CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

International trade is the exchange of goods and services across borders or territories. Through international trade countries supply the world economy with the commodities that they produce relatively cheaper and demand from the world economy the goods that are made relatively cheaper elsewhere. The positive effects of international trade on economic growth were first pointed out by Smith (1776). This idea prevailed until World War II, although with relative hibernation during the “Marginalist Revolution”. Economic theories have argued that countries engage in international trade to reap the gains that arise from specialized production with each country concentrating on producing those goods and services that involve the least opportunity cost.

Economic growth is the increase in the amount of the goods and services produced by economy overtime, it can also be said to refer to growth of potential output, that is, production. It is measured as the percent rate of increase in real GDP. Various literatures on international trade recognize trade as a catalyst for economic growth. To act as an engine of economic growth, trade must lead to steady improvements in human conditions by expanding the range of people‟s choice, a notion that the concept of human development tries to capture.

Foreign trade plays a vital role in reforming economic and social attributes of countries around the world, particularly; the less developed countries because no country is self-sufficient. Before the discovery of oil in 1960‟s, the Nigerian government was able to carry out investment project through domestic savings, earning from agricultural product exports and foreign aids. Since the discovery of crude oil in 1956 and its exploration in commercial quantity in 1958 however, the oil sector gradually became the dominant sector in the economy, and almost the sole source of export earnings. For instance in 1970‟s petroleum constituted of about 78% of Federal Government revenue and more than 95% of export earnings (World Bank, 2002). With the oil boom in 1973, the country‟s foreign exchange earnings rose immensely, which translated into higher economic growth.

Since the advent of oil as a major source of foreign exchange earning Nigeria in 1974 the image has been almost that of general stagnation in agricultural exports. This led

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to the loss of Nigeria‟s position as an important producer and exporter of palm oil produce, groundnut, cocoa and rubber (CBN annual report, 2006). Between the year 1960 and 1980, agricultural and agro-allied exports constituted an average of 60% of total export in Nigeria. Furthermore, by 1977, export stood at N7, 881.7million. Between 1960 and 1977, value of export grew by 19%. It should be noted that before 1972, most of the export were agricultural commodities like cocoa, palm produces, cotton and groundnut. Thereafter, minerals, especially crude, petroleum, became significant export commodities. Imports also increased in values during the period. By 1960, imports were valued at N432 million. They increased to N758.99 million and N813.2 million in 1970 and 1978 respectively, rising to N124, 162.7 million in 1992 and N681, 728.3 million in 1997. Non-oil GDP recorded a growth rate of 8.9%, compared with 8.5% in 2010.

The improved performance in the sector was driven largely by the agricultural sector, which grew by 5.7%, underpinned by robust growth in all its components. However, from 1974, food import became obvious in Nigeria‟s foreign trade. The country had an unfavorable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence. Thereafter, export of crude petroleum guaranteed a favorable trade balance. The oil sector dominates export while the non-oil sector dominates import. In 1960 – 1970 oil export grew by 31.6% and 44.6% respectively. Also, for this period, nonoil export showed marginal growth of 1.2% and 6.6%. (Annual Performance Report of The Nigerian Economy by national planning commission (NPC 2011).

Nigeria experienced a growth transition in 2011, which highlighted a gradual shift away from primary production to secondary and tertiary activities. Primary production activities, comprising agriculture, crude petroleum and natural gas, and solid minerals dominated economic activities in 2011 with a share of 55.30% of GDP, compared with 57.09% in 2010. By contrast, secondary production activities of manufacturing, building and construction that have a greater potential to expand the country‟s productive base recorded a share of 6.25% of real GDP in 2011. The tertiary sectors have shown an upward trend in the last five years, accounting for about 39% of the GDP during 2011 compared with about 37% in 2010. The development of secondary and tertiary sectors showed a gradual expansion of the productive base, resulting in reduction in the dominance of primary activities in the economy. In the merchandise trade, crude oil export continued to dominate total exports, accounting for 92% by end 2011 as against 93% in 2010. Equally, crude oil

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exports amounted to US$79.81 billion compared to US$63.73 billion during the period (Annual Performance Report of The Nigerian Economy by NPC 2011).

It was equally noted that the United States of America was the dominant destination of Nigeria‟s exports, accounting for 53% of total exports, while Europe and Asia accounted for 23% and 12%, respectively during the period (Annual Performance Report of The Nigerian Economy by NPC 2011).

The positive relationship that exists between global trade and economic growth may be as a result of the likely positive externalities due to the involvement of different countries in the international trade. Many empirical studies have argued in favour of the importance of global trade on economic growth using the degree of trade openness, terms of trade, tariff and exchange rate as variables to explain the claim that open economies grow faster than closed economies (Edwards, 1998).

On the contrary, some economists have argued that the practice of protectionism is better means for domestic economic growth because in some instances the domestic economy may have comparative advantage over the foreign economy (Nnadozie, 2003). Nevertheless, the overwhelming evidence of positive impact of international trade on economic growth cannot be overemphasized.

Against the foregoing background, this study shall examine the impact of foreign trade on economic growth in Nigeria from 1980 to 2010.

1.2 STATEMENT OF PROBLEM

Although various factors have been adduced to Nigeria‟s poor economic performance, the major problem has been the economy‟s excessive reliance on the fortunes of the oil market and the failed attempts to achieve any meaningful economic diversification (Osuntogun et al, 1997), reflecting the effect of the so called “Dutch disease”. The need to correct the existing structural distortions and put the economy on the path of sustainable growth is therefore compelling. This raises the question of what else need to be done in order to diversify the economy and develop the non-oil exportation in order to realize the potentials of the sector.

Foreign trade has not helped in promoting economic growth because the Nigeria economy still experiences some elements of economic instability and this has also turned the country into an import dependent economy. By 1960, imports were valued at 432

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million. They increased to N756.0 million and N8.132 million in 1970 and 1978 respectively, rising to N124, 612.7 million in 1992 and N681, 728.3 million in 1997.

The bulk of the imports were finished and semi-finished goods. However, from 1974, food imports became noticeable in Nigeria's external trade. The country had an unfavorable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence.

Furthermore, most African countries engage in the exportation of primary products and not manufacturing exports. The need to diversify the export of their economies is important because not all countries desire a particular product and also if such country desires to grow, it ought not to specialize in one line of production.

Also one of the reasons why foreign trade has not translated to economic growth in Nigeria is the direction of external trade. Nigeria's export to U.K. declined from 14.1 per cent in 1975 to almost 2 per cent in 1988. It rose to about 3 per cent in 1990 and declined to 1.4 per cent in 1992. Also, U.K's import of Nigeria's crude has declined steadily over time. The analysis of the direction of trade also reveals that, for the U.K., Nigeria had a trade deficit for the period 1984-1992.

Nigeria's exports to Japan are very marginal. From 1975 to 1988, the country's exports to Japan amounted to about 0.1 per cent of total exports. In the 21st Century, it is necessary to find ways and means to ensure that Japan imports some of its raw material requirements and crude petroleum from Nigeria. Apart from the fact that Japan is an industrial giant, it is also vital for Nigeria to enlarge her trading partners.

Nigeria exports both raw materials and finished products to other African countries (excluding ECOWAS) and Eastern European countries. However, the magnitude of exports to these regions is quite insignificant.

Furthermore, the direction of trade seems to confirm Nigeria's dependence on Western Europe, North America and Japan. Nigeria's exports go to the same sources where her imports come from. There is need to open up new markets especially in the Far East, Pacific and the Caribbean as well as in promising African countries like South Africa.

Against this background, the main thrust of this research is to take an objective view regarding the controversy of the role of foreign trade, in the progress of a country in

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terms of economic growth of Nigeria. It has been eluded by the dissenting voices in the 21st century that trade could be negative in terms of acting as catalyst of economic growth, being a retrogressive force, in the journey to economic independence. But ironically, past experience has proven the potency of trade as a catalyst of economic progress, with regards to growth.