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HBy:
ADAMU IBRAHIM LAMUWA
Submitted in
partial fulfilment
of the requirements for the awardof Master of Arts Degreein Economic
Policy and
Management atthe AfricanInstitute for economicDevelopment
andPlanning (IDEP)
Supervisor: Dr. Dipo BUSARI
April
2009IDEP/THESIS/LAM
UNITED NATIONS
AFRICAN INSTITUTE
FOR ECONOMIC DEVELOPMENT AND PLANNING IDEP
ADAMU Ibrahim Lamuwa
Identification N° 080707
has successfully defended the M.A. thesis entitled
THE
IMPACT OF
EXTERNAL TRADEON
GROWTHOF
THENIGERIAN ECONOMY
Approved by the Thesis Committee
Medou DIAKHATE
External examiner
Mbaye DIENE
Member
Dipo BUSARI
Supervisor
Aloysius A. AMIN
Chairman / Dir Chief,Training
DEDICATION
This Research work is dedicated tomywife (Izzatu)
andourchildren(Maryam, Ashraf and Fatimah-Zara).
ii
ACKNOWLEDGEMENT
All praises are due to Allah (SWT) the most gracious, most merciful and master of the Day of Judgement who granted me the power and wisdom to commence and complete
this Thesis work successfully. The Thesis research work is the second part of activities
after the Class workwhich culminates into the award ofIDEP's M. A. Economic Policy
andManagement Degree. I have found itto be extremely challenging and rewardingas it
has been designed to test trainees' ability to undertake independent research. However,
this inno way amounts to atrainee "going it solo". Thus, in the process ofmy research,
many people have contributed in different ways, towards the realization of this work.
Accordingly, I have the honour to acknowledge these contributions as follows: First, I
would like to thank the authorities of the Ministry of Foreign Affairs of the Federal Republic of Nigeria for giving me the opportunityto undertake this M. A. Programme. I
also wish to thank the entire staff of UN-IDEP, particularly the Ag. Director/Head, Training Division and theM. A. Programme Co-ordinator for their guidance and support throughout the duration of this programme.
I am deeply indebted to my Thesis Supervisor, Dr. Dipo Busari for his encouragement and guidance throughout the stages leading to the completion of this research work. I
have benefited tremendously from his wealth of knowledge andmastery of theNigerian
economy. I appreciate the warmth with which he accommodated me and the access
granted me all the times. Above all, I thank him for his valued comments which went a
longway in givingmyThesis its final shape. Iam equally gratefulto the Panel of Juryon my Thesis Defence for their constructive advice and critic which sustained my determination and commitment in defending this research work. I also thank the entire
staff ofthe Nigerian Embassy, Dakar and all my colleagues in the 2007/2009 Batch for
the wonderful esprit de corps we shared together. I am also grateful to Dr. Abdullahi
Shehu (Director General, GIABA) and Mr. Usman Modibbo and their entire family
members for theirfriendship and supportthroughout mystayin Dakar.
For the variousways they encouraged and supported meduring my studies, I would like
to thank the following personalities from the Ministry of Foreign Affairs of the Federal Republic of Nigeria namely; Ambassador S. M. Pisagih, Messrs Ahmed Umar, Hassan Tukur,D. G. Bala, N.A. Kolo, Aminu Abdulkadir,Kabiru Bala, B. B. Hamman, and Mrs
Ifeoma Akabogu-Chinwuba. I thank my younger brother Abubakar Lamuwa for his unflinching support, reliability and confidence in looking after our home affairs while I
was away. I also thank Mr. Kamal Umar Arab and Mrs. Ladi Bala Keffi of the Central
Bank ofNigeria for their kindassistance in providingme with CBN documents.
Finally, letme give a veryspecial thanks to mywife (Izzatu) for herunreserved support and taking good care ofour children (Maryam, Ashraf and Fatimah-Zara) while I was away. I thank you very much for bearing my absence. Regardless of the supervision I
received in writing this Thesis, I, and I alone, take full responsibility for any errors, omissions orothershortcomings itmaycontain.
iii
ABSTRACT
This study examines the impact of external trade on growth of the Nigerian economy from 1970 to 2006 using the Ordinary Least Square (OLS) Approach; employing the
Johansen and Juselius (1990) multivariate co-integration framework. The study identified
the existence ofco-integrating vectors and used the Error Correction Model (ECM) to determine the short and long run dynamics of the model. The study confirmed the long
run relationship between external trade and growth in the Nigerian economy by discoveringthat growth in the economy has been influenced by the exogenous variables specified in the model and other essential but non-economic factors that arenot captured
in the model, due to data problem. These include among others; institutions, good
governance and stable political environment. The study also performed a Granger Causality test in order to determine the causal linkage between external trade and
economic growth. The results obtained confirmed the existing long run relationship
between external trade and economic growth as well as their causal linkage. This is in conformity with other previous studies conducted on the subject by scholars such as;
Njikam (2003), Soludo et al. (2003) and Keong et al. (2002). In conclusion, the study
recommends that the Nigerian government should intensify efforts towards
diversification of its export products to knowledge based products, maintain a stable exchangerate andpromote export processingzones and free trade areas in the countryin
ordertoenhance its exportscapacity andpromotegrowth of the economy.
iv
RESUME
Cette étude examine l'impact du commerce extérieur sur la croissance de l'économie
nigérianede 1970 à2006 en utilisantl'approche des moindres carrés ordinaires (MCO)et
en employant le cadre de cointégration à variables multiples de Johansen et Juselius (1990). L'étude a identifié l'existence des vecteurs cointégrants et a utilisé le Modèle à Correction d'Erreur (MCE) pour déterminer les dynamiques à court et à long terme du
modèle. L'étude a confirmé la relation à long terme entre le commerce extérieur et la croissance dans l'économie nigérianeen découvrant que la croissance dans l'économie a
été influencéepar les variables exogènes spécifiées dans le modèle ainsi que pard'autres
facteurs essentiels mais non économiques qui ne sont pas captés dans le modèle à cause de problèmes des données. Ces facteurs comprennent entre autres, les institutions, la
bonne gouvernance et un environnement politique stable. L'étude a également entrepris
untestde causalité deGrangerpourdéterminer le lien causalentre le commerce extérieur
et la croissance économique. Les résultats obtenus ont confirmé la relation existante à longterme entrelecommerce extérieuretla croissanceéconomique ainsi que leurliaison
causale. Cela est en conformité avec d'autres études précédentes menées sur le sujetpar
Njikam (2003), Soludo et al. (2003) et Keong et al. (2002). En conclusion, l'étude
recommande que le gouvernement nigérian doit intensifier des efforts vers la diversification de ses produits d'exportation dans le but d'étendre ces produits aux produits basés surla connaissance, maintenir untaux d'échange stableet promouvoirles
zones de traitement desproduits d'exportation etles zones de libre échange dans le pays pouraméliorersacapacité d'exportationetainsi promouvoir la croissance de l'économie.
Hi. jáÍÍ3iÍm?liI
EXECUTIVE SUMMARY
The objective of this study has beento examinethe impact of external tradeongrowth of
the Nigerian economy, using a time series annual data for the period 1970-2006. The choice of the period was based on data availability and reliability as well as the
transformations the Nigerian economywent through during the oil boomperiods and the
SAP era.Data for thestudy is basicallysecondary, obtained from the IMF data base (IFS;
CD-ROM 2007), Central Bank of Nigeria Annual Reports and Statistical Bulletins (2007), and the World Development Indicators (WDI; CD-ROM 2007). Proxies have
been used for certain variables since the data is not in all cases categorized according to the requirements of this study. The study adopts the Ordinary Least Square (OLS) method, employing the Johansen-Juselius (1990) co-integration technique to test for long-term relationship between external trade and growth. This approach was chosen
because it makes estimating and testing for the presence of multiple co-integration relationships in a single step procedure possible. In the past, many researchers have investigated the phenomena without paying attention to disaggregated products and its implication. Johansen - Juselius proved that aVAR is superiorto the Engle and Granger (1987) approach in assessing the co-integrating properties of variables, particularly in a multivariatecontext.
It was realised that the structure and composition of the Nigerian economy and its trade pattern overthe years, indicates that the country exports about 80% of her commodities
to countries in the European Union, North America, China, Brazil, Japan and other
industrialized countries. The bulk of her imports come from the same sources. Most of
theexports to these countries includepetroleum, agricultural products and other minerals,
with the United States being a major importer of Nigeria's crude petroleum. In the oil
boom period, imports were high because the economy had no 'problem' with foreign exchange. What was disturbing thenwas that these imports constitute over 70% of GDP despite the structural adjustment and stabilization Programmes pursued by thecountry at the time.
The direction ofNigeria's trade could also be traced to other West African countries, within the framework of intra-regional trade. The volume of trade with Ghana, Cote d'Ivoire and Senegal has increased substantially in recent years. From 1980 to 1992, Nigeria had a favourable trade balance with ECOWAS, when both her exports and imports increased remarkably. Although it is possible that most cross-border transactions
are not properly recorded, nonetheless, the charter of ECOWAS stipulates that member
countries must enhance trade among themselves. Interestingly, in the ECOWAS
Common External tariff, member nations are gearing to latchonto the UEMOArates of
four brands- 0, 5, 10, and 20%. Consequently, Nigeriawas required to reduce its tariffs
so as to facilitate intra-regional trade. Itis pertinent to note that Nigeria's trade with the
restof the world generally centers around the following products namely; food and live animals, beverages and tobacco, crude materials (inedible), mineral fuels, animal and
vi
vegetable oils, chemicals, manufactured goods, machinery and transport equipment,
miscellaneous manufactured articles, and miscellaneous transactions (unclassified).
It is generally argued that for Nigeria's trade policy reforms to unleash their catalytic potential on the economy, they should be designed as part and parcel of the overall development plan; where their role will be given due cognisance and the necessary
facilitating infrastructure adequately provided. This is more so, as interesting debates
have been evoked in the literature on trade and growth in national development. It has
been argued that countries with greater liberalization or openness and outward trade policies consistently outperform those with restrictive trade and foreign investment regimes. Increased external trade in the Nigerian economybrought about mixed results especially as it causes increase in output in some sectors and decrease in others. One
sector which traditionally has relatively high returns is the oil sector as its value added
increases in both the short and long runs. In the long run, investments are reallocated chieflyto this sector as theirvalue added expands orcontract less and this further spurs
growth. The non-oil sectorsall experience decreases in value added in both the short and longruns. External trade affectsNigeria's economic growth mainly through its impacton governmentrevenueand theprices of oil products. External trade furtherspursgrowth of imports as imports ordinarily increase with increases in GDP as a result of the marginal propensity to import. Nigeria's imports increase as GDP increases annually, especially during periods when GDP maintainsapositive trend
The study recognized the fact that, in populous developing economies such as Nigeria,
low incomes often makeproducers' potential local market small; this makes trading with
therest ofthe worldvery essential. More so, as external trade diffuses new technologies
and ideas, increases local workers' and managers' productivity. Technology transfers through trade and investment are even morevaluable for developing economies such as
Nigeria which employ less advanced technologies and typically have less capacity to develop domestic new technologies. Notwithstanding the above arguments though, for
external trade to have positive effects on growth, liberal trade policies will have to be successfully implemented alongside supply side policies. In consonance with potential dynamic gains of trade, most early empirical studies have examined only a set of trade
measures; their correlation with each other and with economic growth. In many of these
studieshowever, aclearpositivelinkwas established. In general, empirical studies suffer
from a number of shortcomings, and as a result they have not resolved the questions surrounding the correlation between trade and growth. At the same time following the
failure of imports substitution strategies adopted by African and Latin American
countries in the 1970s and 1980s, researchers have since turn to the Export-Led Growth (ELG) alternative. In addition, the successes recorded by the Asian economies further
rekindled interests in the study of export-growthnexus and optimal growth strategies for developing countries. Accordingly, researchers have undertaken both theoretical and empirical analysis of varying degrees to examine the relationship between trade and
economicgrowth;towhich this study is justone.
vii
On model specification, the study builds on Keong et al. (2002) model, which explains
economic growth as afunctionof exports, imports, gross capital formation, real exchange rate, labour force,terms of tradeanddegree ofopenness in Malaysia. However, this study
introduced other variables such as; money supply and consumer price index which are consideredtohavesignificant influenceongrowth of the Nigerianeconomy. On the other hand, labour was dropped due to data limitation and the insignificant impact it was
envisaged to have on the model. In the same vein, exports, imports, gross capital
formation and money supply were taken as per centages of GDP, to ensure the sustainability of the model. After establishing the existence ofco-integratingvectors, the study used Error CorrectionModel (ECM)to determine the short and longrun dynamics
of the model. A Granger Causalitytest was also performedonthe modelto determine the
causal linkage between external trade and growth in the Nigerian economy.
Consequently, the study discovered that growth in the Nigerian economy has been
influenced by exports, imports, gross capital formation, money supply (M2), real exchange rate and consumer price index, as well as other essential but non-economic factors that are not captured in the model due to data problem. These include among
others; institutions, good governance and stable political environment. The findings of
the study confirmed the existing long run relationship between external trade and
economic growth and their causal linkage which is found to be in tandem with other previous studies conducted on the subject by Keong et al. (2002), Njikam (2003) and Soludoetal. (2003).
The study recommends that the Nigerian government should intensify efforts towards
diversification of export products to knowledge based products, maintain a stable exchangerate and promoteexportprocessingzones and free trade areasin thecountry to enhance its exports capacity. Proper implementation of the above stated
recommendations will go a long way in helping the Nigerian economy to be more competitive and be able to actively participate in the global market. This is opinedto be
the best option if the government wishes to realize its long term goal of attaining a sustainable economic growth and development. This is more so as available evidence in Nigeria shows that increased external trade following multilateral and regional integration arrangements raises the level of economic activities in various sectors of the
economy; particularly textiles and manufacturing sectors. In conclusion, the study
identifiedpotential areas for further studies onthe subject, which include; examining the impact ofstructure change in external trade on economic growth, the impact ofexport diversification on economic growth or even assessing the Sector-Led Growth for the Nigerianeconomy. Similarly, examining the endogeneity problem between external trade
and economic growth (dual causality between the two variables) which may suggest the
use of simultaneous equation model may also be considered as another area of further study.
TABLE OFCONTENTS
Pages
DEDICATION ii
ABSTRACT iv
RESUME v
EXECUTIVE SUMMARY vi
LISTOFTABLES,FIGURESAND ANNEXES x
CHAPTER ONE INTRODUCTIONANDBACKGROUND 12
1.1 Introduction 12
1.2 Statement of the Problem 14
1.3 Objective of the Study 14
1.4 Justification of theStudy 15
1.5 Significance oftheStudy 15
1.6 Organization of the Study 16
CHAPTER TWO ECONOMIC PERFORMANCE AND TRADE POLICY REFORMSIN
NIGERIA 17
2.1 Macroeconomic Overview 17
2.2 The effects of Fluctuations in oil Prices 22
2.3 Review of TradePolicy Reforms 23
2.4 Nature and Direction of External Trade 26
CHAPTER THREE LITERATUREREVIEW 28
3.1 Review of Theoretical Literature 28
3.2 Review ofEmpirical Literature 30
3.3 Linking Trade PolicytoGrowth: (Trade Openness-Growth Nexus) 34
CHAPTERFOUR METHODOLOGY, RESULTSANDINTERPRETATION 37
4.1 Theoretical Framework for Model Specification 37
4.2 Model Specification and Estimation 38
4.3 Justification of Variables and theirexpected signs 39
4.5 DataSource and Measurement 41
4.6 Results andDiagnostic Tests Discussions 42
4.6.1 Unit Root Test 42
4.6.2 Cointegration Test 43
4.6.3 Short andLong RunDynamics 44
4.6.4 Jarque-Bera Normality Test 46
4.6.5 Cususm and Cusum Sum ofSquaresTest 47
4.6.6 WhiteHeteroskedasticity Test 48
4.6.7 Breusch-Godifey Serial CorrelationTest 49
4.6.8 Ramsey Reset Test 49
4.6.9 Granger Causality Test 50
CHAPTER FIVE POLICYIMPLICATIONSAND RECOMMENDATIONS 51
5.1 Summary of Findings 51
5.2 Policy Implications and Recommendations 51
5.3 Areas of Further Studies 53
5.4 Conclusion 53
REFERENCES 55
ix
LIST OFTABLES, FIGURES AND ANNEXES
A. TABLES
Table2.1: SectoralKey Shares in2007 19
Table2.2: Oil and Non-oil TotalTradeand Balanceof Trade (Millions of Naira) 25 Table2.3: Value ofForeign Trade and Visible Balance (Millions of Naira) 27
Table4.1: UnitRootTest Results 42
Table4.2: CointegrationTestResult 43
Table 4.3: ErrorCorrection Result 44
Table 4.4: WhiteHeteroskedasticityTest 49
Table4.5: Serial CorrelationTest 49
Table 4.6: Ramsey ResetTest 50
Table4.7: Granger Causality Test 50
B. FIGURES
Figure 2.1: GDP Per Capita in 1984 Prices, 1965-2000 17 Figure 2.2: GDP Percentage Growth Rates for 2001-2006 20 Figure 2.3: ContributionsofOiland Non-Oil GDP inAggregate Growth 21
Figure 2.4: Fluctuations in Oil Prices (1996-2006) 23
Figure 4.1: Normality Test Result 47
Figure 4.2: CusumTest 48
Figure 4.3: Cusum Sum of Squares Test 48
C. ANNEXES
ANNEX 1: ListofVariables Used for theAnalysis 61
ANNEX2: Graphical Presentation of Variables 62
x
';íH
WÊÊÊÊÊÊÊÊÊ
CBN:
CET:
ECOWAS:
ELG:
ECM:
EU:
FDE FMF:
FTAs:
GDP:
HS:
1ST LDCs:
MFN:
NICs:
OPEC:
PSF:
SAP:
TFP:
TLS:
UEMOA:
UK:
USA:
WTO:
ZEQ:
ACCRONYMSAND ABBREVIATIONS Central Bank ofNigeria
Common External Tariff
EconomieCommunity of West AfricanStates Export-Led Growth
Error Correction Model
European Union
Foreign DirectInvestment FederalMinistry of Finance
Free TradeAreas Gross Domestic Product Harmonised System
Import-Substitution Industrialization
LeastDeveloped Countries
MostFavoured Nations
Newly Industrialised Countries
Organization of Petroleum Exporting Countries
Petroleum Support Fund
StructuralAdjustment Programme
TotalFactorProductivity
TradeLiberalisation Scheme
Economic andMonetary Union of West Africa
UnitedKingdom
United States of America World TradeOrganization
Zenith EconomicQuarterly
xi
CHAPTER ONE
INTRODUCTION AND BACKGROUND 1.1 Introduction
Inthese times ofglobalization and trade liberalization, notwithstanding thecurrentglobal
economic downturn, no country has grown without trade, as all economies are
increasinglyopen. Consequently, it is crucial to examine whether trade openness indeed promotes growth for a country such as Nigeria that seem to have missed the train of economic development. There is a huge policy debate about what constitute 'good and
bad' policies around the world, especially in developing countries where trade plays a
vital role in shaping economic, social performance and prospects. However, the
contribution of trade to development depends a great deal on the context in which it
works and the objectives it serves. Inrecent decades, anumber ofdeveloping countries,
most notably the East Asian newly industrializing countries, have been able to purposefully use the elemental force of trade to boost growth and development within a
relatively short time span. Regrettably, many other developing countries, especially the
least developed countries (LDCs), have embarked on unilateral trade liberalization in
recent years, with very limited results at best, in terms of increased growth and development.
The Nigerian economy has severally been described as a difficult terrain for business.
With apopulation growth of about 3%, it has been acknowledged that the currentaverage
outputgrowthrateof less than4%willseethe countrybeingpoorerin thenextdecade. A major challenge facing policy makers in the country is subsumed in the questions concerning the place and effectiveness of complementary macroeconomic and trade
measures needed to put the economy on the path of sustainable growth. Howbeit, globalization poses its own unique problems for the country. The question therefore is;
should Nigeria completely open up to international trade? Or should it instead, at least temporarilyprotect some orall of its domestic industries?
12
Since long-term economic growth is generally seen as being dependent on openness to trade, Nigeria is fully committed to opening up its economy. This necessitated by the
need to be integrated into the main stream of world economic activities. However, the
"how" of timing, sequencing of reforms and complementary measures to be adopted
among other issues remainunresolved. It ishoped that integrating theNigerianeconomy into the global economic system, will facilitatethe removal of trade barriers, reduction of tariffs and formulation of outward oriented trade policies in compliance with regional
tradeagreementsinitiatives.
It isperhaps safeto argue thatexport diversification has always been recognizedas akey strategy for economic growth since independence even when trade policy was geared
towards import substitution industrializationinNigeria. It however became more visible
as a trade policy tool under the SAP period, and has since then assumed a growing
dimension in tradepolicy. Nigeria'scurrentexportdrive is underpinned byastrong desire
to make the country a major player in the global market. It also draws on adeep-seated
desire tomoveaway from dependenceonoil as adominantsourceofrevenuegeneration.
Accordingly, there has been a determined effort at diversifying the exportbase from the
traditional oil exportstowards giving impetus to thenon-oil export sector and bolstering
value-added. The current policy framework is part and parcel of the overall trade policy,
whoseobjective isto encourage the production and distribution of goods and services, in
order to satisfy both domestic and international markets, for the purpose of accelerating
economic growth. Within this broad framework are embedded specific objectives which
deal with export-oriented measures, aimed at integrating the Nigerian economy into the global market through the establishment of a liberal market; promote and diversify exports in both traditional and non-traditional markets, and stimulate the transfer, acquisition and adoption of appropriate and sustainable technologies to nurture competitive export-oriented industries.
1.2 Statement of the Problem
At Independence in 1960, agricultural produce was Nigeria's major export trade. The
advent ofpetroleum however, considerablyboosted foreign exchange earnings from the earlypart of the mid-1970s. "Export earnings grew at an estimated annual rate of 67.4%
during the period 1970-1974. The trend and pattern ofexports tended to suggest that the country was moving from a mono-cultural agrarian economy to a more diversified
economy. The illusion in thathope, however, soonbecameapparentwiththe observation
that expansion in exports till date was singularly accounted for by petroleum and hydrocarbon. This situation created the "Dutch disease" of the 1980s in the country. The
formulation and implementation of liberal tradepolicies improved Nigeria's export drive
as there was a significant increase in export ofnon oil products during the Structural Adjustment Programme (SAP) era" Okeke (2006). As an integral element of the SAP,
trade liberalization was espoused on the argument that it enhances the welfare of
consumers and reduces poverty since it offers wider platfonn for choice from among a wide variety of quality goods and cheaper imports. There are two fundamental reasons for this potential of welfare improvement: Firstly, the nation would have accessto many
goods atrelatively cheaperprices than in the domestic market; there would also bemore
profitable markets in whichto sell the products of herindustries. Secondly,productionof goods in which the country has a comparative advantage expands, while those sectors displaying comparative disadvantage shrink. It is against this backdrop that many developing countries, including Nigeria liberalized their imports, reduced average tariffs
and dismantledsignificant number of non-trade barriers.
1.3 Objective of the Study
The objective of the study is toexamine the impact of external trade ongrowth of the Nigerianeconomywith aviewtomakingsomepolicy recommendations.
14
1.4 Justification oftheStudy
The mainjustificationfor this study is the needto determine how external trade impacts
ongrowth of the Nigerian economy. Bearing in mindthe fact that trade helps an economy grow in several ways such as; by encouraging specialisation and production in areas where it has relative cost advantage over other economies. External trade also expands
the markets for local producers, allowing them to produce at the most efficient scale to keep down costs. It also diffuses new technologies and ideas while increasing the productivity of local workers and managers. Technology transfers through trade and
investment are even more valuable fordeveloping economies like Nigeria which employ
less advanced technologies and typically having less capacity to develop its own domestic new technologies. By the 1980s, the Nigerian economy was in a recession, leadingto the introduction of economic reform measures in a genuine attempt to putthe
economy on a recovery path. It is believed that the relationship between external trade
and economic growth may have very strong policy implications for the economy;
therefore, it is deemed necessary to explore the interactions between exports and
economic growth in the Nigerian context with a view to formulating development policies for thecountry.
1.5 Significance of the Study
Tradehasplayed aleadingrole in bringing about global economic growth, right from the
19th and 20th centuries. In addition to its role as an "engine of growth" for the world
economy, international trade also plays a pivotal role in bringing about rapid economic growth and development in several countries. The 19th century was perhaps the most important century for primary commodity export-led growth, in history. Expansion of exports can lead to growth through stimulating technical change and investment, or by spilling demandoverothersectors.
Accordingto Oke (2007),"Expansionofprimary commodityexportsoften ledtogrowth
in the 19thcenturyparticularly in Sweden, Australia and Canada. In Sweden, growth was
propelled by the exportation of timber and wood products and in Australia; growth was drivenby the exportation of wool, lamb and mutton. InCanada, growthwaspropelled by
the export of wheat. Thisgave riseto the so-called"staple theory" of growth. In practice,
differentprimary products will have different effects on economic growth because they
differ as regards conditions of supply and demand. Those primary products with high
income and price elasticities of demand are likely to be more growth-inducing than
others. Ofcourse, the most favourable situation is when exports (with high elasticities)
are sold inan expandingmarket atrisingprices as wasthecasewith Swedishexportsinto
the U.K. providing foreign exchange forbuying capital imports. In the 20thcentury, fora
host ofreasons, there have been no good examples of primary product led-growth, but
there areseveral examples of industrial led growth. These include the city-states of Hong Kong, Singapore, Taiwan and SouthKorea".
Consequently, this study is significant because of the strong assumption that external
trade impacts positively on a nation's economic growth. It is in this connection that the study will attempt to examine the role of external trade in enhancing economic growth of Nigeria. The outcome of the research is aimed at helping policy makers to accurately
formulate and implement various economic policies for the county, with a view to enhancing economic growth. The study is also important because it is intended to supplement earlier studies conducted onthe continued efforts ofexploring external trade development strategy for Nigeria, as it is believed that there are many areas in which
external tradecanbebeneficial; themost criticalofwhich iseconomic growth.
1.6 Organization of the Study
The rest of the study will be carried out as follows; chapter two deals with economic performance and trade policy reforms in Nigerian. Chapter three covers the review of
theoretical and empirical literature on the role of external trade on economic growth.
Chapterfour highlights the methodology and interpretation of results, while Chapter five
is devotedtoconclusion anddrawingappropriate policy recommendations.
CHAPTER TWO
ECONOMIC PERFORMANCEANDTRADE POLICY REFORMS IN NIGERIA
2,1 Macroeconomic Overview
The Nigerian economy has had a truncated history since independence. For instance, in
theperiod 1960-70 just after independence, the Gross Domestic Product (GDP) recorded higher growth. During the oil boom era, roughly 1970-78, GDP grewpositively with an
increase of up to 6.2% annually - a remarkable growth! However, in the 1980s, GDP growthratesdeclined considerably. Inthe period 1988-1997 which constitutes theperiod
of structural adjustment and economic liberalization, the GDP responded to economic adjustment policies and grew at a positive rate, but drastically fell in the 1980s, (see Figure 2.1).
Figure 2.1: GDP Per Capita in 1984 Prices, 1965-2000
1200
1100
1000
g 900 800
700
600 .
^ $ $ 4^ 4^ 4° 4 4" 4 >4 <4 4 4 4 4 4? 4 4
Period
—•—GDP Growth
Source: Soludo(2006)
Similarly, in the years after independence, industry and manufacturing sectors had positive growthrates, except for the period 1980-1988 when industry and manufacturing
17
grewnegativelyby - 3.2% and - 2.9% respectively. The growth in the agricultural sector for the periods 1960-70 and 1970-78 was unsatisfactory, simply because the sector suffered from low commodityprices. In addition, the oil booms also contributed to the negative growth. In fact, the neglect of the agricultural sector was largely due to the
relative ease of sourcing foreign exchange through oil exploration and exportation.
Consequently, the boom in the oil sectorlured labour away from the rural areas to urban
centres.
The contribution ofagriculture to GDP was 63% in 1960s and 1970s, but fell to 34% in
the 1980s. This was notbecause the industrial sector increased its share in the economy, but simplyduetoneglect of the agricultural sector. Itwasthereforenotsurprising that by 1980s, the countryhad become a netimporter of basic food items. The apparentincrease
inindustryand manufacturing from 1978 to 1988 was dueto activities in the mining sub-
sector, especially petroleum, as capital formation in the economy has not been satisfactory during this period. Gross domestic investmentas apercentageof GDP, which
was 16.3% and 22.8% in the periods 1965-73 and 1973-80 respectively, decreased to almost 14% in 1980-88 and increased to 18.2% in 1991 -98. Gross National Savingwas verylow and consists mostly of public savingsespeciallyduring the period 1973-80.
Thecurrent accountbalances before official transferswerenegativefor 1965-73, 1980-88
and 1991-98. It is pertinent to state here that, the economy never experienced double- digit inflation during the 1960s, but by 1976, the inflationrate stood at23%. It decreased
to 11.8% in 1979, and jumped to 41% and 72.8% in 1989 and 1995, respectively. By 1998, the inflation rate had, however, reduced to 9.5% from 29% in 1996.
Unemploymentrates averaged almost 5% for theperiod 1976-1998. Based on somebasic indicators, it is clear that the economy performed better during the period immediately
afterindependenceand the oil boomerawhen comparedtothe subsequentyears.
Table 2.1: Sectoral Key Shares in 2007
% Share Agriculture Oil& other
mining
Manufactu
re
Services Tota I
GDP 34 30 31 5 100
TotalExport 0.08 92.69 2.6 4.63 100
Total Imports 8 1 44 47 100
Invest, by
Destination
8.2 15.7 74.5 1.6 100
Labour
Employment
64.08 11.10 11.15 13.67 100
Source: CBN Bulletin(2006)
Table 2.1 shows the dominance of oil and other mining products in the economy when compared with Agriculture and Manufacturing in 2007. As can be seen from the table,
the sector accounts for 30% share ofGDP, 92.69% share of total exports, 15.7% share of
investmentby destination and 11.10 % share of labour employment during theyear.
Nigeria is the 12th largest producer of petroleum in the world and the 8th largest exporter,and has the 10th largestproven reserves. As such, petroleum playsavital role in
the Nigerian economy, accounting for 40% of GDP and 80% of Government earnings.
Interestinglythough, the Nigerian economy seems to defyrecent projections that growth
would slow down in the 2000s, as the CBN announced that GDP growth has risen to 7.1% at the end of the second quarter of 2006. This is an improvement over the 6.2%
recorded in 2005. Analysts opined that the recent growth experienced by the economy maynot be unconnected with the stabilityin the foreign exchange market and the global
increase in crude oilprices. On the other hand, drop inthe growthrates were attributedto the sudden drop in oil prices worldwide, oil production and supply disruptions in the Niger Delta Area, as well as the rising inflation level in thecountry. This can be clearly
seenfromfigure2.2 withasample period of six years, from 2001 to 2006.
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Figure 2.2: GDP Percentage GrowthRates for 2001-2006
10
£
1 4
E
O 2
0
2001 2002 2003 2004 2005 2006 Period
Source: Zenith EconomicQuarterly (2006)
Figure 2.2 indicates that in 2001 and 2002, the GDP growth rate was at 4% and it
increased to 9% in 2003. This was then followed by a sharp drop to 6% and then an increaseto 6.9% and 7% for2005 and2006,respectively.
There is no doubt that oil has been a key sector of the Nigerian economy since its discovery especially during the oil boom periods of 1973/74 and 1978/79.
Notwithstanding the fact that oil production is an enclave sector of the Nigerian
economy, with little forward and backward linkages with the rest of the economy; the
sector is still decisive for economic performance. Its impact is mostly felt through the
income effect mediated by public spending and imports. Much of the modern productive (non-oil) private sector depends on imported inputs and the oil sector provides the required foreign exchange. More fundamentally, the higher revenue from the oil sector enables much higher government consumption and investment. In an economy where major activities ofthe private sector are driven by government contracts and patronage, developments in the oil sectorlargely drives therestof theeconomy.
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Takingasample period of 1981-2001, figure 2.3 shows the total GDP, oil GDP, andnon- oil GDP growth rates forthe period and captures the cyclical trends in the oil GDP and total GDP. Oil GDP is clearlymore volatile than the non-oil GDP. The volatility in oil prices means that the sector can experience rapid growth in value added in one year followed by an equallyrapid decline in the succeeding year— and historicallythe wide swings in the sector's value addedhas been reflected in volatile growth rates as shown in figure 2.3. While thenon-oil GDP closely tracks the total GDP, there is evidence that the
oil GDP leads thecyclical trend in boththe non-oil GDP and total GDP. In other words, a fall in oil GDP ultimately leads to a fall in non-oil GDP. Changes in oil prices could
therefore have both contemporaneous and lagged effects on general economic performance.
Figure 2.3: Contributions of Oil and Non-Oil GDP inAggregate Growth
Period
-Total GDP Growth —■—Non-oil GDP Growth Oil GDP Growth
Source: Soludo(2006)
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2.2 The effects of Fluctuations in oilPrices
Fluctuation in world oil prices surely affects growth, and as such, has serious implications for the Nigerian economy. According to Okeke (2006), "the Nigerian
economyreacted when crude oil prices rose sharply during the third quarter of 2006 and
declined in anundulatingfashion towards the tail end of the period. Thus, while prices of
crude oil in the international market stood atan average ofU$55 perbarrel by the end of
June2006, the figurebymid-Julywas US$78.50pb; and by the end of September, prices
had averaged belowUS$60pb. While thepriceof crude oil was rising in the international
market during the period under review, its upshot in the Nigerianeconomy was highcost of importation of refined petroleum products. Specifically, the situation led to a rapid
draw down on the N150b Petroleum Support Fund (PSF) set aside by the Federal
Government meant to provide succour to the consuming public by subsidizing cost of importedrefined products".
The high but volatile prices of crude oil in the international market, especially duringthe
third quarter of 2006 was attributable to a number of factors including the crises in the
Middle East, accentuated by Iran's Nuclear Programme and the lingering crisis in the Niger Delta region (where about 90% of Nigeria's oil is produced). These factors collectively contributed to the disruption of oil production in the country. There is also
the demand/supply factor by which most OPEC members are unwilling to see crude oil price drop close to US$50 per barrel; such a level would move them to cut production
and supply. The fear of hurricanes and possible disruption to production in the Gulf of
Mexico during the period (aswas thecasein 2005) was also aninfluence ontheprices of
crude oil worldwide. Refer to figure 2.4 for a clear view of the fluctuations in average nominal prices and average annual inflation (adjusted prices) in US Dollar currency
(US$).
22
Figure 2.4: Fluctuations in Oil Prices(1996-2006)
Period
Average Nominal Prices Average Annual Inflation (Adj) Prices Source: ZEQ (2006)
2.3 Review of TradePolicy Reforms
Nigeria's trade policy since independence reflects a trend which is characterized by
uncertain and unpredictable trade regimes the world over. Since the 1960s, the country has witnessed extreme policy swings from high protectionism in the first few decades
after independence to its current more liberal stance. Tariffs have at various times been
used to raise fiscal revenue, limit imports to safeguard foreign exchange or evenprotect
thedomestic industries from competition. Inaddition, various forms of non-tariff barriers
such as quotas, prohibitions and licensing schemes have on various occasions been extensivelyused to limit imports of particular items. Accordingto Bankole and Bankole (2004), "the overallpattern portrays the long-held belief that trade policy can be used to influence the trade regime in directions that can promote economic growth. Attempts
weremade to usetradepolicyto promotemanufactured exports and enhance thelinkages
in the domestic economy, to increase and stabilize export revenue, and scale down the
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countrys reliance on the oil sector. The country's trade policies were accordingly
directed at
discouraging dumping,
supporting import substitution, stemming adversemovements in the balance of payments, conserving foreign exchange, and generating governmentrevenue".
During the first decade of independence, Nigeria pursued an import substitution industrialization strategy, through such measures as quantitative restrictions and high import duties. However, trade policy between 1970 and 1976 assumed a less restrictive stance, ostensiblybecause of demands necessitatedby the post-civil war reconstruction.
This spurt of liberalization ended in 1977 though, when a wide range of imported
finished goods requiring licenses came tobe placed on veryhigh duties orwere banned
outrightly. From 1980s to 1990s, therewas apolicy shift towards exportspromotion and
a move to intensify the use of local raw materials in industrial production. During this period, the central objective of trade policy was to provide protection for domestic industries and reduce the perceived dependence on imports. A corollaryto that objective
was a desire to reduce the level ofunemployment and generate more revenues from the non-oil sector. Accordingly, tariffs on raw materials and intermediate capital goods were scaled down.
Similarly, during the SAP era, there was a significant shift in trade policy direction
towards greater liberalization, which is directly attributable to the adoption of the
programme. The 1998 Customs & Excise Tariffetc. (Consolidation) Decree was based
ona new Customs goods classification, the Harmonized System (HS) of Customs Goods Classification Code. It provided for a seven-year (1988 -1994) tariffregime, with the objective of achieving transparency and predictability of tariffrates. Imports under the regime thus attracted ad-valorem rates applied on the basis of the WTO Most Favoured
Nation (MFN) Principle. By 1995, another seven-year tariff regime was established by
Decree No. 4 of 1995, from 1995 - 2001. These two tariff regimes increased import
duties on raw materials, and on intermediate and capital goods, while slightly reducing
tariffs on consumer goods. For some years,
the
Governmentof Nigeria has been going
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