TRADE LIBERALIZATION AND PERFORMANCE OF THE NIGERIAN TEXTILE INDUSTRY (1986 – 2015)

TRADE LIBERALIZATION AND PERFORMANCE OF THE NIGERIAN TEXTILE INDUSTRY (1986 – 2015)

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ABSTRACT

Nigerian textile industry is characterized with ineffective incentives, political uncertainty, acute power shortage, poor infrastructure, smuggling and red-tape bureaucracy, among others. However, government of Nigeria in appreciation of the role of industrialization in growth process now motivates firms. This is done through various government policies and establishment of various agencies. All these policies were designed to address these problems and encourage textile industry performance with a view of diversifying the productive base of the economy and increase its output for both domestic and export earnings. These problems necessitated the need to examine the effect of trade liberalization on textile industry performance in Nigeria.

The study modified the endogenous growth model within a time series estimation techniques of Autoregressive Distributed Lagged model (ARDL). The data spanned between 1986 and 2015, while four different models were tested. Findings revealed a co-integrated relationship for all model estimated. Specifically, the effect of simple tariff rate on textile industry is negative and statistically significant in the long-run; while trade liberalization policy measure through simple tariff rate has a lag effect before it can be effective in the textile industry. In both short and long run, real effective exchange rate depreciation worsens the performance of textile industry in Nigeria. Similarly, the effect of weighted tariff rate on textile industry is negative and statistically insignificant, while short-run result evidence that trade liberalization policy measure through weighted tariff rate has a lag effect before it can impact on textile industry performance in Nigeria. Specifically, a 1.0% rise in past weighted tariff rate value (trade liberalization policy) raises the level of textile performance by about 0.99%, while the current increases in tariff rate improve the textile industry performance by 1.19% over the period of analysis, though not significant.  In the long run, a 1.0% rise trade openness would decrease the level of textile industry performance by about 17.49%. Thus, factors affecting textile industry performance in the short run are simple tariff rate, exchange rate changes, trade openness and labor and capital inputs in Nigeria. Similarly, causality tests results showed unidirectional causality running from trade liberalization (both measure) to textile industry performance.

The study concluded that trade liberalization has both lag and significant effects on the performance of the Nigerian textile industry from 1986 to 2015. It was recommended that government should make concerted efforts toward providing a favorable and conducive business environment for the textile industry to strive.

Keywords:     Trade liberalization, Industrial Performance, Trade openness, Real Effective Exchange Rate, Nigeria.

Word Count:                 398

CHAPTER ONE

INTRODUCTION

1.1              Background to the Study

Trade arrangements and engagement between Nigeria and its trading partners are in tandem with the magnitude of various endowments the country possesses. For instance, Nigeria is endowed with a population of over one hundred and seventy (170) million citizens, oil production of over two (2) million barrels per day and a Gross Domestic Product (GDP) of over USD 500 billion (U.S. Department of State, 2015:3). On trade footprint, the country’s total external trade stood at N16, 426.8 billion at the end of the fourth quarter of 2015, with an import value of N2, 833.5 billion from Asia, N2, 501.6 billion from Europe, N871.3 billion from America, N420.4 billion from within the African continent, and N213.8 billion from ECOWAS region (National Bureau of Statistics, Foreign Trade Report, 2015: 1-2).

According to the U.S. Department of State (2015:3), Nigeria is the thirteenth world’s largest oil producer and sixth largest oil exporter, producing high-value and low-sulfur crude oil. The contribution of crude oil to the value of total domestic export trade in 2015 amounted to N6, 945.3 billion (NBS, Foreign Trade Statistics Report 2015: 3). Chete, Adeoti, Adeyinka and Ogundele (2014), assert that prior to the discovery of crude oil, agriculture was the mainstay of the Nigerian economy. The agricultural sector provided food, raw materials, revenue and employment for the nation’s teeming population. However, after discovering crude oil in commercial quantities after the nation’s independence in 1960’s, its exploration and exportation weakened the agricultural sector and led to a shift away from industrial activities of a productive nature towards an over-reliance on a single commodity, which is – crude oil (Chete et al., 2014; UNCTAD, 2015).

Correspondingly, Nigeria's trade policy after the nation's independence in 1960 was largely based on an import substituting strategy (World Bank, 2010). However, in the early 1980's, Nigeria encountered various economic problems, which stirred up the need to adopt an effective expansionary trade policy that could ameliorate the apparent economic problems in the country. Hence, in 1986, the expanding economic crisis and its degrading effects on the nation's economy formed the basis for the adoption of the Structural Adjustment Program (SAP), as unguardedly imposed by the World Bank and the International Monetary Fund (Olaniyi, 2014; Odejimi & Odejimi, 2015).

The Structural Adjustment Programme (SAP) was widely acknowledged as a profound economic reform for reversing the downward trends in the economy. The policy was aimed at; promoting investments, reducing the total reliance on crude oil revenue, developing and utilizing domestic technology, encouraging the use of local rather than imported raw materials, privatizing and commercializing state-owned enterprises (Chete et al., 2014). These initiatives were proposed by the global financial institutions, that is, the institutions of the Washington Consensus as the panacea for the promotion of industrial efficiency, and improvement in the performance of the nation's industrial sector (Tamuno & Edoumiekumo, 2012; Olaifa, Subair & Biala, 2013; Chete et al., 2014).

            Also, documented evidence reveal that trade liberalization was one of the fundamental objectives of the Structural Adjustment Programme (Olaifa et al, 2013). Initially, it was expected that the implementation of the trade liberalization policy, under the platform of SAP, would assist in eliminating foreign exchange control, removing price control, disbanding commodity boards and industrial output in the Nigerian economy (Tamuno & Edoumiekumo; 2012; Olaifa et al., 2013; Osa, 2014). However, Tamuno and Edoumiekumo (2012) posit that the adoption of the Structural Adjustment Program (SAP) in Nigeria failed to meet up with these expectations and was unable to reverse the economic crisis in the nation. Pragmatically, the SAP prescription only succeeded in worsening the socioeconomic and political experiences of the country. More importantly, the policy prescription was largely blamed for destroying the economy of the country, as it did to most of the developing countries that adopted it (Olaifa, Subair & Biala, 2013; Chete et al., 2014). 

According to Omolo (2011), trade liberalization is a process that spurs the removal and reduction of barriers to trade. The process ensures free movement of goods and services from one nation to another. Osa (2014) opines that trade liberalization is a trade policy with minimal tariffs, tamed quantitative restrictions, and less effective devices obstructing the free movement of goods between countries. While, Asongo, Jamala, Joel and Waindu (2013) define trade liberalization as the process of meaningfully reducing restrictions in international trade. However, for the purpose of this study, trade liberalization is defined as as a deep-rooted agreement by compliant nations for the complete removal or partial reduction of several trades’ restrictive instruments that hinders the free flow of goods across borders.

Advocates of trade liberalization believe that it; promotes competition, deters monopoly, links national interests, breaks down national animosities, offers consumers broad varieties of product to choose from, encourages domestic firms to be innovative and increases the likelihood of firms to operate in many new markets around the globe (Boyrie & Johns, 2013; Parinduria & Thangavelu, 2013; Falvey, Foster-McGregor & Khalida, 2013). However, in contrast with the assertion of the proponents of trade liberalization, critics of free trade emphasize that there is likelihood that trade liberalization may harm fragile domestic industries and their workers, more than the economy as a whole (Czinkota, 2010; Bittencourt, Larson & Kraybill, 2010; Borraz, Rossi & Ferres, 2012). These authors argued further that, in the absence of matching domestic reforms and policies that maximizes gains from trade, and protect fragile industries from transitional costs, regressive outcomes are more prone to occur. Further evidence also reveals that unguided trade liberalization has the potential to endanger not only the inexperienced domestic producers, but also unduly entrench the monopolistic hands of foreign competitors in the domestic market in a way that erodes the proceeds of liberalization.

In line with some of the observations presented in the preceding paragraphs, the last quarter of the 20th century has shown remarkable improvement in the volume of cross-border trade, as well as a considerable reduction of trade barriers in the global market (Hill, 2014). Prior to this period, various countries protected their fledging industries by setting high tariffs and administrative restrictions on imported products. This trend propelled other nations to also retaliate with the imposition of strict measures on international trade and contributed to the Great Depression of the 1930's (Case, Fair & Oster, 2013; Hill, 2014). Hence, in the light of the paradigm shift of global trade after the World War II and the experience of the Great Depression, twenty three advanced industrial nations under the leadership of the United States, moved a motion to correct the trend in international trade that led to global economy depression by establishing a multilateral agreement known as the General Agreement on Tariffs and Trade (GATT) in 1947 at Geneva, for regulating international trade and promoting trade liberalization (Begg, Vernasca, Fischer & Dornbusch, 2011; Case et al., 2013; Hill, 2014).

According to Falvey et al (2013), the upsurge in the adoption of trade liberalization policy in developing countries within the last three decades, is as a result of the preponderance of empirical evidence that links trade liberalization with economic growth, the dissatisfaction of the developing countries with the import substitution strategy, as well as the inclusion of trade liberalization reforms as a major requirement for obtaining financial loans and grants from the International Monetary Fund (IMF) and the World Bank. Correspondingly, Amiti and Davis (2011) assert that, while developing countries are being persuaded to open their economy to international trade by removing or reducing trade restrictions, industrialized countries continue to protect the sectors, such as the textiles sector which developing countries have comparative advantage. Equally, Shakur (2012) reiterates that despite GATT’s achievement in minimizing tariff rates on manufactured products, most developing countries still experience a systematic discrimination against their products from the developed countries.

The textile industry plays a central role in the economic development of many developing countries and about one hundred and thirty (130) developing nations depend on the textile industry for employment and exports (Seyoum, 2010). Likewise, a report by the United Nations Industrial Development Organization (2015) reveals that among the developing Asian economies, Pakistan's and India's growth rates are largely attributed to the growth of their textile industries (UNIDO, 2015).  The Nigerian textile industry performed these roles as well, especially up to the 1980s. In this early period, the country’s textile industry with over 250 functional factories was rated the largest in Africa after Egypt and South Africa (Bello, Inyinbor, Dada & Oluyori, 2013). The industry was also the second largest employer of labor providing an estimated direct employment which was about 500,000 persons and indirectly about 1,750,000. The industry further served as a major source of revenue to the government (Aguiyi et al, 2011).

The Nigerian textile industry was well-established in the pre-colonial era when for many years, various textile processes including textile weaving, spinning and dyeing, ginning and carding were done with bare hands. At that time, the industry offered good support to the economy because the country had adequate raw materials for textile production (Bello et al, 2013).  The modern industrial production of textile was pioneered by the Kaduna Textile Mills that was established in 1956 and followed by the establishment of Nigerian Textile Mills in 1960.

Table 1.1 below shows the prominent textile firms in Nigeria in the 1960s by their locations and year of establishment.

Table 1.1: Players of the Nigerian Textile Industry in 1960s

Company

Location

Year of Establishment

Quoted Year

Delisted Year

Operational Status

Aba

Aba

1962

1993

2009

Closed (2000)

Afprint Nigeria

Lagos

1964

1979

2010

Diverted to cars and edible oil

Arewa

Kaduna

1965

Closed (2002)

Asaba

Asaba

1964

1995

2009

Closed (2004)

Enpee

Lagos

1968

1978

2008


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