Full Project – THE IMPACT OF FOREIGN TRADE ON THE NIGERIA ECONOMY

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The role of foreign trade in economic development is considerable. The classical and neo-classical economists attached so much importance to foreign trade in a nation’s development that they regarded it as an engine of growth. Over the past several decades, the economies of the world have become greatly connected through foreign trade and globalization. Foreign trade has been identified as the oldest and most important part of a country’s external economic relationships. It plays a vital and central role in the development of a modern global economy. Its impact on the growth and development of countries has increased considerably over the years and has significantly contributed to the advancement of the world economy. The impact of foreign trade on a country’s economy is not only limited to the quantitative gains, but also structural change in the economy and facilitating of international capital flow. Trade enhances the efficient production of goods and services through allocation of resources to countries that have comparative advantage in their production. Foreign trade has been identified as an instrument and driver of economic growth (Frankel and Romer, 1999).

According to Oluwasola and Olumide(2012), the basis for foreign trade rests on the fact that nations of the world do differ in their resource endowment, preferences, technology, scale of production and capacity for growth and development. Countries engage in trade with one another because of these major differences and foreign trade has opened up avenues for nations to exchange and consume goods and services which they do not produce. They further said that the differences in natural endowment present a case where countries can only consume what they have the capacity to produce, but trade enables them to consume what other countries produce. Therefore countries engage in trade in order to enjoy variety of goods and services and improve their people’s standard of living.

The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one of the crucial issues in development and international economics is to know whether foreign trade 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.

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 several literatures 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 (John and Aiyelabola 2012).

Foreign 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 (Usman 2011).

1.2 Statement of the Problem

The importance of foreign trade in the development process has been of interest to development economists and policy makers alike. Imports and exports are a key part of foreign 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 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 favour 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.

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 instability and adverse balances of payment to mention a few.

A recent study  by the U.N. Secretariat provides ample  proof, that the problem  of  the economic development of the low-income  countries  cannot be solved  without  these  countries  becoming not only producers, but  also exporters of manufactured goods, on  an important scale. At present 86 per cent of the exports of the developing countries consists of primary products, and only 14 percent of manufactured goods. If the primary  exporting regions were to continue to depend mainly on the exports  of primary products,  their export receipts  to the outside world could not be  expected to  increase by more than three per cent annually, even if their export prices remained constant. Their import requirements, on the other hand, would be bound to increase  faster  than their domestic product mainly because their import requirements for capital goods  increase  faster  than their domestic  fixed capital  formation, and also because their own  income elasticity  of imports of consumer goods and raw materials  are high (Nicholas 2000).

One of the motives 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 in 1970 to over N562 billion in 1996 and later increase to N1, 266 billion in 2001, (CBN Annual Report, 2004). Also as one of the reason why the benefits of foreign trade cannot be translated into economic growth is that most of the goods and services exhibited are in respect to service rendering.

The importance of foreign trade in the Nigeria economy has grown rapidly in recent time, especially since 2002. Economic openness, measured as the ratio of export and imports to GDP has risen from just above 3 percent in 1991 to over 11 percent in 2008. The moderation in the growth rate of trade in 2008 partly reflects the unrest in Nigeria’s oil producing Niger Delta region, which resulted in significant disruption in oil production and shortfalls in oil export from Nigeria(Usman 2011).

Furthermore, foreign trade has not accrued into economic growth because some of the goods imported into the country were those that cause damages to 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.

For this reason, it is worthy of note to analyze the the impact of foreign trade on the nigeria economy, laying emphasis on Nigerian non oil sector. The main thrust of this research is to take an objective view regarding the controversy of the role of foreign trade, in the progress of a country in terms of economic growth of Nigeria. It is evidenced that Nigeria is practicing a mono economy system i.e a heavy dependence on oil for its foreign exchange earnings. It has also been observed that Nigerian governments have seriously neglected the non-oil sector which has been our major source of foreign exchange earnings in the early 1960s. This study seeks to analyze critically, Nigeria’s involvement in foreign trade and the contributions of the non-oil sector so far from 1980-2012 and proffer solutions on how Nigerian governments can revitalize the sector so as to attract foreign direct investment (FDI), and achieve a favourable balance of payment which will invariably lead to economic growth.

1.3 Objective of the Study

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

1. To ascertain the impact of export trade on the Nigerian economy
2. To determine the impact of import trade on the Nigerian economy

• To assess the effect of exchange rate on economic growth in Nigeria.

1. To find out the consequence of foreign direct investment on Nigerian economic growths.

1.4 Research Questions

The study shall be guided by the following research questions,

1. To what extent does export impact on economic growth in Nigeria?
2. To what extent does import impact on economic growth in Nigeria?
3. How far does an exchange rate have impact on economic growth in Nigeria?
4. What are the effects of foreign direct investment on economic growth in Nigeria?

1.5 The Research Hypotheses

H0: Export trade does not have a significant positive impact on the Nigeria’s economic growth

H0: There is no significant impact of import trade on the Nigerian economic growth

H0: Exchange rates do not have positive impact on the Nigerian economic growth

H0: Foreign direct investment does not have any impact on the Nigerian economic growth

1.6 Scope of the Study

This research work is going to cover Nigeria foreign trade involvement from the point of Import and Export activities within the period 1980-2012 (32 years).This period is believed to cover the major part of Nigerian participation in foreign trade;it is within the geographical zone of Nigeria. Thus, it is a country-specific research. This research exercise, like every other research work, is really a rigorous one that consumes much time and energy especially in the area of data sourcing, data computation and modeling. This work is relatively limited base on time constraints, data availability, precision of data and data range, and methodology adopted which could further be verified by future research. Nevertheless, the researcher has properly organized the research so as to present dependable results which can aid effective policy making and implementation at least for the time being.

1.7 Significance of the Study

The findings of this research work transcend beyond mere academic brainstorming, but will be of immense benefit to, policy makers, intellectual researchers, government students and the general public.

Policy makers: This  study  will  be  essential  to  policy  maker  to  know  more  about  the  performance  of  foreign  trade  and economic growth.

Academic researchers: It will 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.

Student: This research work will further serve as a guide and provide insight for future research on this topic and related field for students who are willing to improve it.

Government: It will also help the government to see the effectiveness of trade liberalization policy on the economic growth of the nation over the years.

General public: It will also educate the public on various government policies as related to trade issues.

1.8 Operational Definition of Terms

Foreign trade: It is a system where the goods and services are advertised, sell and switched between two or more than two countries through import and export.

Foreign Portfolio investment: It is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets.

Exchange Rate: It is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.

Globalization: It is the closer integration of countries and peoples of the world and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge and people across national borders; a process of creating a global market of investments, trade and information through the integration of economic decision making on consumption, investment and savings across the world (Bank of Industry 2004:1)

Trade Liberalization: This is the removal of or reduction in the trade practices that thwart free flow of goods and services from one nation to another. It includes dismantling of tariff (such as duties, surcharges, and export subsidies) as well as nontariff barriers (such as licensing regulations, quotas, and arbitrary standards).

Foreign Direct Investment (FDI): This is an investment by multinational corporations in foreign countries in order to control assets and manage production activities in those countries. (Dutse 2008)

Economic Growth: This is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.

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