Trade Openness And Output Growth In Nigeria: An Econometric Analysis (1970-2007)

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TRADE OPENNESS AND OUTPUT GROWTH IN NIGERIA: AN ECONOMETRIC ANALYSIS (1970-2007)

ABSTRACT

This research work studies the international competitiveness of the Nigerian economy in the global market by analyzing the relationship between trade openness and output growth in Nigeria. Using time-series data over the period 1970-2007, we show that output growth of the Nigeria economy is a function of two sets of shocks; (i) external shocks (openness and real exchange rate) and (ii) internal shocks (real interest rate and unemployment rate). A non-monotonic and an ANCOVA econometric models are postulated in  order to capture the structural pattern of the relationship between openness and output growth as well as the policy effect of structural Adjustment program (SAP). The result shows that there is an inverted U-shape (no-monotonic) relationship between openness and output growth in Nigeria and the optimum degree of openness for the economy is estimated to be about 67%. Also, the liberalization policy of the SAP has positive economic effect on the output growth. The ECM reveals that 79% of the equilibrium error is being corrected in the next period. We concluded that unbridled openness may have deleterious effect on the real growth of output of the Nigerian economy.

 

 

 

TABLE OF CONTENTS

Title page                                                                                i

Approval page                                                                        ii       

Dedication                                                                               iii

Acknowledgement                                                                   iv

Abstract                                                                                  v

Table of contents                                                                     vi

List of tables and figures                                                                   ix

CHAPTER ONE: INTRODUCTION

1.1     Background of study                                                     1

        1.1.2  Trade openness and output growth                               

          Historical Experience of the Nigeria economy     3

1.2            Statement of the research problem                                14

1.3            Objectives of the study                                                  16

1.4            Statement of the research hypothesis                                      17

1.5            Justification of the study                                                         17

1.6            Significance of the study                                                          18

1.7            Scope and limitation of the study                                  19

CHAPTER TWO: LITERATURE REVIEW

2.1            Theoretical literature                                                      21

2.1.2 Theory of customs union and free trade areas                37

        2.1.3Models of export-led growth                                   40

2.2            Empirical literature                                                        45

2.3            Limitation of previous studies                                       69

CHAPTER THREE: METHODOLOGY 

3.1            Analytical framework                                                    70

3.2            Model specification                                                        71

        3.2.1 Test of stationarity                                                 74

        3.2.2 Test of co integration                                                       75

        3.2.3 Error correction model                                           76

3.3     Justification of the model                                                        78

3.4     Estimation techniques                                                    80

3.5     Evaluation Procedure                                                    81

        3.5.1 Economic test (a priori expectation)                      81

        3.5.2 Statistical (first order) test                                               83

        3.5.3 Econometric (second order) test                                       84

3.6     Sources of data and software for estimation                           85

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULTS

4.1            Introduction                                                                             87

4.2            Presentations of regression results                                 87

4.2.1Test of stationarity                                                          89

        4.2.2 Test of co integration                                                       91

        4.2.3 The Error correction model (ECM)                        92

4.3            Interpretation and Evaluation of result                          93

4.3.1Evaluation based on economic criteria                            93

         4.3.2Evaluation based on statistical criteria                            103

         4.3.3 Evaluation based on econometric criteria              110

4.4            Evaluation of the working Hypotheses                                    118

CHAPTER FIVE: SUMMARY, POLICY PRESCRIPTION

AND CONCLUSION 

5.1            Summary                                                                       122

5.2            Policy Recommendations                                                        123

APENDIX                                                                     I       

APENDIX                                                                     II

APENDIX                                                                     III(A)

APENDIX                                                                     III(B)

APENDIX                                                                     III(C)

APENDIX                                                                     III(D)

APENDIX                                                                     III (E)

APENDIX                                                                     III (F)

APENDIX                                                                       IV

APENDIX                                                                       V

APENDIX                                                                      VI    

APENDIX                                                                      VII

APENDIX                                                                      VIII 

APENDIX                                                                       IX

APENDIX                                                                       X

APENDIX                                                                       XI

APENDIX                                                                       XII

 

LIST OF TABLES AND FIGURES

Figure 1:     Growth Rate of Real GDP

Figure 2: Trend of Real GDP

Figure 3: Growth of Export and Import

Figure 4: The Degree of Openness

Table 1: Openness Indicators

Table 2: A Priori Expectation

Table 3: Results of Model 1

Table 4: Results of Model 2

Table 5: Results of Stationarity test

Table 6: Results of Co integration test

Table 7: Results of the Error Correction Model

Figure 5: Non- Monotonic Relationship between TPN and  RGDP

Table 8: Summary of the T-Test

Table 9: Pair-Wise Correlation Matrix

 

CHAPTER ONE

 INTROUDCTION

1.1     BACKGROUND OF STUDY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

          The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one the crucial issues in development and international economics is to know whether trade openness indeed promotes growth. With globalization, two major trends are noticeable: first is the emergence of multinational firms with strong presence in different, strategically located markets; and secondly, convergence of consumer tastes for the most competitive products, irrespective of where they are made. In this context of the world as a “global village”, regional integration constitutes an effective means of not only improving the level of participation of countries in the sub-region in world trade, but also their integration into the borderless and interlinked global economy. (NEEDS, 2005).

          Since 1950, the world economy has experienced a massive liberalization of world trade, initially under the auspices of the General Agreement on Tariffs and trade (GATT), established in 1947, and currently under the auspices of the World Trade Organization (WTO) which replaced the GATT in 1993. Tariff levels in both developed and developing countries have reduced drastically, averaging approximately 4% and 20% respectively, even though the latter is relatively high. Also, non-tariff barriers to trade, such as quotas, licences and technical specifications, are also being gradually dismantled, but at a slower rate when compared with tariffs.

          The liberalization of trade has led to a massive expansion in the growth of world trade relative to world output. While world output (or GDP) has expanded fivefold, the volume of world trade has grown 16 times at average compound rate of just over 7% per annum. In fact, it is difficult, if not impossible, to understand the growth and development process of countries without reference to their trading performance. (Thirlwall, 2000).

          Likewise, Fontagné and Mimouni (2000) noted that since the end of the European recovery after World War II, tariff rates have been divided by 10 at the world level, international trade has been multiplied by 17, world income has quadrupled, and income per capita has doubled. Incidentally, it is well known that periods of openness have generally been associated with prosperity, whereas protectionism has been the companion of recessions. In addition, the trade performance of individual countries tends to be good indicator of economic performance since well performing countries tend to record higher rates of GDP growth. In total, there is a common perception that even if imperfect competition and second best situations offer the possibility of welfare improving trade policies, on average free trade is better than no trade.

          From the ongoing discussion, it is evident that trade is very important in promoting and sustaining the growth and development of an economy. No economy can isolate itself from trading with the rest of the world because trade act as a catalyst of growth. Thus Nigeria, being part of the world, is no exemption. For this reason, there is a need to thoroughly examine the nature of relationship between trade openness and output growth in Nigeria.

1.1.2           TRADE OPENNESS AND OUTPUT GROWTH: HISTORICAL EXPERIENCE OF THE NIGERIA ECONOMY  

Today, Nigeria is regarded to have the largest economy in sub-Saharan Africa, excluding South Africa. In the last four decades there has been little or no progress realized in alleviating poverty despite the massive effort made and the many programmes established for that purpose. Indeed, as in many other sub-Saharan Africa countries, both the number of poor and the proportion of poor have been increasing in Nigeria. In particular, the 1998 United Nations human development report declares that 48% of Nigeria’s population lives below the poverty line. According to the report (UNDP, 1998). The bitter reality of the Nigerian situation is not just that the poverty level is getting worse by the day but more than four in ten Nigerians live in conditions of extreme poverty of less than N320 per capita per month, which barely provides for a quarter of the nutritional requirements of healthy living. This is approximately US 8.2 per month or US 27 cents per day.

Doug Addison (unpublished) further explained that the Nigeria economy is not merely volatile; it is one of the most volatile economies in the world (see figure 1 below). There is evidence that this volatility is adversely affecting the real growth rate of Nigeria’s gross domestic product (GDP) by inhibiting investment and reducing the productivity of investment, both public and private. Economic theory and empirical evidence suggest that sustained high future growth and poverty reduction are unlikely without a significant reduction in volatility. Oil price fluctuations drive only part of Nigeria’s volatility policy choices have also contributed to the problem. Yet policy choices are available that can help accelerate growth and thus help reduce the percentage of people living in poverty, despite the severity of Nigeria’s problems.

Figure 1: growth rate of real GDP

Nigeria real GDP Growth Rate

 

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