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This study empirically examined the impact of external trade on economic growth of Nigeria between the period 1980-2013. The study employed Ordinary least square (OLS) regression technique to analyze the data obtained from the CBN statistical bulletin for the relevant years under study. The empirical results were on Augmented Dickey Fuller test. In the second step, Johansen co-integration test was conducted. The presence of long run equilibrium found led to the use of Vector Error Correction Model (VECM). The entire regression plane is statistically significant. This means that the joint influence of the explanatory variables [Net Exports (NEX), Degree of Openness (DOP) and Exchange Rate (EXR)] on the dependent variable (RGDP) is statistically significant. There is significant causal relationship between external trade and economic growth in Nigeria. The computed coefficient of multiple determination shows that 93.6% of the total variations in the dependent variable (RGDP) is influenced by the variation in the explanatory variables. The total variation of 6.4% in the dependent variable is attributable to the influence of other factors not included in the regression model. The study therefore recommended that the Nigerian government should adopt vibrant and workable policies that will promote export increase over imports, also Nigeria as a country should concentrate on commodities which she has comparative advantage over other countries as this measure will boost economic growth of her economy.
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. 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 masters that brought in their wares and made Nigerians their middle men (Nicks, 2008). By this, Nigerians understood the need for trade both domestically and externally. External 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 external transaction of goods and services. The classical and neo-classical economists attached so much importance to external trade in a country‘s development that they regarded it as an engine of growth (Jhingan, 2006), Trade is recognised 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 external 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 product 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 external 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 external 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 four 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).
1.3 Research Questions
In other to examine the impact of external trade on economic growth in Nigeria, Specifically the study is to be guided by the following research questions
1. Does external trade have any long-run significant impact on economic growth in Nigeria?
2. Is there any causal relationship between external trade and economic growth in Nigeria?
1.4 Objectives of the Study
The main objective of this study is to evaluate the impact of external trade and its contribution to economic growth in Nigeria. Specifically the research work will focus on the following objectives: to,
1. Investigate the long-run impact of external trade on Nigeria’s economic growth
2. Investigate if there is any existing relationship between external trade and economic growth in Nigeria
1.5 Research Hypotheses
The research on external trade on Nigeria economic growth has led to the following hypothesis.
Ho: There is no long-run significant impact of external trade on Nigeria’s economic growth.
Ho: There is no significant causal relationship between external trade and economic growth in Nigeria.
1.6 Significance of the Study
This study will be essential to policy maker to know more about the performance of external trade and economic growth. It will also assist in providing the frame work of where work has been done by earlier researchers. It will also provide a framework on which further research in external trade could be carried out. The study will basically cover a period of 33 years (1980-2013). This study is limited to external trade as it affects the growth and development of the Nigeria economy, and based on the findings from the research work, the researcher will make recommendation to the government and other authorities so as to ensure macroeconomic stability and put the Nigerian economy along the path of sustainable growth and development.
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 external trade on economic growth in Nigeria. The study will basically cover a period of 33 years (1980-2013); 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, problem of consistent and accurate data and inadequate finance to fund the research work.
1.8 Operational Definition of Terms
External Trade: that is buying and selling abroad; a country’s balance of trade is the excess of the value of its exports of goods over its import.
Trade Barriers: laws, institutions, or practice which makes trade between countries more difficult or expensive than trade within countries. Some are deliberately designed to discourage trade.
Free Trade: means the absence of barriers to external trade, a free trade area is of group countries with no barriers to external trade between them, at least for most goods, though there may be exceptions.
Economic Growth: is an increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal, and may be measured in absolute or in per capita terms. Growth in real economic variables such as GDP for short periods or at low rates may occur by simply having similar activities conducted on a larger scale. Rapid or persistent growth is likely to involve changes in the nature of economic activity.
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