The Impact of Trade Liberalization on Economic Growth in Nigeria

The Impact of Trade Liberalization on Economic Growth in Nigeria

Purpose of the Study: This research proposal focuses on the impact of trade liberalization on economic growth/development in Nigeria. Therefore, the specific objectives are:

1. To examine the relationship between the exchange rate and the human development index
2. To determine the relationship between trade openness and the human development index
3. To evaluate the impact of foreign direct investment and the human development index

CHAPTER ONE: INTRODUCTION

1.1     Overview of the Study

Historically, trade has acted as an engine of growth for countries at different stages of development, not only by contributing to a more efficient allocation of resources within countries but also by transmitting growth from one part of the world to another. Over the past several decades, the economies of the world have become increasingly linked, through expanded trade. International trade has often played a central role in the historical experience of the developing world.  Because of the economic impact that trade has always had on civilizations, governments often become involved in trade to produce a particular economic outcome for their countries. There are, however, static and dynamic gains from trade between countries, but there is nothing in the theory of trade that says that the gains are equitably distributed.

Trade is the exchange of goods and services between industries and nations for money. International trade no doubt is highly a means of surviving in this world of diversity and endowment. Trade is considered the engine of development strategies as it can create jobs, expand the market, raise income, facilitate competition and disseminate knowledge.  Like other developing countries, the Nigerian economy considers trade as a principal engine for growth. This is based on the implicit belief that trade creates jobs, expands markets, facilitates competition; disseminates knowledge, and raises income both for the individuals and the government (Nwosa et al, 2012).

Trade liberalization is loosely defined as a move toward freer trade between two or more countries and entails the removal of import quotas and other quantitative restrictions. It also involves the abolition or reduction of import tariff rates, removal of export taxes, removal of protection for infant industries, elimination of non-tariff barriers, and devaluation of the local currency.

Trade liberalization allows countries to export those goods and services that they can produce efficiently, and import the goods and services that they produce inefficiently. The above statement refers to the theory of comparative advantage. Traditional explanations of trade as “the engine of growth” and the impact of trade on economic development are rooted in the principles of comparative advantage.

The principal and primary intention of trade liberalization are to promote free trade by eliminating all restrictions and barriers to trade. This, it is believed, will ultimately enhance economic growth by capturing the static and dynamic gains from trade through a more effective allocation of resources; greater competition; an increment in the flow of knowledge and investment, and of course, a faster pace of capital accumulation and technological progress (Babatunde, 2009). The outward-oriented strategy adopted by Nigeria was chiefly to boost exports by cutting down all restrictions, exchange rate control, and breaking apart some of the marketing boards (Ayorinde and Olayinka, 2012).

Besides, the country had undergone foreign trade liberalization through the decrease in both duties and non-tariff barriers. The aim this time was to promote economic growth by increasing her export of goods and compete with other nations globally. In the opinions of Yakubu and Akanegbu (2015), trade exposes domestic firms to the best practices of foreign firms and the demand of discerning customers and encourages greater efficiency. Trade, to them, gives firms in the domestic economy access to improved capital inputs such as machine tools, boosting productivity and providing new opportunities for growth to developing countries. International trade generally deals with economic and financial interdependence among nations: it is part of our daily life and it plays a vital role in the shaping of economic and social performance and prospects of countries around the world, especially those of developing countries (Sakyi, 2011). He reiterated however that no country has grown without trade but the contribution of international trade to any economy depends to a great extent on the context in which it works and the objective it serves.

Three international organizations have expressed views on Nigeria’s import prohibition policy, these are the World Trade Organization, the World Bank, and the International Monetary Funds (Effiom et al, 2011). They have advisory roles concerning trade and other policy matters in Nigeria and had advised a more liberal trade policy regime in Nigeria which was initiated in the 1980s. The World Bank and the International Monetary Funds did support this via their lending program before the introduction of the structural administration program (SAP) in 1986 in Nigeria, imports were subjected to quantitative controls implemented through a combination of the ban on agriculture and some manufactured goods and a licensing system (WTO, 2015). But under the SAP, import and export licensing were abolished, price and distribution control on agricultural exports was removed and the prohibited list of imports was reduced (Effiom et al, 2011).

1.2     Statement of the Problem

The Nigerian economy was at the same level of development as countries such as Brazil, Indonesia, Malaysia, and Pakistan in the 1950s-60s, but today it is far behind all of them in terms of its overall level of economic development (Egbochuku, 2001). In essence, Nigeria has lagged behind other oil-producing countries in terms of development, especially as most of these countries are now emerging as newly industrialized countries (NICs). Same deadening factors constrain the expected impact of trade liberalization on economic growth in Nigeria. These factors constitute the major problems of liberalization. They are discussed extensively in the section.

First, the institution necessary to aid the success of trade liberalization and ultimately growth and development has not been utilized to achieve this goal of development but has brought about a disequilibrium. i.e. widening the gap between the rich and the poor. Since there are no functional and corrupt-free institutions in the country, corruption does not seem but has vehemently proven to have eaten deep into the bones and marrows of the economy. Another constraint is fiscal and monetary policy indiscipline. Most times, policies and investments made are not profitable and amount to a waste of resources. International trade is expected to be beneficial to participants (in form of lower prices, a variety of products, etc) to firms and businesses. A study has it that firms exposed to the world’s best practices demonstrate higher productivity through many channels, such as learning from these best practices, and also creating new products and processes in response to the exposure but in the case of Nigeria it has left our industries in a state of a comma, as domestic infants industries are destroyed by competition with already established international firms, without bringing out new ones. Hence, all these additions to both fiscal and monetary indiscipline, have made the reverse the case for these years (Effiom et al, 2011).

In addition to a great extent, the problem of hoarding and secrecy is still much. The major aim of trade liberalization is to make way for economics so that countries can benefit from themselves and improve production and output. Because of the fear of domination, most developed countries are not willing to expose their methods of production and technologies.

Also, the majority of the countries engaging in trade hoard important commodities which are needed in Nigeria; yet they get every single thing they need from Nigeria. This, therefore, results in a situation where trade is liberalized only in words but not in action. The developing countries learn nothing from these developed countries when it comes to an improved and modernized way of doing things. Instead, they are used as dumping grounds, hurting the economic growth of Nigeria (Yakubu et al, 2015).

Furthermore, trade and financial organizations such as the Organization for Economic Corporation and Development (OECD), Economic Community of West Africans State (ECOWAS), International Chambers of Commerce (ICC), World Bank, etc. have made little or no impact on trade liberalization in terms of the extent of trade corporation among developed and developing nations. These and other challenges are the problems of trade liberalization in Nigeria and until they are intercepted properly, the economic development of Nigeria may not be bolstered.

1.3 Purpose of the Study

The main purpose of the study is to decide the impact of trade liberalization on economic development in Nigeria. Therefore, the specific objectives are:

1. To examine the relationship between the exchange rate and the human development index
2. To determine the relationship between trade openness and the human development index
3. To evaluate the impact of foreign direct investment and the human development index

1.4 Research Questions

The following questions will guide this study:

1. What is the nature of the relationship between exchange rate and human development index?
2. What is the nature of the relationship between trade openness and the human development index?
3. What is the impact of foreign direct investment and the human development index?

1.5     Statement of Hypotheses

The following hypotheses stated in their null form were formulated during this research:

Ho₁: There is no significant relationship between exchange rate and human development index.

Ho₂: There is no significant relationship between trade openness and the human development index.

Ho₃:  There is no significant relationship between foreign direct investment and the human development index.

1.6     Significance of the Study

This study will be of significance to the following stakeholders:

Scholars/ Academics: This study will add to the existing literature in the area of trade liberalization as well as, serve as a reference point to students and academicians wishing to carry out further study on the impact of trade liberalization and economic growth in Nigeria.

Investors/Entrepreneurs: Investors and entrepreneurs will benefit immensely from this research work as it will expose them to the benefits of trade liberalization.

Regulators/policy-makers: It is also expected that the empirical results and recommendations of this work would be useful to policymakers as they would help in adopting suitable trade policies that will promote trade in Nigeria.

General public: The general public would find this study very useful because it will serve as a springboard for the continuation of research as well as for detailed information as regards trade activities in Nigeria.

1.7         Limitation of the Study

There were some constraints during this research, amongst them were constraints in the area of sourcing for information, and also that the data used in carrying out this study are secondary. However, amidst all these enumerated constraints faced by the researcher, an effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advanced econometric tests to fish out any possible spurious results among others.

1.8         Organization of the study

The study will be systemically organized into five chapters, chapter one creates an insightful expression of the background to the study, a statement of the problem aims, and objectives of the study, research questions, research hypotheses, and the significance of the study. Chapter two presents related literature concerning conceptual and empirical literature. Chapter three discusses the research design, sample size determination, method of data collection, operational measure of the variable, model specification, and data analysis technique. Chapter four deals with data presentation, data analysis, and data interpretation. Also, hypotheses will be put to test. Chapter five addresses a summary of the finding, conclusions, and recommendations.

1.9       Definition of Terms

Exchange Rate: The exchange rate is defined as the amount of a country’s currency that can be exchanged for another.

Export: Export is defined as a function of international trade whereby goods produced in one country are shipped or transported to another country for future sale or trade.

Import: Import is defined as a function of international trade where goods are brought into one country from another.

Foreign Direct Investment(FDI): Foreign Direct Investment (FDI) is defined as an investment in the form of a controlling ownership in a business in one country by an entity based in another country.