

Manufacturing industries should improve on their production so that their output would be competitive in the global market. Excise duties should be lowered so as to encourage local industries to export their goods and services. Lifting of trade barriers on local output should not be followed by the introduction of new ones.  Only the importation of capital goods that are essential should be encourages, since not all importation are necessary for economic growth.

The following recommendations are also made.

1. For now, devaluation of the naira should be deemphasized. Much as the low exchange value of the naira would promote export and discourage import, it should be noted that  not  until  the  nation’s  exports  become  those industrial goods and services whose foreign demand and domestic  supply  are  elastic,  the  nation’s  economy  stand little  chance  of  gaining  from  an  unguided  exchange  rate deregulation  policy.  This  remains  true  so  long  as  the economy  depends  on  primary  products  whose  foreign demand and domestic supply are inelastic.
2. The service industry should be explored as well. This gives a clarion call for educational development to boost the nation’s technological base.
3. Serious  surveillance  and  supervisory  efforts  should  be stepped up to curb dumping activities  of some  foreigners and  unpatriotic  Nigerians  who  assist  them.  The  role  of NAFDAC  and  other  law  enforcement  agencies  in  this battle is commendable and should be sustained.

Finally,  Nigeria government  should  focus  on  the  catch  up  strategy  by  establishing  a national  innovation  system  which  includes  proper  education,  finance  and  industrial  policy, which  could  promote  openness  and  enhancing  domestic  absorptive  capability,  thereby increasing productivity of the economy.

Contributions to Knowledge

This study has brought to the fore the impact of external trade on growth of Nigerian economy. The following is a summary of the contributions the study has added to existing body of knowledge on the topic.

1. The study establishes empirically, that external trade impact significantly on the growth of Nigerian economy. By  implication  issues  on  external trade  should  not  be  ignored  in  policy  decisions  aimed  at  promoting  the economic development of Nigerian.
2. The study also contributed in terms of geography because of the findings being based on Nigeria which differs from climes where substantiated studies had been carried out.
3. The study establishes empirically, that foreign direct investments have non-significant on the growth of Nigerian economic growth, which indicates that there has been insufficient inflow of investment over the years. This calls for attention and direction of government policy that will encourage and increase foreign direct investment into Nigeria.

Areas for Future Studies

Following the areas this study has covered, the areas listed below are recommended for future studies by interested researchers of capital flows and investment in Nigeria.

1. The impact of external trade on the standard of living in Nigeria.
2. An empirical analysis of Trade in West African sub-regions and the impacts on their economic developments.
3. External trade policy development in Nigeria and the impact on foreign direct investment.

Bibliography

• Abayomi, O. (1997). “The agricultural sector in Nigeria: The way forward.” CBN Bullion, 21: pp 14-25. Retrieved from www.cenbank.org
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• Abimboye, D. (2009, August 3). A Revolution Abandoned. News watch, . 8-9
• Dushko, J., Darko L.(2013). External trade and Economic growth: cross-country evidence.GRP International Journal of Business and Economics, 87. Retrieved from http://ssrn.com/abstract=2098972
• Dutse, A. Y. (2008), “Nigeria’s Economic Growth: Emphasizing the Role of Foreign Direct Investment in Transfer of Technology”, Communications of the IBIMA 3. Vol. 17, pp. 113-124
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