CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

Predominantly, in our world today, nothing can be done without an exchange of some value

for value which involves money, ideas, product and technology. As a result of this there is

direct effect on the economy of any nation, either positively or negatively. Trade can be traced

back to the need for exchange, which evolved from the barter system to the money system.

Trade in Nigeria, however, became popular with the advent of the colonial rule that brought in

their wares and made Nigerians their middle men (Nicks, 2008). By this Nigerians understood

the need for trade both domestically and internationally.

International trade has been an area of concern to policy makers and economists. Its importance

lies on the ability to obtain goods which cannot be produced in the country or which can only

be produced at greater expenses. Also it enables a nation to sell its domestically produced goods

to other countries of the world. The performance of a given economy in terms of growth rates

of output and per capita income has not only been based on the domestic production and

consumption activities but also on international transaction of good and services. The classical

and neo-classical economists attached so much importance to international trade in a country

‘s development that they regarded it as an engine of growth (Jhingan 2006).

Trade is recognized as a vital catalyst for economic development. For developing countries like

Nigeria, the contribution of trade to overall economic development is immense owing largely

to the obvious fact that most of the essential elements for development such as, capital goods,

raw materials and technical know-how, are mostly imported because of inadequate domestic

supply. However, it is important to note that internal trade complements external trade since

domestically produced goods are collected for export, while imported goods are distributed

within the country, sometimes into remote areas. It also facilitates internal specialization and

the division of labour between the various firms and geographical areas of the country.
Therefore, the higher the level of internal trade the greater the level of specialization. This

raises the level of efficiency and productivity of the various economic units (Anyanwuocha

1993).

Economic growth is measured by the Gross Domestic Product (GDP) in Nigeria. GDP is a total

market value of a country’s output of goods and services, which are exchanged for money or

traded in a market system over certain periods. This indicates that trade is an essential aspect

of Economic growth. The Gross Domestic Product (GDP) of Nigeria is $166 billion in 2007.

The economy has overdependence on the capital intensive oil sector, which provides 20 per

cent of GDP, 95 per cent of foreign exchange earnings, and about 65 per cent of government

revenue for 2005. The largely subsistence agricultural sector has not kept up with rapid

population growth, and Nigeria, once a large net exporter of food, now imports some of its

food products.

The overdependence on oil produce not only leads to unbalanced trade but has resulted in

economic fluctuations. Nigeria was severely affected by the global economic meltdown partly

due to the collapse of global oil price in 2008, the prices set by the Organisation of Petroleum

Exporting Countries (OPEC) which can be influenced by political reasons that might not be

favourable to Nigeria economy and the recent Niger Delta Crisis which had a big role to play

in slowing down Nigeria’s economic growth. Economic and trade diversification may serve as

a strategy for reducing the exposure of Nigeria economy to external shock associated with

commodity production and trade.

However, it must be established that before any significant benefit from trade can be gained,

the domestic economy will have to diversify away from overdependence on oil produce and

concentration on the production and export of primary commodities.

1.2 STATEMENT OF PROBLEM

Prior to the discovery of crude oil in commercial quantity in Nigeria, the country depended

largely on the proceeds of agriculture primary product for the generation of foreign exchange.

The country therefore constituted one major agrarian country in Africa. By the mid-1960s,

production and export of crude oil had become important in Nigeria’s export structure,

ironically, the ascendancy of petroleum production and export was accompanied by a

simultaneous decline of agricultural products in the nation’s economic activities. Indeed, by

the end of the 1970‘s, crude oil accounted for as much as 90 per cent of the country’s export

trade. Nigeria’s non-oil production structure is still basically of the import-substitution variety,

being largely dependent on foreign technology, industrial machinery and raw materials and

negligible exports of finished products. It can therefore be said that the pattern of Nigeria’s

trade with the rest of the world has not undergone a structural change since the 1940s. The

country had been producing and trading consistently in natural resource products (Akano,

1995).

Crude oil production is an extractive, non-renewable activity which Nigeria had been

exploiting since the late 1950s (Akano, 1995). For almost two decades of commercial

production, Nigeria produced and exported crude oil in its natural state with minimal

processing into higher stages of product development. While other oil producing African

countries such as Libya and Algeria have diversified operation into more technology-intensive

areas such as the LNG and petrochemicals. Nigeria is still locked essentially in the primary

stages of petroleum development (Akano, 1995). The most important implication is that there

is adverse effect of making the Nigeria’s export sector dependent on external factors, outside

the control of Nigeria economy.

Nigeria has been diagnosed for suffering from ―The Resource Curse Syndrome‖ (also known

as the paradox of plenty) (Soludo, 2005). This refers to the countries and regions with an
abundance of natural resources, specifically point-source non-renewable resources like

minerals and fuels, tend to have less economic growth and worse development outcomes than

countries with fewer natural resources. This is hypothesized to happen for many different

reasons, including a decline in the competitiveness of other economic sectors (caused by

appreciation of the real exchange rate as resource revenues enter an economy), volatility of

revenues from the natural resource sector due to exposure to global commodity market swings,

government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions

(possibly due to the easily diverted actual or anticipated revenue stream from extractive

activities) (Auty, 1993).

A developing economy as that of Nigeria is basically characterized by a high degree of

subsistence production, with a very low application of modern technology. These have resulted

into a very high volume of importation against manufacturing and tertiary industries are

relatively low and the agro- based industries are common but, in low capacity.

Foreign trade should be highly encouraged but, there should be a balance of trade that is the

aggregate imports should equal the aggregate exports, so as to have a balanced economy and

good exchange rate.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effect of trade on economic growth in

Nigeria. Specifically, the study hopes to:

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

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

1.4 HYPOTHESIS OF THE STUDY

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

HO: There is no significant impact of import trade on the Nigerian economic growth.
1.5 RESEARCH QUESTIONS

i) To what extent does export impact on economic growth in Nigeria?

ii) To what extent does import impact on economic growth in Nigeria?

1.6 JUSTIFICATION OF THE STUDY

Previous efforts made to examine, the economic impact of trade in Nigeria has been limited to

the area of trade policy implementations, trade openness and liberalization. The significance of

this study is numerous, though the primary objective is on the effect of trade on economic

growth in Nigeria. This study intends to explore deeply into, how the concentration of trade to

primary commodities in Nigeria especially the over-dependency on oil has hindered the

economy from benefiting significantly in trade and its numerous contributions to economic

growth. Though, series of effort have been made both theoretically and empirically to examine

the impact of trade on economic growth, so much effort has not been made at identifying trade

diversification as a major route for Nigeria to enjoy the various economic benefits attached to

trade. And this research work intends to provide insight into this area.

1.7 SCOPE AND LIMITATION OF THE STUDY

The research work is confined to Nigerian economy. Therefore, data that were considered are

those relating to Nigeria economy on effect of trade on economic growth in Nigeria. The study

will basically cover a period of 25 years (1984-2008). This study is limited to external trade as

it affects the growth and development of the Nigeria economy. A major constraint of this study

is the short time needed to complete this study and problem of consistent and accurate data.

1.8 STRUCTURE OF THE STUDY

Ordinary Least Square (OLS) method is devised for the data analysis. The dependent variable

in the study is economic growth which is measured with Gross Domestic Product (GDP) while

the explanatory (independent) variables are net export, degree of openness, exchange rate, and

trade policy changes.

 CHAPTER TWO

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.0 INTRODUCTION

International trade has been and is today an economic force that has spurred commerce,

promoted technology and growth, spread cultural patterns, stimulate exploration and

colonization, and frequently fanned the flames of war. The history of international trade has

gone hand in hand with the development of civilizations. From ancient times, international

trade brought about the exchange of products and raw materials between one land or nation

and another. Although such trade was often conducted in barter form and was of small volume

by today‘s standard, this interchange of products was important in economic and historic

development.

International trade in its early beginnings was necessary, not just because it provided one

society with products such as cowries from West Africa to other areas, international trade also

led to cultural interchange, thus trading not only on product, but also on lifestyles, customs and

technology.

In addition international trade prompted the development of monetary system of record keeping

and accounting, adn of an entire vocation of commerce. One can state that the economic and

political development of the entire western world was spurred and enhance by international

trade. Another distinct contribution of international trade was the strong promotion given to

the field of exploration, map making, adn ship construction technology. Early international

trade routers ranged over vast expanses, thus requiring advances in transportation to make

possible further search for new products and markets. Let us not forget, of course, that such

desire for new trade routes products, and markets was the driving force that launched

explorations leading to the discovery of the new world.

Columbus set out, as you can recall, not to settle in a new nation, but to discover a new trade

route of the Orient. The interest upon his return to Europe centre not on his accounts of forest

and soil, but on the new products available such as tobacco, corn, cowries etc. As international

trade progressed and technology developed, these explorations were to turn up another area of

foreign trade, still important today. This was the import of raw materials by a nation and the

re-export of finished and manufactured products. As a result, not only living standards

advanced, but national incomes were also increased.

2.1 LITERATURE REVIEW

2.1.1 ARGUMENT FOR AND AGAINST INTERNATIONAL TRADE AS AN ENGINE

OF GROWTH

i. Direct Benefits

When a country specializes in the production of a few goods due to international trade and

division of labour, it exports those commodities which it produces cheaper in exchange for

what others can produce at a lower cost. It gains from trade and there is increase in national

income which, in turn, raises the level of output and the growth rate of economy. Thus, the

higher level of output through trade tends to break the vicious circle of poverty and promotes

economic development.

A Less developed country (LDC) is hampered by the small size of its domestic market which

fails to absorb sufficient volume of output. This leads to low inducement to investment. The

size of the market is also small because of low per capita income and of purchasing power.

International trade widens the market and increases the inducement to invest income and

savings through more efficient resource allocations.

In Smith‘s ‗vent for surplus‘ theory to the LDCs for measuring the effects of gain from

international trade, the introduction of foreign trade opens the possibility of a ‗vent for surplus‘

(or potential surplus) in the primary producing LDCs. Since land and labour are underutilised
in the traditional subsistence sector in such a country, its opening up to foreign trade can

produce a surplus of primary products in exchange for import of manufactured products which

it cannot itself produce. Thus, it benefits from international trade (H. Myint 1958).

Many under-developed countries specialise in the production of one or two staple commodities.

If efforts are made to export them, they tend to widen the market. The existing resources are

employed more productively and the resources allocation becomes more efficient with given

production functions.

As a result, unemployment and under-employment are reduced; domestic savings and

investment increase; there is a larger inflow of factor inputs into the expanding export sector;

and greater backward and forward linkages with other sectors of the economy. This is known

as the ‗staple theory of economic growth‘ (Watkins, 1963). Foreign trade also helps to

transform the subsistence sector into the monetized sector by providing markets for farm

produce and raises the income and the standards of living of the peasantry. The expansion of

the market leads to a number of internal and external economies, and hence to reduction in cost

of production. These are the direct or static gains from international trade.

ii. Indirect Benefits

10

Besides, there are indirect dynamic benefits of a high order from foreign trade, as pointed out

by Mill. By enlarging the size of the market and the scope of specialisation, international trade

makes a greater use of machinery, encourages inventions and innovations, raises labour

productivity, lowers costs and leads to economic development. Moreover, foreign trade

acquaints people with new products, tempts and goads them to work harder to save and

accumulate capital for the satisfaction of their new wants. It also leads to the importation of

foreign capital and instils new ideas, technical know-how, skills, managerial talents and
entrepreneurship. Lastly, it fosters healthy competition and checks inefficient monopolies. Let

us study these indirect benefits of foreign trade to under-developed countries in detail.

Import of Capital Goods against Export of Staple Commodities.

Foreign trade helps to exchange domestic goods having low growth potential for foreign goods

with high growth potential. The staple commodities of under-developed countries are

exchanged fro machinery, capital goods, raw materials, and semi-finished products required

for economic development. Being deficient in capital goods and materials, they are able to

quicken the pace of development by importing them from developed countries, and establishing

social and economic overheads and directly productive activities. Thus, larger exports enlarge

the volume of imports of equipment that can be financed without endangering the balance of

payments and the greater degree of freedom makes it easier to plan domestic investment for

development.

Important Educative Effects.

Foreign trade possesses an ‗educative effect‘. Under-developed countries lack in critical skills,

which are a greater hindrance to development that is the scarcity of capital goods.

Foreign trade tends to overcome this weakness. For, it is, in the words of Haberler, ‗ the means

and vehicle for the dissemination of technical knowledge, the transmission of ideas, for the

importation of know-how skills, managerial talents and entrepreneurship‘. The importation of

ideas, skills and know-how is a great stimulus to technological progress in under-developed

countries. It provides them with an opportunity to learn from the successes and failures of the

advanced countries. Foreign trade helps in accelerating the development of poor countries by

facilitating the selective borrowing of ideas, skills and know-how from the developed counties

and adopting them in accordance with their factor endowments. Even the rapid development

of the USA, Japan and Soviet Russia has been the result of the educative effect of foreign trade.
Basis for Importation of Foreign Capital.

Foreign trade provides the basis for the importation of foreign capital in LDCs. If there were

no foreign trade, foreign capital would not flow from the rich to the poor countries. The volume

of foreign capital depends, among other factors, on the volume of trade. The larger the volume

of trade, the greater will be the ease with which a country can pay back interest and principal.

It is, however, much easier to get foreign capital for export-increasing industries than for import

substitution and public utility industries. But from the point of view of the importing country,

the use of foreign capital for import substitution, public utilities and manufacturing industries

is more beneficial for accelerating development than merely for export promotion. Foreign

capital not only helps in increasing employment, output and income but also smoothens the

balance of payments and inflationary pressures. Further, it provides machines, equipments,

know-how, skills, ideas, and trains native labour. 12

Checking of Inefficient Monopolies.

Foreign trade benefits an LDC indirectly by fostering healthy competition and checking

inefficient monopolies. Healthy competitions is essential for the development of the export

sector of such economies and for checking inefficient exploitative monopolies that are usually

established on the grounds of infant industry protection

In conclusion, foreign trade, in addition to the static gains resulting from efficient resource

allocation with given production functions, powerfully contributes in four ways indicated

above, by transforming existing production functions and pushing them upwards and outwards.

iii. It Criticisms
The foregoing analysis, based as it is on the comparative cost doctrine, has been criticised by

economists like Prebisch, Singer and Myrdal. They opine that historically international trade

has retarded the development of LDCs. Three arguments are usually advanced in support of

this view that international trade has impeded development.

Strong Backwash Effects

International trade has strong backwash effects on the LDCs, according to Myrdal (1956). He

writes, ‗Trade operates (as a rule) with a fundamental bias in favour of the richer and

progressive regions (and Continues) and in disfavour of the less developed countries‘. 13

Unhampered trade between two countries of which one is industrial and the other

underdeveloped strengthens the former and impoverishes the latter. The rich countries have a

large base of manufacturing industries with strong spread effects. By exporting their industry

products at cheap rates to LDCs, they have priced out the small-scale industry and handicrafts

of the latter. This has tended to convert the backward countries into the producers of primary

products for exports. The demand for primary products being inelastic in the export market,

they suffer from excessive price fluctuations. As a result, they are unable to take advantage of

either a fall or a rise in the world prices of their exports. The importing countries take advantage

of the cheapening of their products because of the inelastic market for their exports. Similar

advantages follow when there is any technology improvement in their export production. When

the world prices of their products rise, they are again unable to benefit from it. Increased export

earnings lead to inflationary pressures, mal-allocation of investment expenditure and balance

of payments difficulties when they are wasted in speculation, conspicuous consumption, real

estate, foreign exchange holdings, etc.

Adverse Effect of International Demonstration Effect

It has been contended that the operation of the international demonstration effect through

foreign trade has adversely affected capital formation in LDCs.

Secular Deterioration in Terms of Trade

In the opinion of Prebisch there has been a secular deterioration in the terms of trade of the

LDCs. It implies that there has been an international transfer of income from the poor to the

rich countries and that the gains from international trade have gone more to developed 14

countries at the expense of the former, thereby, reducing their level of real income and hence

capacity for development.

iv. OVERVIEW

But all these criticisms are unfounded. There is no empirical evidence to prove that the

development of the export sector has been at the expense of the domestic sector. Foreign trade

has not always stood in the way of domestic investment. Nevertheless, as pointed out by

Nurkse, ‗even unsteady growth through foreign trade is surely better than no growth at all‘.

The adverse effects of the demonstration effect are also exaggerated. Emulation of higher

standards of living and superior consumer goods act as incentives to increased efforts and

productivity on the part of the people of LDCs. It encourages the development of service

occupations to supply superior goods. It also exercises a healthy influence in stimulating local

initiative and enterprise. Again, the adoption of the Western consumption standards tends to

influence the subsistence sector favourably. The incorporation of milk, eggs, vegetables, and

the subsistence sector favourably. The incorporation of milk, eggs, vegetables, and fruits in

diet induces agriculturists to produce them more for the market, in addition to subsistence
production. It involves the investment of more capital and making improvements in agriculture,

dairy and poultry production. This also provides increased employment, income and leads to

further capital accumulation. The subsistence economy itself tends to be converted to an

exchange economy gradually. The government is encouraged to provide more amenities in the

form of improved means of transport, communications, irrigation, power etc. There is also a

tendency on the part of the people to move from the villages to towns to seek jobs in those

secondary and service occupations which produce the new consumer goods and services.

Imitation of advanced production methods further helps in increasing the rate of capital

accumulation in LDCs. Governments in such countries have 15

encouraged the transmission of improved techniques like the L-D process of steel production,

the introduction of high-yielding maize hybrids, and Mexican wheat, the Japanese method of

rice cultivation, improved seeds and fertilizers, etc. It is, therefore, not wholly correct to say

that international demonstration effect inhibits the propensity to save and the rate of capital

formation in LDCs. In fact, by imitating the consumption and investment patterns of the

advanced countries, they have been able to accelerate the pace of economic development.

So far as the problem of deterioration in the terms of trade of the LDCs is concerned, it is

conjectural and based on obsolete data. In the first instance every LDC is dependent upon a

very narrow range of export of primary products. Moreover, such countries produce only a part

of the world‘s total exports of minerals and agricultural products. Cairncross has shown that in

1937 the volume of primary products from the industrial countries was slightly lower than in

1913 while export from non-industrial countries were over 50 per cent higher. By 1950, there

has been a spectacular change when exports from other countries fell sharply. In 1957, both

groups experienced 50 per cent expansion in of primary products. Thus, both groups

experienced 50 per cent expansion in the volume of exports between 1950-57. Lastly, this view
fails to take into account changes in the pattern of exports and imports of under-developed

countries. LDCs are no longer exporters of primary products and importers of manufactures.

According to GATT, they import only one-third of their total consumption of manufactured

articles and even this proportion is on the decline. They produce the remaining two-thirds at

home (GATT, 1959). Mostly they import capital goods, raw materials and foodstuffs.

Manufactured consumer goods hardly form 10 per cent of their total imports. On the other

hand, their exports consist of textiles, light engineering goods, machine tools, steel and a variety

of manufactured consumer goods. The reason for the deterioration in terms of trade of under

developed countries has not been the declining world demand for their primary 16

products, but inflationary pressures leading to high costs and prices, and a large external deficit

which acts as a drag on their exports.

v. Conclusion

Thus it is an erroneous view that international trade has operated as a mechanism of

international inequality and has restated the development of LDCs. Rather, foreign trade has

acted as an engine of growth for them. Thus Cairncross is right in saying, ‗Over the past

century and a half the growth of international trade has continued to open up new opportunities

of specialisation and development for the countries engaged in it. These opportunities were

particularly in the primary producing countries overseas that were still in the process of

settlement, since trade enabled them to bring into use unexploited natural resources and freed

them from the limitations of their own domestic markets‘(Jhingan 2006).

2.1.2 Free Trade and Economic Growth

Free trade is considered by some economists as most relevant for economic development.

According to Haberler (1961) ―free trade is economically advantageous because it maximizes

the output of social products‖. However, a counter argument holds that although the derivable

benefits of free trade are laudable, they are to some extent hypothetical, effective only under

the conditions of full employment, full allocation of resources and free competition in the

economy. For instance, Singh (1985) argued that ―the applicability of free trade is limited in

the case of a developing economy, where a vast segment of the productive resources are still

unexploited, with acute problem of unemployment. A free trade regime will further compound

these problems by weakening the domestic industries, especially those that lack sufficient

competitive powers‖. 17

Earlier opponents of free trade such as Harry G. Johnson (1965), and Ellsworth (1969) argued

in favour of trade intervention owing to the belief that ―such interventions would help rectify

the defects of free trade and thus provide the opportunity for developing economies to fully

derive the benefits of international trade‖. Interestingly, these arguments do not in any way

negate the fact that international trade plays a vital role in the economic development of any

country. Perhaps the conclusion one could draw from the two schools of thought is that for a

developing economy, trade intervention policy is preferable. When the economy has attained

full capacity, then the idea of adopting free trade option could be considered. However, it is

necessary to point out that in today‘s world the concept of free trade is utopian. Trade

intervention is practiced in every country, except that the degree of intervention varies from

country to country.

Official intervention in trade processes is made possible through the implementation of trade

policies. For developing countries that have adopted National Development Plan as a

development strategy, trade policies are the instruments used for effective channelling of
resources to appropriate sectors of the economy towards meeting plan objectives. According

to Singh (1985), this group of countries ―have high income elasticity of demand for imports.

The scarce foreign exchange available to them has to be judiciously utilised in line with

deliberate trade policies and in accordance with development priorities‖. In other words, trade

policies are essential for ensuring optimal allocation of scarce resources. It is very clear from

the foregoing that there is an integrated relationship between trade and economic development.

The total output of an economy is mirrored by the Gross National Product (GDP). According

to Peter J. Lloyd (1968), ―the national income is the result and the most common summary

measure of a nation‘s economic performance. It is the reflection of the prevailing pattern of

production and international trade‖. The ratio of exports of goods and services to domestic

product shows the share of output produced in the export sector, and the 18

ratio of imports of goods and services to domestic product is an indication of the proportion of

income expended on imports. The ratio of the sum of exports plus imports of goods and services

to domestic product is the summary measure of the extent of a country‘s involvement in

international trade. The productivity of the entire economy is the index of total economic output

to the value of total input. This was derived from the definition of agricultural productivity by

Alabi (1987). The external trade productivity of the economy will then be the index of total

economic output to the value of total trade. Productivity can be increased by either a higher

output per unit of resources or producing the same level of output with a reduced amount of

input.

2.2 THEORETICAL FRAMEWORK

The framework for foreign trade is based on the law of comparative costs, otherwise known as

the theory of comparative cost. It is the classical theory of international trade formulated by
David Ricardo, and later improved by John Stuart Mill, Cairnes and Bastable. Its best

exposition is found in the works of Taussig, and Haberler (1988).

2.2.1 Theory of Comparative Cost

Comparative cost assumes that trade will be beneficial to a country if it concentrates on the

production of those goods in which it has the greatest relative advantages over its trading

partners. The law is however, an extension of the absolute advantages paradigm in industry.

That is gain will be available to a given country so long as it transfers resources towards the

industry in which its absolute or comparative advantages is greater. The country then sells the

surplus to other country that in their turn channel resources towards those industries in which

their deficiency is least (Dereck, 1974) 19

The theory discussed above depends on the existence of certain conditions for international

trade, and complications arise if these conditions are not met. These conditions include:

Existence of free trading environment that enables a country to concentrate on the production

of the good or goods for which its comparative advantage is greatest.

There should be free movement of factors from one industry to another.

The production opportunity cost ratios in different countries must differ.

The exchange rate of currency must lie between the limits set by the international (non-trading)

price ratio for different product.

Transport cost should not be so high to out reign the price advantage enjoyed by exporter over

domestic producers, and

Trade should not be seriously inhibited by artificial barrier to trade (Dereck 1974 and Livesey

1978).
2.2.2 Theory of Reciprocal Demand

Ricardo expounded the theory of comparative advantage without explaining the ratio at which

commodities would exchange for one another. It was J.S Mill (1848) who discussed the latter

problem in details in term of his theory of reciprocal demand. The term ‗reciprocal demand‘

introduced by Mill explains the determination of the equilibrium terms of trade. It is used to

indicate a country‘s demand for one commodity in terms of the qualities of another commodity

it is prepared to give up in exchange. It is reciprocal demand that determines the terms of trade

which, in turn, determine the relative share of each country. Equilibrium would be established

at that ratio of exchange between the two commodities at which quantities 20

demanded by each country of the commodities which is imports from the other, should be

exactly sufficient to pay for one another.

To explain his theory of reciprocal demand, Mill first restated the Ricardian theory of

comparative cost ―instead of taking as given the output of each commodity in the two

countries, with different labour costs he assumed a given amount of labour in each country, but

different outputs‖ (Mill, 1848). Thus his formulation ran in terms of comparative advantages;

or comparative effectiveness of labour, as contrasted with Ricardo‘s comparative labour cost.

2.2.3 Haberler’s Theory of Opportunity Costs

Haberler‘s (1961) opportunity cost theory overcomes the major criticism of the Ricardo‘s

comparative cost theory which is the labour theory of value and explain the doctrine of

comparative cost in terms of what he called ‗the substitute curve‘ or what Samuelson terms

‗Production Possibilities Curve‘ or ‗Transformation curve‘ or what Lemer calls ‗Production

Indifference Curve or Production Frontier‘.

A production possible curve (PPC) shows the various alternative combinations of the two

commodities that a country can produce most efficiently by fully utilizing its factors of

production with the available technology. The slope of the production possibilities curve

measures the amount of one commodity that a country must give up in order to get an additional

unit of the second commodity. In other words, the slope of the PPC is its marginal rate of

transformation (MRT).

It is the shape of the PPC under different cost conditions that determines the basic and the gains

from international trade under theory of opportunity costs. 21

2.2.4 Heckscher-Ohlin Theory

Berth Ohlin in his famous book Interregional and international trade (1933) criticized the

classical theory of international trade and formulated the general Equilibrium or factor

proportions theory of international trade. It is also known as the Modern Theory of

International Trade or the Heckscher-Ohlin’s (H-O) theory. In fact, it was Eli Heckscher,

Ohlin‘s teacher, who first propounded the idea in 1919 that trade results from differences in

factor endowment in different countries, and Ohlin carried it forward to build the modern

theory of international trade.

The H-O theory states that the main determinant of the pattern of production, specialization

and trade among regions is the relative availability of factor supplies. Regions or countries have

different factor endowments and factors supplies ―some countries have much capital, others

have more labour. The theory now says that countries that are rich in capital will export capital-

intensive goods and countries that have much labour will export labour-intensive goods‖

(Ohlin, 1933).
To Ohlin, the immediate case of international trade always is that some commodities can be

bought more cheaply from other regions, whereas in the same region their production is

possible at high price. Thus the main case of trade between regions is the different in prices of

commodities. The model is more realistic than the classical theory, in that, the former leads to

complete specialization in the production of one commodity by one country and of the other

commodity by the second commodity when they enter into trade with each other.

However, the principal objective of any theory of international trade is to explain the cause of

trade. Two other objectives of a theory of international trade are to explain the composition 22

and volume of external trade. A theory, which explains these three issues: cause, composition

(structure) and volume of trade is conventionally said to be a ―complete" theory of

international trade. The two complete theories of international trade in existence are the

Classical (also called Ricardian) theory and neo-classical theory.

2.2.5 THE CLASSICAL THEORY OF INTERNATIONAL TRADE David Ricardo, the

18th century British economist was the author of the classical theory of international trade and

the doctrine of comparative advantage. Ricardo was the first to demonstrate that external trade

arises not from difference in absolute advantage but from difference in comparative advantage.

By ―comparative advantage" is meant by ―greater advantage". Thus, in the context of two

countries and two commodities, trade would still take place even if one country was more

efficient in the production of both commodities (provided the degree of its superiority over the

other country was not identical for both commodities). In his theorizing, Ricardo assumed the

existence of two countries, two commodities and one factor of production, labour. He assumed

that labour was fully employed and internationally immobile and that the product and factor

prices were perfectly competitive. There are no transport costs or any other impediments to
trade. According to Ricardo, differences In climate and environment tend to result in

differences in comparative advantage; differences in comparative advantage lead to trade. In

the context of a model of two countries, two commodities and one factor of production, Ricardo

obtained the result that a country will tend to export the commodity in which it has a

comparative advantage and to import the commodity in 23

which it has a comparative disadvantage. Since comparative costs are the other side of

comparative advantage, the classical theory is easily couched in terms of comparative costs.

Specifically, the theory now states that a country will tend to export the commodity whose

comparative cost is lower in autarky and import the product the comparative cost of which is

higher in pre-trade isolation.

2.2.6 NEO-CLASSICAL THEORY OF INTERNATIONAL TRADE The Neo-classical

theory of trade evolved in an attempt to modify some unsatisfactory aspects of the classical

theory. Thus, the Neo-classical theory, also called the modern theory, advanced a more

satisfactory explanation for the existence of comparative cost differences between countries;

introduced capital as a second factor of production; and allowed for international differences

in the pattern of demand. The Neo-classical theory is therefore a 2 2 2 model (i.e., it assumes

the existence of two countries, two commodities, and two factors of production). The

introduction of a second factor of production turns out to e very important. This makes the

approach of Neo-classical theory to be different n certain fundamental respects from the

classical theory, namely, in handling of the relationship between factor allocation, income

distribution and international trade.

2.2.7 New trade theory

Prior to Krugman's work, trade theory (Ricardo and Heckscher-Ohlin) emphasized trade based

on the comparative advantage of countries with very different characteristics, such as a poor

country exporting agricultural goods to a rich country in exchange for industrial 24

products. However, in the 20th century, an ever larger share of trade occurred between

countries with very similar characteristics, which is difficult to explain by comparative

advantage. Krugman's explanation of trade between similar countries was proposed in a 1979

paper in the Journal of International Economics, and involves two key assumptions: that

consumers prefer a diverse choice of brands, and that production favours economies of scale.

Consumers' preference for diversity explains the survival of different versions of cars like

Volvo and BMW. But because of economies of scale, it is not profitable to spread the

production of Volvos all over the world; instead, it is concentrated in a few factories and

therefore in a few countries (or maybe just one). This logic explains how each country may

specialize in producing a few brands of any given type of product, instead of specializing in

different types of products. Krugman's model also involved introducing transportation costs, a

key feature in producing the "home market effect". The home market effect "states that, ceteris

paribus, the country with the larger demand for a good will, at equilibrium, produce a more

than proportionate share of that good and be a net exporter of it." The home market effect was

an unexpected result, and Krugman initially questioned it, but ultimately concluded that the

mathematics of the model was correct.

2.2.8 International Trade and Growth

2.2.8.1 A brief historical sketch

It can be said that the positive effects of International Trade (IT) on Economic Growth (EG)

were first pointed out by Smith (1776). This idea prevailed until World War II (WWII),
although with relative hibernation during the ‗marginalist revolution‘. After WWII, the

introverted and protectionist EG experiments had some significance, especially in Latin

America. From the 60‘s on, owing to the failure of those experiments and to the association of

quick EG with the opening of IT and the consequent international specialization in several 25

countries, as well as to the results of many studies based on the neoclassical theories of EG and

IT, a new decisive role was given to IT as EG‘s driving force.

However, although the dominant theoretical position tended, from the beginning (with the

Classics), to indicate a positive relation between IT and EG, many studies linked the gains of

IT only with static effects. But Baldwin (1984), for example, concluded, in a survey of

empirical studies, that the static effects were of little significance. The debate has widened in

the last decades, precisely in the direction of pointing out and stressing the dynamic effects of

IT. The theoretical development afforded by the models of endogenous EG [especially after

the works of Romer (1986) and Lucas (1988)], which stimulated the creation of empirical

studies, moved toward an integrated analysis of the EG and IT theories. So, the classical

tradition, apparently interrupted by the neoclassical separation of those two areas of the theory,

seems to have been recovered, assigning, as a result, a decisive role to IT on the countries‘ rate

of EG. The recognition of this importance has even led to the ceaseless appearance of proposals

from international organisations, such as the World Bank (WB) and the United Nations (UN).

As a result, many countries began to reduce commercial barriers and other controls of economic

activity and obtained a significant (and lasting) increase in the rate of EG, which suggests that

extroversion has a dynamic effect on the economy, helping to speed up the rate of EG.

Moreover, the processes of economic integration intensified.

2.2.8.2 CLASSICAL PERIOD: INTERNATIONAL TRADE AND GROWTH

Since the classics don‘t distinguish the questions of EG from the questions of IT, the

examination of this problem leads us to the classics‘ main models of IT. However, given the

aim of this work, we attempt to advance on those models which basically discuss the ‗static

gains of the IT‘. 26

As far as the interaction between IT and EG is concerned, we found two main ideas to point

out in Smith (1776). On the one hand, IT made it possible to overcome the reduced dimension

of the internal market and, on the other hand, by increasing the extension of the market, the

labour division improved and the productivity increased. The IT would therefore constitute a

dynamic force capable of intensifying the ability and skills of workers, of encouraging technical

innovations and the accumulation of capital, of making it possible to overcome technical

indivisibilities and, generally speaking, of giving participating countries the possibility of

enjoying EG.

In turn, Ricardo (1817) presented a ‗dynamic model of EG‘ with three forces and two

restrictions. He characterized the progressive states as having high savings, capital

accumulation, production, productivity, benefits and labour demand forcing the increase of

wages and demographic growth. However, in view of the limitations of land, both in quantity

and in quality, the additional alimentary resources were obtained in conditions of decreasing

returns, in which the production is absorbed by wages in an increasing proportion, reducing the

stimulation of new investments and, sooner or later, reaching the ‗stationary state‘ IT could

delay the fall in the rate of profit. Apart from the contribution of IT, underestimating the

importance of technology, he underestimated the positive effects of IT on technology.

Finally, among the Classics, Mill (1848) also explicitly reported the Classic point of view

according to which the production resulted from labour, capital, land and their productivities.

And just like Ricardo, he recognized that underlying the ‗progressive state‘ there was the
‗stationary state‘, and that ultimately the force capable of delaying this state was technical

progress. Accordingly, the emphasis that Smith had placed on the extension of the market

decreases, even though he also defended free trade among countries. We think that this situation

was the result of the expectation created by the Industrial Revolution (IR) in regards to

technical progress 27

2.2.8.3 POST CLASSICAL PERIOD: INTERNATIONAL TRADE AND GROWTH

Classical thought gave way to ‗marginalism‘ from the 1870s onwards. This fact led to a ‗new

theory‘ (neoclassical) which, for some time, kept the main lines of the evolution of the economy

in the long-term away from the studies. The structure of this section takes into account the

separation that occurred between IT and EG theories, and takes also into consideration some

reactions to the classical and neoclassical theories.

2.2.8.4 Neoclassical international trade

The followers of Ricardo ignored the question of the foundations of comparative advantages

and didn‘t identify factors, resulting from IT that could raise, in a lasting form, the rate of EG

and its tendency in the long-term. In general, the changes introduced in the Ricardian theory

demonstrated the increase of welfare caused by IT, but ignored eventual gains in the rate of

EG. It was in the context of neoclassical general equilibrium that the model of Heckscher

(1919) and Ohlin (1933) appeared, whose contributions Samuelson (1948 and 1949) completed

in the late 40‘s. In a rigid analysis of the model, we observe that it permits to advocate the

opening of the countries to IT, showing that it is efficient, mutually beneficial and positive for

the entire world. However, it limits the analysis to the static gains of welfare.
2.2.8.5 Post-classical growth, before Solow

Generically, the classical economists gave us an idea of the race between the increase of the

population and EG, with an uncertain winner. This version gradually disappeared with the

industrial revolution (IR), because the product increased from decade to decade in increasingly

larger areas. That might be the reason why EG was no longer seen as a problem and why it

wasn‘t amply pursued in the studies and writings of the following economists. 28

Nevertheless, Marshall (1890, p. 225) pointed out that ―The causes which determine the

economic progress of nations belong to the study of international trade‖. In effect, the expansion

of the market that it represented led to the increase of global production and originated the

increase of internal and external economies, which resulted in increasing income for the

economy. But, although he understood the importance of those externalities, he also recognized

the difficulties of his analytic treatment. Among his successors, only Young (1928) was

concerned with EG when he considered, like Smith, that the dimension of the market limited

the labour division (and therefore, the productivity). He also examined the inter-relation

between industries in the process of EG, the creation of new industries due to the specialization

resulting from the extension of the market, the importance of specialization and standardization

in a vast market and the influence of this market on technological progress.

Another exception of this period‘s remarkable was Schumpeter (1912, 1942 and 1954), who

repeated old points of view concerning the tendency of the profit to reach a minimum and the

dependency of the rate of EG on capital accumulation. But he went further, distinguishing

‗invention‘ (advancement of useful knowledge to production) from ‗innovation‘ (economic

activity of exploring that knowledge). Considering the latter as the central element of EG, he
described the exigencies for a successful innovation, which included the need for markets

opened to the exterior.

We conclude this subsection by mentioning some authors who made the restart of studies of

dynamic themes – and, consequently, of the EG theory – easier, thus laying a good foundation

for future investigations. Ramsey (1928) introduced the description of EG and the principle of

research of an optimum EG. Cobb and Douglas (1928) presented production functions that

became known as Cobb-Douglas production functions and which constituted an essential

element of numerous models of EG. Harrod (1938 and 1948) and Domar (1937 29

and 1946) independently developed a model inspired in Keynes, which gave the research of

EG an important momentum and a specific direction. Finally, Rosenstein-Rodan (1943)

retrieved some of Young‘s ideas, when the problems of the Less Developed Countries (LDCs)

attracted the economists‘ attention.

2.2.8.6 Reactions of classical and neoclassical theories

Immediately after the end of WWII, the dominant position was questioned, namely in the case

of the LDCs. Those reactions abandoned the classical and neoclassical orientation in

considering hypotheses that were strange to them. The introverted and protectionist

EG experiments of Latin America (industrialization for import substitution) also stood out,

with rationalization and justification owing, first of all, to some structuralist economists

[Prebisch (1949) – executive secretary of UN – and Singer (1950)] and to the UN Economic

Commission for Latin America (ECLA). Essentially, they defended that the IT brought on

negative consequences in the long-term for the LDCs because their specialization occurred in

products with low demand income elasticity and, therefore, with a weak perspective of exports

growth, and noticed a tendency for the constant deterioration of trade terms. Furthermore, this
specialization entailed significant economic and social costs of adaptation to the evolution of

the chain of IT.

Myrdal (1956 and 1957) sustained that IT didn‘t equal the remuneration of factors (in

contradiction with the proposal of the neoclassical model) and that, unlike the industries of the

DCs, the traditional industries of the LDCs remained weak. In short, the IT had some positive

effects of diffusion on the LDCs, but in the long-term the negative effects remained because it

stimulated a production of primary goods (plantations and mining enclaves) subject to irregular

prices and demand. Lewis (1954 and 1969) and the Marxist author Emmanuel (1969) decided,

respectively, on the deterioration of the trade terms of the LDCs 30

and on the existence of unequal trade biased against the LDCs. Nurkse (1959) also questioned

the relevance of commercial trade between the DCs and the LDCs for the latter. Perroux (1978)

considered that the LDCs were controlled. Consequently, the EG and the structural

transformation were induced by the DCs, which will cause the loss of potential positive effects

to the external world, in the long term.

Another group of (radical) authors observed the economic relations as a whole (chain of goods,

services and capitals): radical Marxist visions [among others, Destanne de Bernis

(1977) and Andreff (1981)] and the dependency theory [among others, Santos (1970), Frank

(1970) and Amin (1970 and 1973)]. Basically, they defended that the underdevelopment was

the consequence of the changes and deformations in the economic and social structures caused

by the economic and social relation that existed with DCs.

2.2.8.7 Modern neoclassical theory of growth

In the late 50‘s and early 60‘s the interest for the EG reawakened with the recovery of the

classical approach, according to which the production was a function of labour, capital, land

and their productivities. The question of the ‗accounting of EG‘ was also raised.

We can point out 1956 as the year of birth of the ‗modern neoclassical theory of EG‘ with

Solow [and Swan (1956)]. The proposed model describes the relation between savings,

accumulation of capital and EG based on a function of aggregate production (crucial supply),

and there was a point of sustainable equilibrium (steady state), which would be reached

regardless of initial conditions. By increasing the productivity of the factors, the exogenous

technical progress created positive effects on the process of accumulation and made the model

compatible with a balanced growth path. In economic terms, this means that it took into account

the convergence between economies. Moreover, along with the diffusion of technical progress

there would be a convergence of the rate of EG per capita for a common 31

steady-state. Consequently, it can be said that, by facilitating the diffusion of technical

progress, the IT would be important for the LDCs.

As far as the ‗accounting of EG‘ is concerned, Solow (1957) used the function of aggregate

production as a starting point to measure the sources of EG in the United States. The rate of

EG springs from labour and capital growth rates (which we call traditional sources), weighed

by the respective participation in production and technical progress or total productivity of

factors (TPF). The TPF resulted from the difference between the observed rate of EG and the

part of that EG explained by the traditional sources (thus the designation ‗residual of Solow‘).

Clearly he distinguished ‗EG effects‘ (the three sources mentioned above) from ‗level effects‘.

As a result, IT would, eventually, be a ‗level effect‘ that would create positive effects in a

transitory period of time.

From Solow on, many economists considered the advance of knowledge to be a source of the

‗residual‘. However, the ‗accountants of EG‘ (post Solow) included as sources the

contributions of many elements such as the accumulation of ‗human capital‘, economies of

scale, the improved allocation of resources and the new generations of more productive

machines [among others, Kendrick (1961), Denison (1962, 1974 and 1985) and Griliches and

Jorgenson (1967)]. However, they didn‘t quantify the advancement in knowledge, leaving a

residual factor unexplained. Furthermore, they didn‘t include IT, at least not explicitly, as a

source of EG. We think that this situation is due to two factors that have already been

mentioned. On the one hand, the separation that occurred between the theories of IT and EG,

and on the other, the effects of IT on the level and not on the long-term rate of EG. 32

2.3 REVIEW OF NIGERIA’S TRADE POLICIES

Nigeria‘s trade policies could be discussed under two broad regimes, that is, the period before

the introduction of the Structural Adjustment Programme (SAP), and the period after its

adoption. Throughout these regimes, trade policies exhibited identical characteristics of being

short-term in nature (operational within each fiscal year and reviewed thereafter), and directed

at meeting specific objectives such as, ensuring balance of payments viability and export

promotion. They were also meant to complement other policy initiatives, such as,

industrialisation policy, employment creation and self-sufficiency policies, etc. The trade

policies implemented under the two regimes were as follows:

2.3.1 Pre-SAP Trade Policies

At independence, Nigeria‘s economy was in many respects, rural and relatively backward,

purely agrarian with very narrow industrial base. In an effort to modernise the economy, the

early political leaders adopted development planning strategy as an instrument for securing a

steady and rapid growth of the economy. Emphasis was placed on accelerated development of

the economy through expansion in the nation‘s industrial base. Consequently, the trade policies

had to be restrictive in order to moderate the demand pressures. Exchange control measures

were then introduced to adjust the demand for foreign exchange to the available supply so as

to maximise the use of reserves by ensuring that essential imports were accorded priority over

other imports in the use of foreign exchange resources. Also, in order to give effect to the

import substitution industrialisation policy, trade barriers in the form of imports licensing was

put in place to complement imports tariffs in the control of import, as well as protect domestic

industries that were set up to produce import substitutes. The customs tariff structure was

deliberately discriminatory, biased in favour of capital goods and raw materials. 33

Items considered as luxury goods were either put on import prohibition list or had very high

import tariffs placed on them. In terms of directional flow of trade, Nigeria‘s imports and

exports were concentrated in the Western Hemisphere, although not as a deliberate policy, but

due to historical inheritance.

The second National Development Plan (1970-74) came on the heels of the termination of

Nigeria‘s civil war. The major strategy of the plan was to secure economic growth through the

replacement of destroyed assets and restoration of the productive capacity of the country, as

well as ensure equitable distribution of the fruits of development. It was also envisaged that by

the end of the plan period, Nigeria would have been able to produce its own goods and services,

finance its development, rely on its own labour, as well as strive for the best terms for its

exports.
Towards this end, the plan was designed to incorporate and enhance the priority areas of the

1962 - 68 plan. That is, enhance agricultural and industrial production, as well as develop high

level and intermediate level manpower. Additional inputs were therefore required for the

execution of the plan which eventually gave fillip to import demand. To moderate the pressures,

restrictive trade policies were retained and strengthened. Exchange control measures became

stringent with the introduction of foreign exchange budgeting in 1971/72 to relate aggregate

foreign exchange expenditure, by category, to income. Similarly, import licensing was

intensified and increasing number of non-essential items were placed under ban, while some

finished consumer items considered not too essential were placed under specific license so as

to keep their importation within specified quota. Increase in the prices of crude petroleum in

1973 coupled with the country‘s low absorptive capacity, and the existence of various

production bottlenecks in the economy had by 1974 led to a situation whereby the country was

faced with surfeit of funds for which it had no immediate investment outlet internally, in the

circumstance, it was thought that the exchange control 34

regulations needed further liberalization‖. Consequently, the restrictions on import payments

were removed in 1974. The boom from the crude oil export earnings spilled into the Third

National Development Plan (1975 - 80).

The design of the Third National Development Plan was very ambitious, predicated on

enhanced earnings from the oil sector of the economy. Trade policies were accordingly relaxed.

By the time the Fourth National Development Plan (1981 -85) came up, the economy had

started experiencing declines in foreign exchange earnings which was climaxed by the oil

shock of the early 1980s. Oil price fell precipitously, but the demand for imports maintained

the upward direction. The external reserves level which could finance about 24 moths of

imports in 1974 could only support 1.8 months by the end of 1978, and less than one month in
the early 1980s. This was a reflection of the fact that import demand had become price inelastic,

and the resultant effect manifested in balance of payments deficits. Concerted efforts were then

made to control the import trend through imposition of stricter trade restrictions. The mounting

level of controls administered by innumerable persons further created administrative

bottlenecks. The inability of the control measures to effectively secure downward adjustment

to imports demand against the backdrop of shrinking export earnings gave rise to serious

payments imbalance which required urgent and drastic remedial actions from the authorities.

2.3.2 Trade Policies During SAP

The magnitude of the distortions in the economy ushered in by the culture of controls made it

imperative for government to take urgent and drastic actions to ameliorate the situation. Thus,

in July, 1986, the Structural Adjustment Programme A number of strategies were enunciated

to achieve the broad objectives of the SAP. Specific to international trade, the primary focus

was on liberalization of trade and the pricing system, with emphasis on the use of 35

―appropriate price mechanism for the allocation of foreign exchange‖. The application of

import and export licensing became irrelevant in the new dispensation and were consequently

abolished. To encourage export activities, the policy which required exporters to surrender their

export proceeds to the Central Bank of Nigeria, was abolished. Consequently, exporters were

allowed to retain 100 percent of their export earnings in their domiciliary accounts from which

they could freely draw to meet all their eligible foreign exchange transactions. Furthermore,

under the revised duty drawback/suspension scheme, exporters/producers could import raw

materials and intermediate products free from import duty and other indirect taxes and charges.

The Export Incentive and Miscellaneous Provisions Decree of 1986 were promulgated to

encourage exports. Through it, the CBN could provide refinancing and rediscounting facilities
to banks to encourage them to provide export financing to their customers. Also, the Nigerian

Export Credit Guarantee and Insurance Corporation came on stream in 1988, and was

subsequently renamed Nigerian Export-Import Bank (NEXIM), to provide credit and risk

bearing facilities to banks, so as to encourage them to support exports. In the area of imports,

the devalued exchange rate of the naira at the different shades of the Foreign Exchange Market,

either SFEM, AFEM or IFEM, was meant to make imports dearer and thus discourage

excessive importation and thereby reduce the pressure on the balance of payments. Import

licensing was abolished and reliance was placed on the use of customs tariff for the control of

imports. The list of items on the imports prohibition list was also drastically reduced.

2.3.3 Trade Policies in Recent Years

Nigeria‘s tariff policy is mostly governed by the recently revised Common External Tariff

(CET) regime of the Economic Community of West African States (ECOWAS). Initially 36

adopted in 2005, the four bands CET with a maximum rate of 20 percent, was revised in June

2009 to include a fifth band of 35 percent, primarily at the behest of Nigeria. Nigeria applies

the 35 percent rate to 167 (of 5,671) tariff line items, and the new CET covers about 80 percent

of the country‘s tariff lines that had non-zero import values in 2008 , Besides tariff barriers,

Nigeria has a long list of prohibited imports (and a shorter list of prohibited exports), making

smuggling prevalent in the country. Smuggled imports typically enter Nigeria from its regional

neighbours (Benin, Niger, Cameroon, and Chad).

In September 2008, the trade regime was amended to lower tariffs for a wide range of goods

and replaces a number of import bans by tariffs. Based on the country‘s latest (2006) MFN

Tariff Trade Restrictive Index (TTRI) of 11.4 percent, it ranks 98th (where 1st is least

restrictive) of 125 countries. Based on this index, Nigeria is as open to trade as the average sub-
Saharan Africa (SSA) country but is more restrictive than the average lower-middle-income

country (TTRI of 8.6 percent). With the government‘s aim of enhancing food security, the

agricultural sector is afforded a high level of tariff protection (TTRI of 28 percent) compared

to the non-agricultural sector (TTRI of 8.5 percent).

The country‘s average MFN applied tariff (including ad valorem equivalents of specific duties)

has decreased dramatically from the late 1990s and early 2000s when it was well over 20

percent and now stands at 12 percent. The maximum applied MFN tariff (excluding alcohol

and tobacco) has also decreased in the last decade and was 50 percent as of 2008. The country‘s

trade policy space, as measured by the wedge between bound and applied tariffs (the overhang),

is very large at 106.4 percent, compared to 48.1 percent on average for its regional neighbours

and 29.5 percent for the lower-middle-income countries. The country ranks 91st (out of 148)

on the GATS Commitments Index, reflecting ample room for committing to further multilateral

liberalization in services trade. 37

Faced with high food prices in 2008, the government drastically lowered the import tax on rice

from 100 percent to 2.7 percent and allocated a special fund for rice imports to fight food

shortages.

2.4 OPENNESS, PRIMARY COMMODITY DEPENDENCE AND ECONOMIC

GROWTH

Most empirical studies define openness of an economy as the ratio of trade to GDP, but the

appropriateness of this variable as an indicator of openness has been questioned on the grounds

that it does not capture the dynamic effects of trade from both the demand and supply sides for

which growth of exports related to marginal propensity to import is clearly more appropriate.

Different indicators do not even signal openness that is the rough direction of trade policy, in
a uniform way. However, for time series studies, the ratio (exports + Imports)/GDP seem more

preferable and the only viable choice but is far less for cross country comparisons as the ratio

varies with country sizes. For small countries trade may account for a large share of the GDP

than for larger countries. A small county may be open in practice in the face of numerous policy

distortions to trading activities. If a country has 45 per cent of average tariff then it must be a

closed one compared to country with 25 per cent tariff but again the country with per cent tariff

is more closed than a country without any tariff. Even worse, because they consider several

indices of trade openness naturally we face a question of which one is more important. Is a

country with 45 per cent tariff and 20 per cent black market premium more closed than a

country with 25 per cent tariff and 35 per cent black market premium? So, we must see what

will happen if we change the criteria for openness a little. This means that the effect of openness

on growth in general also depends on what criteria are adopted. 38

Studies have shown that most commodity dependent countries experienced slow or negative

growth in the 1980s and 1990s. In the 1960s and even more in the 1970s commodity producer

countries were able to finance trade deficits because their expected export revenue streams

were relatively high. Then, with the collapse in the world prices of their exports in the early

1980s, they were forced to close these deficits quickly, which resulted in declines in their

trade/GDP ratio, government revenue, capacity to import and consequently aggregate growth.

While some empirical studies have posited that freer trade increases a country‘s growth rate by

raising the productivity of a country‘s labour and capital (what is known as ―total factor

productivity‖ or ―TFP‖), especially through exposure to increased competition in the global

market, access to new technology via trade in information or imitation of new products;

increased foreign direct investment (FDI), economies of scale in production, as well as access

to cheaper imported inputs, the experience of most LDCs is one of declining productivity.
Countries with high natural resources and primary commodity content in their exports are not

necessarily ―closed‖ nor have they necessarily chosen to ―participate more in the global

trading system‖. For them, reducing tariffs and eliminating non-tariff barriers to trade may not

lead to growth (Birdsall and Hamoudi, 2002). Part of a proper strategy for diversifying

production in natural resource rich countries involves ―openness to trade, market access, and

FDI flows.― but then such a strategy involves improvements in education, infrastructure, and

governance, as well as publicly supported research and development, non of which relates to

―openness.‖ There is no theoretical reason why trade liberalization should be expected to

result in a shift away from primary commodities in the short run, especially where the abundant

factor in a country is some extractable natural resource. In the long run, a change in relative

prices would probably result in such shifts, but trade liberalization is only relevant in this case

if the pre-reform trade policy explicitly favours natural resource exports. 39

2.5 PROBLEMS AND CHALLENGES OF EXPANDING TRADE IN NIGERIA

Nigeria‘s agricultural and industrial declines are the result of the combination of interrelated

factors:

2.5.1 Misplaced Priority: agriculture versus oil

The discovery of oil and the subsequent neglect of agriculture since the 1970‘s have created

the breeding ground for corruption and economic mismanagement in Nigeria, with the later,

reinforcing the former. The unfortunate side of the unfolding events, with its attendant grand

corruption in high places, few Nigerians became stupendously rich, while the majority went

under in abject poverty. The resultant frightening wide gap between the rich and the poor took
its toll on the state of the nation. To join the elite millionaire/billionaire clubs, many Nigerians

abandoned agriculture, their profession and overnight, turned oil speculators and merchants.

With this ugly development, the once ebullient Nigerians became lazy always longing and

looking out for cheap and easy means of ‗making it‘ while greed, corruption and crave for

instant gratification thrived and took the centre stage, the urge for agricultural activities crashed

to the lowest ebb.

2.5.2 Poorly Designed Liberal Trade Policies

Generally, the process of trade liberalization involves the reduction of tariff or trade barriers.

In this context therefore, trade liberalization has become a common policy prescription for

increasing trade flows. However, this has not always worked out and empirical evidences has

shown that trade liberalization cannot be counted on to balance export and import of an

economy. To think mechanically in terms of liberalization programming models taught in

training seminars or the university, a model in which trade policy variables are shifted to 40

balance export and import is to call for disaster. This is more so as the factors which determine

imports may differ from those that determine exports. In this regard, although a developing

country may be able to control how fast it liberalizes imports, it is on the other hand much less

unable to influence the rate of growth of its export, at least in the short run. Consequently,

agricultural and industrial output could not grow due to factors attributable to the indifferent

standard of policy implementation by the various governments, absence of executive capacity

at the national level etc. All these grew into a culture robbing the Nigerian society at large the

moral fiber to stand up for the development of a self reliant economy.

Moreover, the failure of the export sector to grow more rapidly in Nigeria reflects a reluctance

to commit investment to the export sector. The weakness of the export sector is, at the root, a
reflection of the inability of the Federal Government to the maintenance of policies other than

through the fragile device of donor conditionality. Consequently, agricultural and industrial

expansion for export in Nigeria continued to be generally impaired by low effective demand

for locally made goods, occasioned by the continued influx of cheaper and better quality

imported products, lack of institutional framework to grow and develop these sectors and the

poor state of infrastructure (such as power and water supply).

2.5.3 Unfavourable International Trade Policies and Asymmetric Information

The World Trade Organisation (WTO) rules have national implications on developing

countries sustainable development agenda. The present paradigm of investment governance

(represented by the international investment agreement entered into by these countries) does

not capture the principles of sustainable development. These agreements do not take into

account the economic vulnerability of these countries. A number of scholars and strategies

specialists have produced literature that yields important conclusions about the new roles and

41

implications and the relationship between powers, threats, and purpose of international

investments. These account raises questions about the moral and professional obligations of

economists in government and international organizations. Asymmetric information is at the

forefront of these debates. As the phrase implies, it is a situation in which some economic

agents have more information than others and this affect the outcome of bargain between them.

Among the theories are some that yield important insight into the operations of the financial

markets and international trade. Cooper (1984) once observed that: ―The structure of the

world of nations lies far from what could be required to meet the conditions of perfect

competition. There are only 160 members of the committee of nations, many of which are large
enough to influence some of the markets in which they operates, a few of which are large

enough to influence all the market in which they operate. In short, the committee of nations

exists in the presence of extensive monopoly power. The attempt to exercise this limited

monopoly in the pursuits of national objectives violates the conditions of competitions and

gives rise to the pervasive possibility of pushing economic policy towards a global sub-

optimality. That in turn give rise to the possible gains from collusion or as it is more politely

called in context of economic policy ‗cooperation and coordination‘ in order to enhance the

attainment of national economic objectives (Cooper 1984, Pg 1221).

If Coopers observation is correct, then the current global economic interdependence is

asymmetrical, skewed in favour of the West. Consequently, for nations to benefit from such an

economic order, they must reorganize their house from the inside (Thliza 2007). 42

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

This chapter explicitly deals with the methodology employed in the course of the research. in

the previous chapter there was an argument in support of and against international trade as an

engine of growth. However relying on this notion will not provide us with an optimal solution

for achieving the desired result as there is need for empirical verification through econometric

methods, putting in mind the supporting criteria.

The aim of econometric is to verify economic theory or assertion on how well the explanatory

power of the model estimates behaves with regard to macroeconomic unit (Koutsoyiannis

1973). This justified the reason for adopting econometric tools for this study.

3.2 Model Specification

There has been series of models in the area of international trade, Ayinde Adelemo on

―External Trade and Internal Development‖ used GDP as a function of net export, degree of

openness and terms of trade, Bela Balasa on ―Export and Economic Growth‖ used GDP as a

function of net export, degree of openness and exchange rate, Oviemuno Anthony on

―International Trade as an Engine of Growth in Developing Countries‖ used GDP as a function

of Exchange rate, import, export and inflation, the dependent variable for the above studies is

economic growth measured with GDP while the various independent variables follows.

This research work examines the effect of trade on Nigeria economy. The variables required

for this study like most other studies are both dependent and independent variables. 43

The OLS technique, was adopted for the specification of the model in the form

Y= b0+b1X1+b2X2+b3X3+b4X4+ε

Where,

Y= the dependent variable

b0= intercept or the equation constant

b1= the coefficient of X1

b2= the coefficient of X2

b3= the coefficient of X3

b4= the coefficient of X4

ε= the error term

Specifically the following functional relationship is stated for this study

GDP=ƒ(nex, dop, exch, tpc)

Where,

GDP= Gross Domestic Product

nex= net export

dop= degree of openness

exch= exchange rate

tpc= trade policy changes

Similarly 44

(log)GDP= (log) b0+ b1 (log) nex+ b2 (log) dop+ b3 (log) exch+ b4 tpc + (log)ε

Was developed to see the overall effect of trade on economic growth in Nigeria.

Trade policy changes would be represented by dummy variables:

A dummy variable is a variable that can have only two possible values, zero and one. When a

dummy variable is one the variable indicates the occurrence of a particular state.

Tpc/Dummy=1 when trade restrictive policy was adopted

Tpc/Dummy=0 when trade liberalization policy was adopted

Unit of measure:

The values for GDP are in billion/naira

The values for net export are in billion/naira

The values for exchange rate are in naira per one dollar

The values for degree of openness was gotten as the ratio of GDP to total trade.

3.3 A priori Expectation

Considering the various instrument of international trade in Nigeria, it is expected that there

will be a positive relationship between trade and economic growth in Nigeria.

That is:

> 0; b1 > 0

> 0; b2 > 0 45
> 0; b3 > 0

> 0; b4 > 0

3.4 Test of Significance criteria

The next stage after establishing economic criteria of any model is to develop the statistical

and econometric criteria for the evaluation of the parameter estimate. Those adopted for this

model includes;

The square of the correlation coefficient ( ) is the ratio of explained variation to the total

variation, which is offered called the coefficient of determination.

It is used to show the percentage of total variation i.e. dependent variable that are explained by

the independent variable. The ratio lies between 0 and 1 and the nearer to 1, the greater the

explanatory power of estimator.

Testing helps in deciding whether the estimates are significantly different or not. If the standard

error is small than the half of the numerical value of the parameter estimates, we conclude that

the estimates are statistically significant.

In order to determine the goodness of fit of the regression line and reliability of the result, the

quantitative tools such as adjusted coefficient of determination ( ̅ ) t-statistic, f-statistic, the

Durbin-Watson statistics, and Schwarz Criterion, were also employed.

Adjusted Coefficient of Determination ( ̅ ): owing to the fact that does not take into account

the loss of degree of freedom, the adjusted would be used to measure the goodness of fit of the

model. 46

Durbin–Watson statistic (d): is a test statistic used to detect the presence of autocorrelation

in the residuals from a regression analysis. It is named after James Durbin and Geoffrey Watson
Gujarati (2003). The value of d always lies between 0 and 4. If the Durbin–Watson statistic is

substantially less than 2, there is evidence of positive serial correlation. As a rough rule of

thumb, if Durbin–Watson is less than 1.0, there may be cause for alarm. Small values of d

indicate successive error terms are, on average, close in value to one another, or positively

correlated. If d > 2 successive error terms are, on average, much different in value to one

another, that is negatively correlated. In regressions, this can imply an underestimation of the

level of statistical significance.

T-statistic: measure of the statistical significance of an independent variable b in explaining

the dependent variable y. It is determined by dividing the estimated regression coefficient b by

its standard error SB. Thus, the t-statistic measures how many standard errors the coefficient is

away from zero. Generally, any t-value greater than +2 or less than - 2 is acceptable. The higher

the t-value, the greater the confidence we have in the coefficient as a predictor. Low t-values

are indications of low reliability of the predictive power of that coefficient.

Schwarz Criterion or Bayesian information criterion (BIC): is a criterion for model

selection among a class of parametric models with different numbers of parameters. Choosing

a model to optimize BIC is a form of regularization. The BIC was developed by Gideon E.

Schwarz, who gave a Bayesian argument for adopting it. It is very closely related to the Akaike

information criterion (AIC). In BIC, the penalty for additional parameters is stronger than that

of the AIC Schwarz (1978). 47

F-test: is any statistical test in which the test statistic has an F-distribution under the null

hypothesis. It is most often used when comparing statistical models that have been fit to a data

set, in order to identify the model that best fits the population from which the data were

sampled. Exact F-tests mainly arise when the models have been fit to the data using least

squares.
3.5 Justification for the estimation technique

This research work is based on the (OLS) equation, designed to predict the relationship between

the explained and explanatory variable. The model is basically in multiple regression forms.

Though there is no agreement on which of the available economic model is the most suitable

for empirical stations but the parameter estimate obtained by Ordinary Least Square (OLS) has

some optimal properties. Secondly the computation of Ordinary Least Square is fairly simple

as compare to other econometric technique and the data required are not excessive.

Thirdly, the (OLS) method has been in a wide range of economic relationship with fairly

satisfactory result and despite the improvement of computational and of statistical information

which facilitate the use of other more elaborate econometric techniques. Also OLS is an

essential component of most other econometric techniques. 48

CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION OF RESULTS

4.0 INTRODUCTION

The presentation, analysis and interpretation of the data gathered were discussed in detail in

this chapter. Given that it has been widely acknowledge that research is an investigation taking

place, in other to discover new facts, verifying existing knowledge as well as obtaining

additional information about something with a view of solving its inherent problem or

improving its beneficial attributes, this work seeks to evaluate the effect of trade on economic

growth in Nigeria. In view of this, this chapter is design to present the result of the empirical

investigation.

The result reveals a lot of interesting issues regarding the relationship between economic

growth (measured by Gross Domestic Product) and external trade using net export, exchange
rate, trade policy changes and degree of openness as the explanatory variable as specified in

the model. The time series data used spans 25 years (1984-2008).

4.1 PRELIMINARY ANALYSIS OF DATA

UNIT ROOT TEST

Before the estimation of our equation, the characteristics of the data have to be examined to

know if the data‘s used is relevant to the study. Therefore, a unit root test using Augmented

Dickey Fuller (ADF) Test is carried out to know if data‘s are stationary, if integrated at order

zero I(0), if integrated at order one I(1) or if integrated at order two I(2). The table below gives

the result of the ADF test. 49

Table 4.1.1 Unit Root Test ADF UNIT ROOT TEST

Variable ADF at level ADF at first ADF at Order of

diff. second diff. integration

LGDP -0.802337 -3.985074 -5.489041 I(1)

LNEX -1.047817 -5.814226 -6.047040 I(1)

LEXCH -2.900120 -4.896311 -7.786602 I(0)

LDOP -2.019731 -4.420894 -8.044110 I(1)