THE IMPACT OF EXPORT TRADING ON THE GROWTH OF THE NIGERIAN ECONOMY
CHAPTER ONE INTRODUCTION
BACKGROUND OF THE STUDY
Growing the economy has become the major objective of most government in the developing economies of the world. Over the years, these governments have adopted a number of measures aimed at accelerating growth and development in their domestic economy. The need to improve the living standard of the citizenry, reduce unemployment, increase capacity utilization which leads to increased productivity as well as increase in Foreign Exchange Earnings, etc has led to the introduction of vibrant economic policies in Nigeria and other developing nations of the world.
According to Azam (2009), the drift from trade restricted economy to trade liberalization is attributed to positive relationship that exists between export and economic growth. Bhagwati (1973) noted that for efficient utilization of available scarce resources and for expanding global trade volume, freer trade in goods and services is highly beneficial. And so, to enjoy the advantage of this free trade, Nigeria has adopted trade liberalization policy with a view to increase export of goods and services which increases capacity utilization as well as foreign exchange earnings. Economists often assert that trade liberalization improves social welfare and alleviates poverty, because it generates jobs opportunities, fosters economic growth and improves consumer choice and living standard of the societies.
Reacting to this, Fouad (2005) notes that exports of goods and services represent one of the most important sources of foreign exchange income that ease the pressure on the balance of payments and create employment opportunities, increase productivity and enhance the living standard of the citizenry. Exporting is associated with static gains that include access to larger outside markets, hence exploiting economies of scale. There are also dynamic gains that include efficiency advances as a result of knowledge and technological spillovers from exporting experience. Exporting is also associated with efficiency in resource allocation, employment generation, and relaxing the foreign exchange constraints (Bbaale and Mutenyo 2011).
The are several plausible theoretical arguments supporting the view that exporting activities and overall economic growth are positively associated. On the one hand, exporting implies that a country gains access to the wider external demand, which acts as a stimulus to domestic output and hence economic growth. Second, it is frequently argued that small domestic markets may not grow continuously and that any positive economic shock leading to the expansion of the domestic market is more likely to decay quickly. On the other hand, large external markets do not always encompass growth restrictions on the demand side, and this leads to the exploitation of economies of scale (Bbaale and Mutenyo, 2011). Therefore, export expansion can be argued to be a stimulus of economic growth (Agosin, 1999; Giles and Williams, 2000; Grossman and Helpman, 1991).
Additionally, Verdoorn (1949) dwells on the argument that export growth may generate specialization in the production of export commodities. By extension, specialization is argued to lead to efficiency gains in the export sector owing to the rise in skills due to learning-by-doing. Consequently, resources would flow from the relatively less productive and non-trade sector to the highly productive exports sector, leading to economic growth. On the same vein, Futher, Chenery and Strout (1966), Balassa (1978), Buffie, (1992) and Riezman (1996), dwell on an indirect argument linking exporting to economic growth. They argue that exporting activities generate foreign exchange that is required to import capital goods. Increase in capital goods imports in turn stimulate a country's capacity to produce.
This is more pronounced in developing countries that have an extreme disadvantage in the production of capital goods. In the same line of argument, it is suggested that the most up-to-date knowledge and technology is embodied in the capital goods (plants and equipments) imported from technologically advanced countries. This knowledge transfer through international trade may increase productivity and, by extension, lead to economic growth and development (Hart, 1983 and Chuang, 1998).
There exists enormous empirical evidence on the relationship between exports and economic growth tested in a number of countries, employing time series techniques. It is noteworthy that the evidence generated does not translate into a consensus on the direction of causality of the two series. For that matter, the relationship between exporting and economic growth remains controversial issue for both researchers and academics alike (Bbaale and Mutenyo, 2011). Some authors have argued that export growth precedes economic growth hence giving a stance to the
export-led-growth (ELG) hypothesis (Arnade et al., 1995; Fosu 1996; Thornton 1996). On the other hand, others have provided evidence in support of the growth-led-export hypothesis (GLE) by arguing that economic growth precedes export growth (Lancaster, 1980; Krugman, 1984; Henriques and Sadorsky 1996; Al-Yousif 1999; Kemal et al., 2002).
The stance of this argument is such that economic growth leads to knowledge and technological development in the various sectors of an economy through the learning-by-doing effect. This effect on the economy becomes a vehicle for export growth especially in those commodities where the country enjoys a comparative advantage. Other authors argue that there is a feedback relationship between export growth and economic growth (Helpman and Krugman, 1985; Dutt and Ghosh, 1994; Thornton 1996; Shan and Sun 1998a; Anwar et al., 2000;). The arguments presented along these lines are that exports may arise from the economies of scale effects of economic growth. At the same time, export expansion may propel further cost reductions leading to efficiency gains, and by extension, leading to economic growth. At an extreme end, some authors find no causal relationship between the two series (Mutairi, 1993; Anwar et al., 2000). So many researchers have looked at single country effect of export on economic growth, while there are also substantial authors who have examined cross-country empirical literature on the effects of exports on growth (Voivodas, 1973; Michaely, 1977; Balassa, 1978; Fajana, 1979; Fosu 1990; Lussier 1993; Greenaway and Sapsford, 1994; and Sala-i-Martin, 1997).
In this work the author seeks to evaluate export-led-growth with a particular reference to Nigeria. However, it is important to note that most of the recent and earlier literature on exports and economic growth concentrated on „aggregate exportsImage only. The major deficiency of this approach is that it limits our understanding of the important differences between dissimilar export components and their influence on economic growth. It is argued that even if there is a growth- enhancing or growth-limiting effect of a particular export component, it may not be reflected at the aggregate level, and this may lead to unauthentic conclusions and implications for policy (Ghatak et al., 1997 in Bbaale and Mutenyo, 2011). All the cross-country studies cited above do not explicitly investigate the effect of disaggregated exports on economic growth.
However, there is quite scanty literature investigating the role of export composition on economic growth (Feder, 1983; Fosu, 1990; Ghatak et al., 1997; Hussain, 1998; Greenaway et al., 1999; Srinivasan et al., 2001; Herzer et al., 2004; Giles and Williams (2000); Bbaale and Mutenyo, 2011; and Wörz (2005). Additionally, the literature addressing the subject, apart from Fosu (1990), and Bbaale and Mutenyo, 2011 is overly concentrated on Asia, Latin America, and Europe. This leaves a huge knowledge gap for Africa and Nigeria in particular and this gap is what this paper seeks to fill. This paper tests the hypothesis that not only the aggregate exports perse matter, but that different export components have a differential influence on economic growth in Nigeria. The author believes that the impact that oil export will have on the economy will be different from that of non-oil export.
In other words, the type of products (oil and non-oil) that Nigeria exports to other countries of the world really matters for the growth of Nigerian economy. This is connected to the argument documented by Feder (1983) and Wörz (2005) that efficiency, knowledge spillover, and economies of scale are different across different export components. This, in turn, implies that their growth stimulating power is obviously different. Therefore, the question of interest from the policy perspective extends beyond the influence of aggregate exports on growth and dwells on whether export components have a differential stimulating power on economic growth in Nigeria. Gaining insights on the differential impact of export components on growth is a key to successful policy formulation, analysis, and advocacy.
STATEMENT OF THE PROBLEM
It is believed by most writers (Arnade et al., 1995; Fosu 1996; Thornton 1996; Wörz (2005)) that export of goods and services has a positive impact on the growth of the economy. This implies that growth in export will bring about growth in the economy. In other words, export drives the economy. This is what the classical school of thought regarded as export-led-growth hypothesis. Other writers (Lancaster, 1980; Krugman, 1984; Henriques and Sadorsky 1996; Al-Yousif 1999; Kemal et al., 2002) are of the opinion that it is economic growth that brings about increase in export of goods and services and not the other way round. This however is in line with growth-led-export hypothesis which believes that the growth in the economy will bring about knowledge and
technological development in various sectors of the economy and will lead to increase in export of goods and services.
Meanwhile, many others believe that there is a feedback relationship between export and economic growth (Helpman and Krugman, 1985; Dutt and Ghosh, 1994; Thornton 1996; Shan and Sun 1998a; Anwar et al., 2000;). They argue that exports may arise from the economies of scale effects of economic growth. At the same time, export expansion may propel further cost reductions leading to efficiency gains, and by extension, leading to economic growth. From the forgoing it is obvious that there is no conclusive evidence literature on how export affects the growth of an economy. On this note, one wonders as to the extent export have affected the growth of Nigerian economy as most of the literatures on this subject matter were very scanty in Nigeria. The problem now is, considering the fact that there is mixed finding among these variables, should one adopt a policy that will increase export in Nigeria or not since there is no agreement as to how export affects economic growth. This work seeks to provide solution to this problem by not only looking at the impact of export on the Nigerian economy but by taking a particular look at the contribution of different export component (oil and non-oil).
OBJECTIVES OF THE STUDY
The main objective of this work is to determine the impact of export trading on the growth of the Nigerian economy. The following specific objects were set out to be achieved:
1. To determine the impact of oil export to the growth of Nigerian economy.
2. To ascertain the level of impact that non-oil export has on the growth of Nigerian economy.
3. What is the direction of causality between export (oil and non-oil) and economic growth in Nigeria.
The following research questions were presented for this work and the answers to these questions will be provided at the end of this work. The answers that will be provided for these questions will enable us solve the above stated problem. The questions are as follows:
1. How does oil-export affect the growth of Nigerian economy?
2. How far has non-oil export impacted on the growth of the Nigerian economy?
3. To what extent does causal relationship exists between (Oil and Non-oil) export and economic growth in Nigeria?
The following hypotheses were formulated for this study, they include:
1. Oil export does not have a positive and significant impact on growth of the Nigerian economy.
2. Non-oil export has not positively and significantly affected growth of the Nigerian economy.
3. There is no causal relationship between export (oil and non-oil) and economic growth in Nigeria.
SCOPE OF THE STUDY
This study will cover the period 1987-2012, this time period was chose with the consideration of the fact that it was the period when Nigeria liberalized the economy. This period also witnessed boom in the oil sector of the Nigerian economy and so, we will be looking at this 25 years period to see how export of both oil and non-oil product have affected the growth of Nigerian economy. This period was considered long enough to` examine whether the increase witnessed in can be attributed to export.
SIGNIFICANCE OF THE STUDY
This study will have a broad significance to both the policy makers and researchers as well.
TO POLICY MAKERS
1. It will provide information on how oil export have contributed to the growth of Nigerian economy which will guide the policy makers in designing policies and programs that is needed to sustain economic growth.
2. The contribution of non-oil export to the growth of Nigerian economy will be determined in this study and this will give policy makers information that will guide them in formulating polices that will encourage the non-oil export in Nigerian economy.
1. This study will contribute to existing literature in this study area.
2. It will provide information to other researchers carrying out research on this area.
TO INTERNATIONAL TRADERS
1. This study will provide the needed information that international traders might need to make the right decision on the active area of trade.
2. It will provide information on their contribution to the growth of the economy. Showing them how relevant they are to the country. This will energize them to do more.
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