CHAPTER ONE
1.0 INTRODUCTION
1.1 Motivation
Trade is widely accepted as a major engine of economic growth. This has been the experience of Nigeria since the 1960s even though the composition of trade has changed over the years.
International trade has been an area of interest to decision makers, policy makers as well as economists. It enables nations to sell their locally produced goods to other countries of the world. International trade is the exchange of capital, goods and services between countries.
Foreign trade allows a country or nation to expand her markets for both goods and services that otherwise may not have been available to her citizens. Foreign trade means per capita income has been based on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services.
It has been established in the literature that export trade is an engine of growth. It increases foreign exchange earnings, improves balance of payment position, creates employment and development of export oriented industries in the manufacturing sector and improves government revenue through taxes, levies and tariffs. These benefits will eventually transform into better living condition for the nationals of the exporting economy since foreign exchange derived would contribute to meeting their needs for some essential goods and services. However, before these benefits can be fully realized, the structure and direction of these exports must be carefully tailored such that the economy will not depend on only one sector for the supply of needed foreign exchange.
According to (Grossman and Helpman 1997) a theoretical view and (keller 2002) an empirical view has argued that openness is important for growth because it generates channels for
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technology diffusions, which makes the less developed countries to import such goods from the developed countries.
International trade has been regarded as an engine of growth (Adewuyi, 2002). Foreign trade as it has been regarded as an engine of growth must lead to steady improvement in human status by expanding the range of people‟s standard and preference. Since no country has grown without trade, foreign trade plays a vital role in restructuring economic and social attributes of countries around the world, particularly the less developed countries. Before 1972, most of Nigerian exports were agricultural commodities like cocoa, palm produces, cotton and groundnut. Thereafter, minerals, especially petroleum, became significant export commodities. By 1960, imports were valued at N432million. They increased to N758.99million and N8.132million in 1970 and 1978 respectively, rising to N124, 162.7million in 1 and N681, 728.3million in 1987.
Food import became noticeable in Nigeria foreign trade. The country had an unfavorable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence.
Thereafter, export of crude petroleum guaranteed a favorable trade balance. The oil sector dominates export while the non-oil sector dominates import.
Growth performance of the Nigerian economy has been determined by both domestic production and consumption activities as well as foreign transactions in goods and services. . Before her political independence, Nigeria has been an active player on the field of foreign trade, initially with predominately agrain products, but presently dominated by petroleum products.
Since the discovery of oil in commercial quantity in Oloibiri in the present day Delta State,
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Nigeria has been an important player in world affairs, economically and otherwise, particularly being the 6th largest producer of crude oil in the organization of petroleum exporting countries (OPEC).
Prior to the discovery of oil in 1960s, the Nigerian government was able to execute investment projects through domestic savings, earnings from agricultural product exports and foreign aids.
However, the capacity of the economy to accumulate domestic savings to finance investment was limited.
This study is going to take a position, whether Nigeria‟s economic under-development can be attributed to international trade or whether her relative economic prosperity, in terms of growth and development can be attributed to her taking part in the field of international trade. In other words, how effectively has trade contributed to Nigeria‟s economic growth and development?
This is the important question which this study attempts to answer.
Since the last twenty years, economic policy in Nigeria can be characterized by trade liberalization and regional integration which is defined by the radical reducing or removal of trade barriers. The World Trade Organization (WTO) the IMF and especially the World Bank
(WB) have obtained considerable powers to sway policies in countries towards this path. As apart of the global Structural Adjustment Programme, it is assumed and argued that trade liberalization improves the welfare of consumers and trims down poverty. The assertion was two-fold and simple. First, it is argued that liberalization offers wider room for choice from an array of quality goods and cheaper imports also find more lucrative markets in which their products can be sold. A second argument is that, the production of goods in which a country has comparative advantage expands, while the sectors without comparative disadvantage minimize.
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This is believed to lead to an overall rise in real GDP since there would be reallocation of the productive factors from less efficient sectors to more efficient sectors.
The importance of foreign trade in the development process has been of interest to development economists and policy makers alike. Imports and exports are key parts of foreign trade and the import of capital goods in particular is vital to economic growth.
Promotion of economic growth is one of the objectives of foreign trade but in recent times, this has not been the case because the Nigerian economy still experience some element of economic instability such as high level of unemployment, price stability and adverse balance of payment to mention a few. One of the major obstacles why benefits of foreign trade cannot be translated into economic growth is the macroeconomic policy distortions resulting from the trade which turned the country into an import dependent economy. The import of the country grew from N0.7 billion in1970 to over N562 billion in 1996 and later increase to N1, 266 billion in 2001, (CBN Annual Report, 2004). More so, foreign trade has not accrued into economic growth because some of the goods imported into the country were those that cause damage to the local industries by rendering their product inferior and being neglected, this thereby reduces the growth rate of output of such industries and this later spread to the aggregate economy.
Due to the reasons stated above, it is worthy of note to analyze the influence of foreign trade on economic growth in Nigeria. To this ends, to what extent should Nigeria allow the importation of goods and services to avoid damages to local industries? And what kind of standard should be adopted for upgrading the exportation of goods and services. The main objective of this study is to evaluate the performance of foreign trade and its contribution to economic growth in Nigeria.
Most economists especially development and international economists have argued in favor of international trade as it relates to global and domestic economic growth and development. They
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believed that international trade leads to specialization, increase in resource productivity, large total output, creation of employment, generation of income and relaxation of foreign exchange restraints (Nnadozie, 2003). The positive relationship that exists between global trade and economic growth may be as a result of the likely positive externalities due to the involvement of different countries in the international trade. Many empirical studies have argued in favor of the importance of global trade on economic growth using the degree of trade openness, terms of trade, tariff and exchange rate as variables to explain the claim that open economies grow faster than closed economies (Edwards, 1998). On the contrary, some economists have argued that the practice of protectionism is better means for domestic economic growth because in some instances the domestic economy may have comparative advantage over the foreign economy (Nnadozie, 2003). Nevertheless, the overwhelming evidence of positive impact of international trade on economic growth cannot be overemphasized. However, there are some questions to ask: what relationship exists between Nigeria‟s involvement in international trade and her economic growth?
1.2 Statement of the Problem
The importance of international trade in the development process has been of interest to development economists and policy makers alike (Arodoye and Iyoha, 2014). Imports and exports are a key part of international trade and the import of capital goods in particular is vital to economic growth. This is so because imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. Economic reform is expected to affect imports as part of the strategy to restore external balance. However, unless policy makers know
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what the major components of imports are and how they are determined, such a policy decision can be harmful to investment and output if domestic production relies on imports.
In Nigeria, some people are in favor of protectionist and highly regulated economy and have even criticized the previous Nigerian government, for signing the treaty of the World Trade Organization (WTO), claiming that, Nigeria was not adequately represented in the negotiations and should push for a fairer deal. As regards to this statement, some people, particularly economists pushed for the implementation of the Structural Adjustment Programme (SAP) in 1986 which brought about deregulation of formerly regulated areas of the economy, so that the country could reap the benefits of economic openness.
The main thrust of this research is to take an objective view regarding the controversy of the role of international trade, in the progress of a country in terms of economic growth of Nigeria. It has been eluded by the dissenting voices in the 21st century that trade could be negative in terms of acting as a catalyst of economic growth and development, being a retrogressive force, in the journey to economic independence. But ironically, past experience has proven the potency of trade as a catalyst of economic progress, with regards to growth and development.
1.3 Research Questions
This work will be guided through the following questions;
(i) What is the impact of international trade on the economic growth in Nigeria?
(ii) To what extent exchange rate policy impacted on the economic growth in Nigeria?
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1.4 Objectives of the Study
International trade has, by and large, been an “engine of growth” for global economy (Usman, 2011); Obadan and Okojie, 2010) and may well be the condition needed by small countries to record rapid growth (Arodoye and Iyoha, 2014). But there have been large dissenting voices in the 21st century, claiming that international trade only perpetuates the under-development of poor countries due to the fact that there is a disproportionate share of gains from trade that accrues to industrialized countries. This research work focuses on the following objectives:
(i) To examine the impact of international trade on the economic growth of Nigeria;
(ii) To determine the extent to which exchange policies have impacted on the growth process of Nigerian economy
1.5 Justification of the Study
This study will be essential to policy maker to know more about the performance of foreign trade and economic growth. It will also assist in providing the frame work of where work has been done by earlier researchers. It will also provide a framework on which further research in foreign trade could be carried out.
1.6 Scope of this study
This study will basically cover a period of 32 years (1981-2013). This study is limited to international trade as it affects the growth and development of the Nigerian economy using the data covering the 32 years period(1981-2013).
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