CHAPTER ONE

INTRODUCTION

1.1        BACKGROUND OF THE STUDY

There have been ongoing debates on the direction of causality between trade and productivity. According to Ogunleye and Ayeni, (2008), the causal relationship between them is two-way (in theory) but export-led growth theorists argue that it is exports that enhance productivity growth. Colander (2001) however writes that, “Most economists believe that policies allowing free trade, increase growth by increasing competition. For example relaxation of import tariffs on Japanese automobile imports made U.S producers change their production methods and improve the quality of American-made cars”. This implies that the influx of imported goods will bring about improvement in domestic production. In other words, imports also enhance productivity.

To buttress this, Egwaikhide (1999) writes that imports are a key part of international trade and the import of capital goods in particular is vital to economic growth. He emphasizes that imported capital goods directly affect investment which in turn spurs economic expansion.

Moskalyk (2007) also supports with the argument that, foreign trade boosts productivity by two broad ways: (1) importing products that embody foreign knowledge and (2) involving knowledge that comes with an imported product (technical instructions, know-how, marketing and managerial innovations etc). These are particularly important for developing countries which are behind the technology frontier. Similarly, De Long and Summers, (as cited in Mody and Yilmaz, 2002), found strong empirical support that foreign knowledge embodied in imported equipment is of significant value to the economy buying the equipment.

Proponents of import-led growth theory, maintain that protection tends to reduce rather than increase productivity and output growth. For instance, Lawrence and Weinstein (1999), found evidence in Japan which casts doubt on the importance of exports as a source of productivity growth and supports the argument that liberalization of imports will bring about productivity growth through competitive pressure which spurs innovation and learning from foreign rivals.

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Thangavelu and Rajaguru (2004), also investigating the existence of export or import-led growth in some Asian countries wrote that “trade has an important impact on productivity and output growth in these economies, however it is imports that provide the important ‘virtuous’ link between trade and output growth” and that “exports and imports have qualitatively different impacts on labour productivity”. They found no evidence of export-led growth in Hong Kong, Indonesia, Japan, Taiwan and Thailand. They also found strong evidence of import-led growth in India, Indonesia, Malaysia, Philippines, Singapore and Taiwan. Finally, they concluded that imports tend to have greater positive impact on productivity growth in the long run.

A cursory look at Nigeria’s trade figures will reveal that there has been substantial increase in the value of aggregate imports since independence in 1960. Statistics reveal that the import of consumer goods dominated aggregate imports until 1965, though their relative share declined from 60% in 1950 to 41% by 1965 (Egwaikhide,1999). This is because prior to independence, Nigeria depended heavily on the colonial government (Britain) for the supply of manufactured goods which at the time could not be locally produced due to the prevalent crude technology. The reported decline in the share of consumer goods in total imports was therefore as a result of Nigeria’s political independence from Britain.

Further reports show that during this period, the import of capital goods which was next to consumer goods fluctuated between 24% and 40%, while the share of raw materials generally increased from 10% to 23%. According to Egwaikhide (1999), from 1970 the distributional pattern of imports changed with capital goods leading and followed by raw materials.

The share of primary products in total imports declined from 17.2% in 1980 to an average of less than 14% during 1990-2000. Food imports fell from 13% of total imports in 1980 to 8% in 1990 but returned to 13% by 2000. The share of machinery and transport equipment was almost 50% during this period (Oyejide, 2004). The share of capital goods in total imports declined from 28.2% in 2004, to 27.8% and 27.5% by 2006 and 2008 respectively.

Total imports grew at an average rate of approximately 5%, 10% and 43% within the periods 1960-1965, 1966-1970 and 1971-1975, while total exports grew at an average rate of 10%, 14% and 51%, within the same intervals. Between 1980-1985, 1990-1995 and 2000-2008, total

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imports grew at the average rates of 1%, 97%, and 25% while total exports grew at the average rates of approximately 4%, 89% and 30% within the same period.

This reveals that the rate of growth of both imports and exports have fluctuated over the years as a result of the different policy regimes associated with these periods. It is however important to note that, over the years total imports have increased at an increasing rate with the exception of the pre-SAP period of 1980-85 when the economy experienced a general decline in external trade due to the rigid foreign exchange and import control measures which were being implemented at the time (Egwaikhide, 1999). With the introduction of SAP, the economy was highly liberalized and the value of imports and exports continued increasing once again, although at a decreasing rate. Import of machinery and transport equipment on the other hand, increased exponentially in the period under review. It is therefore expected that this rate of increase in imports should have a significant effect on the growth of the economy, by affecting the level of productivity.

Technological obsolescence and weak technological base have been identified as the most limiting factor to technical change and the resultant low productivity in Nigeria. “Policy focus in the past tried to make up for this through the massive importation of technology and the attempt to develop a local capital goods sector. However, inadequate investment in basic industrial research, a lack of serious commitment to establishing research and development laboratories, weak linkages among the government, the private sector and the universities for the purpose of exploiting research findings, as well as a declining standard of education and skills acquisition, did not provide the needed platform for the imported technology to be domesticated” (Adenikinju, 2005 p49). This can be attributed to the failure of the protectionist trade policy focus of the pre-SAP era which created room for uncompetitive and non-innovative firms and led to the economic recession of the early 1980s.

The government therefore put in place trade liberalization polices within the structural adjustment programme (SAP) introduced in 1985. These were designed to play an important role in the technological decisions of firms. These policies which included lower tariffs, increased access to foreign exchange and raw materials, and increased competition, were supposed to increase the tempo of technological development in domestic enterprises and thus enhance

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productivity. However, Ayonrinde, Adenikinju and Adenikinju (1998), as reported in Adenikinju (2005), noted that these policies did not achieve their stated objectives. Meanwhile, studies in other countries (for instance, Keller (1997)), have shown empirically that, countries which have experienced faster growth in total factor productivity (TFP) have imported more from the world technological leaders.

1.2         STATEMENT OF PROBLEM

Many studies have focused on the effects of foreign Direct Investment (FDI) and Portfolio Investment on growth in Nigeria and these have emphasized their importance in stimulating economic activities in the country.

It is important to draw attention to other channels that provide opportunities for growth and development which may alleviate the constraints presented during unstable periods of inconsistent or nonexistent inflow of foreign capital. As noted in the background of the study, importation of capital goods for the production of both exports and domestically consumed goods, serves as a stimulant to productive capacity. Thus it is expected that any policy that induces importation (of capital goods for instance), would have a positive effect on productivity and growth of that economy.

Increasing productivity should be the focus because many other countries that have found themselves facing the predicaments of fallen incomes and devalued standards of living as experienced by Nigerians, have resolved them through productivity enhancement schemes (Alao, 2010).

For our economy to develop, productivity must be enhanced. However, Oshiomhole (2006) noted that the level of productivity in Nigeria is comparatively low in relation to other countries that have less human and material resources. Despite two decades of growth boosted by import substituting policies, Nigeria's manufacturing sector remains heavily import dependent. This has been the inevitable outcome of a perverse incentive structure that accelerated the growth of import intensive consumer goods and light assembly industries contributing relatively little value-added under high protective walls while decelerating growth of local resource-based industries. For example, the share of food and textile products in manufacturing output fell from

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51% in 1973/74 to 36% in 1977/78, while the share of durable goods with low value added rose from 7% to 19% during the period. Within the durable goods subsector itself, the share of transport equipment, which has low value added, rose from about one-tenth of one percent to 11% during 1971/72–1977/78. The net effect of this is that import dependency was fostered in the manufacturing sector in the 1970s (Chete and Adenikinju, 2002).

A study by the United Nations Industrial Development Organization (UNIDO) revealed that the productivity of Nigerian workers was only 10 percent of that in Botswana and 50 percent of that in Ghana and Kenya and the deterioration of the manufacturing sector in recent years was attributed to a number of factors, including a poor investment climate and low capacity utilization. Average capacity utilization in the manufacturing sector is reported to have declined from a peak of nearly 80 percent in 1978 to less than 30 percent in the 1990s before rising marginally at the end of the decade and as at the time of the study (2009); it was hovering at about 65 percent.

This ought not to be the case, in light of Nigeria’s growing dependence on import of capital goods which are supposedly geared towards improving the level of productivity in the economy. Previous studies in this area have established that there is a link between trade and productivity. However the emphasis in Nigeria has been on exports, especially non-oil exports. These include the works of Ogunleye and Ayeni (2008), I. Nwokoma and A. Nwokoma (2009), and others. These have studied exports in the context of employment and income/foreign exchange generation, they have tried to identify the problems that hinder export growth and recommended ways to improve the situation. As for imports, several attempts have been made to model the determinants of import demand in Nigeria and other countries of the world as a result of which a lot of functional specifications have been explored. These also include the works of Egwaikhide (1999), Aliyu (2007), Abdullahi and Suleiman (2008) among others. This research takes a different dimension by looking at the effect of import dependence on productivity in Nigeria. The basis for this is that, it is generally believed that a country can depend on raw materials, machinery and equipment imported from other countries for its industrial development and imported capital goods have been identified by Mody and Yilmaz (2002), and others, as the conduit through which knowledge transfer occurs during trade (that is, international diffusion of technology).