Impact of International Trade on the Economic Growth of Nigeria 1980-2012
Chapter One
Objectives of the Study
The objective of this study is
- To analyze the relationship between trade and economic growth and development in
- To estimate the validity of international trade-led growth hypothesis in
- To examine if there is a long-run relationship between trade and economic growth.
CHAPTER TWO
LITERATURE REVIEW
Theories of international trade and Economic Growth
We review two important theories in the study of internation trade-growth relationship. They are the neo-classical theory in the Solow’s tradition and the endogenous growth theory. However, the endogenous growth theory was adopted in analyzing the relationship between trade and growth in Nigeria.
Neo-Classical Growth Theory in the Solow’s Tradition
The neoclassical growth theory in the Solow-tradition is based on the following production function
WhereY is output, K is physical capital, A is an index of overall productivity, and L is the labourforce. The theory assumes a constant return to scale and decreasing returns to capital. With these assumptions, income growth can come from the increased efficiency of productive inputs, i.e. an increase in A, or the augmentation of such inputs, i.e. an increase in K and/or L. Positive growth rates can be sustained if and only if the decreasing returns to the accumulation of capital are offset by population growth, or if the marginal productivity of capital is constantly shifted upwards by technical progress.
In balanced growth equilibrium – i.e. given a constant savings rate – there will be no depreciation of the capital stock and, assuming as constant, output and capital will grow at the rate of population growth. Differences in the time path of the scale factor explain countries’ different growth experiences. This exogenous source of growth has been interpreted as technical progress. Policy has little scope in affecting long-run growth in this setting. Investment and savings behavior impacts on the level of per capita income, but has no effect on the long-run growth rate. Policies can raise the long-term growth rate by speeding up technical innovation or knowledge accumulation, but the theory itself suggests no mechanisms whereby this could be achieved. There is neither invention costs, that is, costs associated with the development of new technologies – nor adoption costs that is, costs associated with making use of new technologies.
Arrow (1962) was among the first economists who relaxed the assumption of decreasing returns to capital by incorporating the concept of learning-by- doing. He argues that the level of knowledge is itself a productive factor and that new technology is discovered as investment takes place. However, knowledge gains are exogenous because a producer can increase his efficiency only through an increase in the cumulative aggregate output of capital goods, whereby the quality of each new capital good is superior to that of previous ones. A knowledge gain is assumed to be a public good, with the result that the benefits of a firm’s investment spill over to the rest of the economy. This means that the production function of the economy as a whole displays increasing returns, while the production function of each individual firm demonstrates constant returns to scale. However, despite the introduction of knowledge as a production factor, Arrow’s conclusion about the ultimate determinant of economic growth does not diverge from that of the Solow model: given the assumption of an exogenous and fixed labour quality, the marginal product of capital diminishes with a fixed supply of labour; as a result, the rate of growth of per capita output is a monotonically increasing function of the growth rate of population. Like conventional models with diminishing returns, it predicts that the rate of growth is zero in an economy with zero population growth. Like in the Solow-model, there are no invention costs (since the supply of technologies expands jointlywith that of capital goods) or adoption costs (meaning that all countries apply state-of-the-art technology).
Endogenous Growth Theory
The theory holds that investment in human capital; innovations and knowledge are significant contributors to economic growth. It focuses on positive externalities and spillover effects of knowledge based economy which will lead to development of economies and also holds that policy measures can have an impact on the long-run growth rate of an economy. For example, subsidies on research and develop mentor education increase the growth rate in some endogenous growth models by increasing the incentive to innovation.
CHAPTER THREE
RESEARCH METHODOLOGY
Theoretical Foundation/Model Specification
Following the literature review, this research is anchored on the endogenous growth theory. This theory maintained that economic growth is primarily the result of endogenous and not exogenous factors. In other words, the endogenous growth theory, opines that investment in human capital, innovation and knowledge are significant contributors to economic growth and development. The theory also focuses on positive externalities and spillover effect of knowledge based economy which will lead to the development of economies.
Recent endogenous theories suggest that policy measures can have an impact on the long-run growth rate of an economy. For example, subsidies on research and development or education increase the growth rate in some endogenous growth model by increasing the incentive to innovation. The main implication of this theory therefore is that trade policies which embrace openness, competition, change and innovation will promote economic growth. Conversely, policies which have the effect of restricting or slowing change by protecting or favouring particular industries or firms are likely, over time, to cause unsustainable economic growth.
Adopting the endogenous growth theory, Fosu and Magnus (2006), investigated the relationship between trade and economic growth in Ghana. The variables incorporated in their model include the gross domestic product (GDP), openness(OPEN), exchange rate(EXC) and human capital development (HCD). This present study adopted the Fosu and Magnus (2006) variable mentioned above and went further to use GDP per capita instead of the GDP, as the dependent variable, as well as incorporate two more variables. These variables include foreign direct investment (FDI) and inflation (INF). The reason behind the incorporation of these two variables is that the former (FDI), serve as a major source of capital and also enhance knowledge innovations and technological transfer, which the endogenous theory, considered to be a major determinant of economic growth, while the later, serve as a measure of the overall economic stability of the country.
CHAPTER FOUR
ANALYSIS OF DATA, PRESENTATION OF RESULTS AND DISCUSSION
Analysisof Data
This section deals with the presentation of the data used in this study. The E- view auto estimation was used to estimate the data, which yield the results below
CHAPTER FIVE
SUMMARY OF FINDINGS, POLICY RECOMMENDATION AND CONCLUSION
Summary of Findings
The study focuses on determining the relationship between trade and economic growth in Nigeria from 1980 to 2008. Applying endogenous growth theory, the ordinary least square technique was used to test the effect of internation trade, human capital, exchange rate, inflation and foreign direct investment son economic growth. Prior to the regression analysis, we tested for the stationarity of the variables using Augmented Dickey-fuller test. The variables proved to be integrated of order 1(1) at first difference. Johansen co integration test was used to determine the presence or otherwise of a co integrating vector in the variables. The likekihood ratio indicated two co integration at 5% level of significance pointing to the fact that the variables have a long-run relationship.
Furthermore, the ordinary least square was used to evaluate the short run adjustment behaviors of the variables and the result reveal that trade, foreign direct investment and exchange rate have a positive relationship and insignificant relationship with economic growth This justifies the unsatisfactory effect of internation trade openness and Foreign direct investment in achieving a sustainable economic growth and development in Nigeria. Inflation was found to be positive and significant while human capital has negative and significant relationship with economic growth. The negative relationship between human capital and economic growth further highlight the shortage of skilled labour, and the need to invest in education, research and development sector of the economy. Finally, the Granger causality test was employed to determine if trade-growth hypothesis, exist in Nigeria, and the result was negative, signifying thattrade is not causing economic growth, proxied by gross domestic product per capita
Policy Recommendations
In the light of the foregoing, we therefore recommend the following key policy actions.
There is a need to adopt deeper and significant policy and practical measures to improve the contribution of internation trade and make it more significant to the well being of people. These include demonopolizing trade; streamlining the import process; reducing red tape and implementing transparent customs procedures; avoid extreme variation in tariff rates and high rates of protection; allow exporters duty-free access to imported inputs; and do not tax exports too highly. Also, if the economy is to escape the vicious cycle of primary commodity exports and cyclical export price collapses, there is a need to diversify her export, through building new comparative advantagesin non-traditional exports, especially in labor intensive manufactures. This will not only improve export, but will aid in solving the unemployment, which will in turn, improve the living standard.
The discovery that human capital is negatively related to the living standard is worrisome. To this end, government should as a matter of priority implement the minimum United Nations recommendation of 26 percent budgetary allocation to education as well as investing and subsidizing the cost of research and development activities. In addition to this, government and the private sector must join hands by mobilizing resources to furnish primary, secondary and tertiary educational institutions and equip them with adequate facilities, libraries, laboratory equipments, computers and modern instructional materials in order to improve the quality of education and enhance the contribution of human capital development to sustainable growth and development.
To make the contribution of foreign direct investment significant, government must improve the poor infrastructure, unstable power supply, fiscal and monetary instability, obtainable in the country. In a Business Environment Report 2011, the Lagos Chamber of Commerce and Industry (LCCI) firms reported that the most critical problem faced by foreign investors in 2011 was the unbearable energy cost which was a consequence of the appalling state of the power sector. Others are difficulties in accessing credit and security issues. On top of the security issues is the Boko Haram uprising, which the World Investment Report (WIR) of the United Nations Conference on Trade and Development (UNCTAD) estimated that Nigeria lost the sum of N1.33 trillion Foreigsn Direct Investment (FDI). These issues must be critically addressed if the effect of foreign direct investment on the living standard must be positive and significant.
Policy makers should ensure that trade policies must not be the type that supports only economic growth and export promotion; rather, it should be able to positively affect the range of choices available to people in a country at a particular point in time. This will not only reduce poverty, but brighten the chance of gainful trade engagement.
Conclusion
There is an urgent need to restructure and intensify the rate of international exposure in the Nigerian economy, as this will truly serve as a forward step towards achieving a desirable growth level and improved livingstandard in Nigeria. More importantly, the sincerity of purpose and commitment of economic and political players will be very essential to achieve this noble goal.
References
- Adewuyi, A.O. (2002). Balance of Payment Constraints and Growth rate Difference underalternative policy regime. Nigeria institute of social and economic research (NISER)monograph series no 10 Ibadan, Nigeria
- Adedipe, B. (2004), The Impact of Oil on Nigeria’s Policy formulation. Paper presented at a conference on Nigeria: Maximizing Pro-poor growth, organized by overseas Development Institute in conjunction with Nigeria Economic Summit Group, June 16th – 17th.
- Adegbite, E.O. (2007). External Sector Reforms and Macroeconomic Performance in Nigeria, Lagos.Journal of Banking, Finance and Economic Issues.
- Akbar, M. andNaqvi, Z.F. (2003). Are Exports an Engine of Growth in Pakistan? International Conference on Policy Modeling (EcoMod2003), Istanbul, July 3-5.
- Akinlo, A.E. (2004). “Foreign direct investment and growth in Nigeria: An empiricalinvestigation”.Journal of Policy Modelling, 26: 627–39.
- Arrow, Kenneth (1962). “The economic implications of learning by doing”, Review of Economic Studies, Vol.29, pp. 155-173.
