EMPIRICAL TEST OF THE HECKSCHER-OHLIN THEORY BETWEEN NIGERIA AND USA IN 2012

EMPIRICAL TEST OF THE HECKSCHER-OHLIN THEORY BETWEEN NIGERIA AND USA IN 2012

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CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

The main determinants of patterns of production, specialization and trade among nations are the relative availability of factor endowments and factor intensity (Heckscher-Ohlin, 1933), Bharawaj (1962) and Thompson (2005). According to Kenen (1996), the Heckscher-Ohlin approach to trade theory, also known as the factor endowment and factor proportions approach, is based on two suppositions, namely relative factor endowment and factor intensity. He further argued that goods differ in their factor requirements. For instance, cars require more capital per worker than say furniture or cloth and aircraft require more capital per worker than cars. In other words, goods can be ranked by factor intensity. On the other hand, countries differ in their factor endowments. Some countries have much capital per worker and some have very little. In other words, countries can be ranked by factor abundance. Heckscher-Ohlin model shows that trade between countries is in proportion to their relative amount of capital and labour. In countries with relative capital abundance, wage rates tend to be high; therefore, labour-intensive products e.g. textiles are more costly to produce internally. In contrast, capital-intensive products e.g automobile,


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cars are relatively less costly to produce internally. Thus the Heckscher-Ohlin theory predicts that a country will tend to export those commodities that use relatively intensively its relative abundant factor of production, and import those commodities, which use relatively intensively its relatively scarce factor of production. However, Leontief (1953) empirically tested this perspective, and the test was based on the constructed input-output table for the United States in 1947. Leontief’s findings were revolutionary in many ways, however, most importantly because they cast doubt on the Heckscher-Ohlin theory. For instance, one of the findings was apparently at odds with the basic prediction of the Heckscher-Ohlin theory. Leontief reached that paradoxical conclusion that United States of America that possesses a relatively large amount of capital and a relatively small amount of labour in relation to the rest of the world, exported labour-intensive goods. That is, United States did not trade according to the Heckscher-Ohlin prediction.

Although the theory has been largely disproved, yet it is still a useful framework for understanding international trade theory. For instance, Leontief’s result did not prevent the Heckscher-Ohlin model from being the workhorse of international trade theory. This was supported by the work done by Davis and Weinsterin in 1996. They pointed out that


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economists have strong prior belief that relative factor endowments have much evidence for predicting the patterns of production and trade, and that the Heckscher-Ohlin model is the most sensible way of embodying these links.

Interestingly, these arguments do not in any way negate the fact that both relative factor endowments and factor intensity theory of trade play vital roles in predicting the basis for and patterns of trade existing among nations of the world (Foster 2004). Furthermore, it has been argued that the Heckscher-Ohlin theory gives some interesting insight into the effects of international trade on factor use and factor rewards (Bo-Soderstern and Reed 1996). In addition, the model shows how comparative advantage might relate to general features of a country’s capital and labour, and how these features might change through time. The model also provides a basis for later works on the effects of production on wages, and has been fruitful in providing predictions and analysis. Therefore, there is need to examine, measure, explain and empirically test whether Nigerian pattern of trade is consistent with the Heckscher-Ohlin framework. This derives from the fact that no attention has been given to the patterns of production and trade existing between Nigeria and any other nation.


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1.2    STATEMENT OF PROBLEM

In the Heckscher-Ohlin (H-O) model, countries tend to export the commodities that use relatively intensively their abundant factors of production (Heckscher 1919, Ohlin 1933). This framework has been considered by economists as most relevant for predicting the patterns of production and trade between two countries. Among these economists are Krugman (1979), Lancaster (`1980), Brander (1980), Falvey (1981), Richard, Courant and Douglas (1994). The prediction of Heckscher-Ohlin holds true for developing countries. This results in a situation where the commodity of one industry is exchanged for the commodity of entirely different industry i.e. inter-industry trade. Indeed, actual patterns of production and trade in the Heckscher-Ohlin framework confirm that developing countries should specialize in the production and export of traditional agriculture, primary goods and labour intensive manufactures whose factors of production are relatively abundant. Myrint (1988) emphasized that unemployment represents a potential production supply that exceeds the domestic demand in the developing countries. For most developing countries, this provides an incentive to expand labour-intensive production. In this situation, the Heckscher-Ohlin framework can provide


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a “vent for surplus”, that is a larger market, that will permit a country to increase its output and employment.

Evidence has shown that countries with successful patterns of trade and other prudent economies and developmental policies would wean themselves from heavy reliance on foreign aids and use trade as one of their engines for economic growth and development (International Trade Statistics Year Book 1992 and 1994). Furthermore, a study done by EL Agraa (1985) shows that the pattern of production and trade that gives a nation greater access to world market is more stable to secure and maintain trade advantages over the rest of the world.

Besides, the increasing importance of inter-industry trade theory in predicting the patterns of production and trade in developing nation is necessary, because little or no studies have been conducted to empirically examine whether Nigeria’s pattern of production and trade are consistent with trade regime characterized by Heckscher-Ohlin theory. The main thrust of Heckscher-Ohlin framework is to encourage a nation to use relatively intensively their abundant factors of production to satisfy domestic production and international markets for the purpose of achieving and accelerating economic growth and development. One thing is at least very clear; Nigeria is endowed, both in natural and human


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resources. The pool of resources from one end to the other is unquantifiable to such extent that given a dynamic and democratic leadership without political corruption and strong institutional framework, economic prosperity would have been achieved (Samuel, 2003). On the other hand, the United States of America (USA) is abundantly endowed with capital resources. From the above scenario, the study is justified, because the United States of America (USA) is the major trading partner with Nigeria. Therefore, the aim of this study is to integrate the measures of factor abundance and factor intensity measures to examine whether Nigeria’s pattern of production and trade are consistent with the framework of Heckscher-Ohlin. Furthermore, it is vital in contributing ideas on how to easily diversify the economy through adopting the Heckscher-Ohlin framework as a policy issue.

Understanding the factor abundance and factor intensity theory of Heckscher-Ohlin is very important to determine the pattern of production and trade that Nigeria would adopt in order to reap the potentials benefit of the abundantly endowed labour and fertile land among others. Moreover, it will help Nigeria to diversify the economy through expanding non-oil sectors such as agricultural sector and labour-intensive manufactures.

The research questions, which constitute the subject of inquiry are as follows:


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a.                Is Nigeria’s export to the USA relatively labour-intensive or capital-intensive goods?

b.                Is Nigeria’s import from the USA relatively capital-intensive goods or relatively labour-intensive goods?

c.                 Is Nigeria’s export to the USA produced with her abundantly endowed resources?

d.                Is Nigeria’s import from the USA produced with US’s endowed resources?

1.3    OBJECTIVES OF THE STUDY

The broad objective of this study is to examine empirically whether Nigeria’s patterns of production trade are consistent with a trade regime characterized by the Heckscher-Ohlin framework.

The specific objectives are:


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