1.1. BACKGROUND TO THE STUDY
In our economy today we are privileged
to make use of the advanced world countries’ products having risen from
improved or advanced technologies of the world. We even eat their type
of food, wear their type of cloth, drive in their kind of cars etc.
without having to do all these in their country. Also we enjoy the best
of products from neighboring countries without having to travel there to
get or use it. All these are made possible by international trade.
International trade has a direct effect on the economy of any country as
the country sees the need for the exchange of ideas, products and
technologies. This effect could either be positive or negative at each
given point in time.
International trade can be traced back
to the need for exchange which evolved from the barter system to the
money system. International trade became popular with the advent of the
colonial rule that brought their wares and made Nigerians their middle
men (Nick 2008). The classical and neo-classical economists have
attaches so much importance to international trade in an economy’s
growth that they even regard it as an engine of economic growth (Jhingan
2006) and so we can say that the performance of any economic in terms
of growth rate of output and per capita income is not only based on the
domestic production and consumption activities but it can also be based
on the international transaction of goods and services. One of the major
reasons why countries engage in international trade is to obtain the
goods and services which they cannot produce in the home country or
commodity which its cost of production is very high. To solve this
problem, the classical economist, David Ricardo suggested that countries
should specialize on the production and exportation of goods whose cost
of production is low and import the product whose cost of production is
high for the country. This is what Ricardo referred to as ‘the theory
of comparative advantage’.
From the little write up above, we can
see that international trade is actually a catalyst or speed up for
economic growth and thus international trade has been of a great concern
to policy makers in the country. For developing countries like Nigeria,
its participation in international trade is high as most of the
essential facilities for growth e.g. capital goods, technical know-how,
raw materials are entirely imported because of inadequate domestic
supply of these goods. Increased domestic demand sure reduces the
expansion of exports, thus to enhance export capacity, improved
technology must be imported which in turn raises the demand for imported
goods. There is every tendency that import would be raised far above
export which would result to an unfavorable balance of trade. Prolonged
pressure on the country’s balance of payment shrinks economic growth and
so appropriate economic policy measures have to be put in place to
streamline international trade for the achievement of a desirable
economic growth.
The Nigerian economy has overdependence
on the capital intensive oil sector which provides about 15% of the GDP,
95% of foreign exchange earnings and about 75% of the government
revenue. Nigeria which used to be a large net exporter of food now
imports some of its food product as the agricultural sector could not
cope with the increasing population growth. The overdependence on the
oil sector has not only led to unbalanced trade but has resulted to
economic fluctuations and this has been a major challenge for Nigeria.
Even the Structural Adjustment Programme of 1986 whose major aim was to
diversify the productive base of the economy could not achieve this till
date as we are still dependent on the revenue accruing from oil
produce.
1.2 STATEMENT OF PROBLEM
Before Nigeria’s political independence
in October 1960, Nigeria was actively involved in international trade.
Nigeria’s main export was primary agricultural commodities which
accounted for 70.8% of the total export and its relative contribution to
GDP was almost 64% during that period. This agricultural commodity
comprises of groundnut, cocoa, palm oil cotton and rubber. At that time,
the oil sector accounted for only 2.6% of the total export and its
relative contribution to GDP was 1.6%. This story is no longer the same
starting from the 1970s. Why? The discovery of oil in commercial
quantities in Olobiri in the year 1956 made Nigeria to become a “hot
cake” and an important player in the world market. In the first half of
the 1970s, there was an increase in the price of oil in the world market
which made Nigeria to experience oil boom. The proceeds from oil were
so high and this showed a great sign to a start of a prosperous economic
development in the country. This made the government’s focus to move
from the non-oil sector almost fully to the oil sector causing other
sectors of the economy to suffer setback. The agricultural, industrial,
manufacturing sector’s relative contribution to GDP and export fell so
much as a result of over-dependence on the oil sector. Nigeria is
Africa’s largest producer of crude oil producing about 2.2 million
barrels per day. This has made Nigeria to be the 4th world exporter of
oil and 7th largest producer of oil in the Organization of Petroleum
Exporting Countries (OPEC). In the early 1980s, there was an oil price
shock in the world market which caused an oil glut for Nigeria and since
other productive sectors were abandoned, Nigerian government could not
meet up with the needs of its populace thus resulting to external
borrowing. This did not tell well on the overall welfare of its
citizens. Nigeria could be said to be suffering from the syndrome called
“Dutch Disease” as a nation abundantly blessed with natural resources
especially crude oil still have over 60% of her population still living
below the poverty line. Nigeria can also be said to be suffering from
the “Resource Curse Syndrome (also known as the paradox of plenty)”
(Soludo 2005). This means that 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
was hypothesized for reasons including a decline in the competitiveness
of other sectors caused by the appreciation of the real exchange rate as
resource revenue enter the economy,volatility of revenue from the
natural resource sector due to exposure to the 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 the extractive activities
(Auty 1993). With the collapse of the global oil price in 2008, Nigeria
was severely affected by a global economic meltdown. There has been
large proceeds obtained from the domestic sales and export of petroleum
product, its effect on the growth of the Nigeria economy as regard
returns and productivity is still questionable, hence the need to
evaluate the relative impact of crude oil on the economy.
The oil sector contributes
about 11% in 2012 and15% in 2013. This shows that other sectors of the
economy are rising up and contributing immensely to the country’s
economic growth. But still yet it is this oil which constitutes 95% of
our export earnings and 75% of the government revenue. Marco
economically, in examining a country’s economic growth, its external
transactions are examined, also the government expenditure as a result
of its revenue is examined. There is a problem of determining the
overall effect of international trade on Nigeria’s growth. This study
helps to address this problem.
1.3 RESEARCH QUESTIONS
These are the questions which the study seeks to answer and these questions will guide us through the course of this study.
- Is international trade really a catalyst for economic growth in Nigeria?
- To what extent does exchange rate impact on the growth process in Nigeria?
- Has the use of trade policies been beneficiary to the growth of the Nigeria economy?
- What are factors hinders international trade in Nigeria?
1.4OBJECTIVES OF THE STUDY
The broad objective of the study is;
- To examine if international trade has any impact on Nigeria’s economy growth and to see if it impacts positively or negatively.
- To examine the factors that hinders the success of international trade in Nigeria
- To examine also the trade policies i.e. restrictions Nigeria has
imposed on international trade and how favorable such policies has been.
- To examine the impact of the exchange rate system in Nigeria
- To make necessary policy recommendations based on the findings of the study.
1.5STATEMENT OF HYPOTHESIS
The research hypotheses to be tested in the course of this study are as
follows;
- H0: That international trade does not contribute to the growth of the Nigeriaeconomy
H1: That international trade does contribute to the growth of the Nigeria economy
- H0: Exchange rate in Nigeria does not impact positive on GDP
H1: Exchange rate in Nigeria does impact positively on GDP
1.6 SIGNIFICANCE OF THE STUDY
This study is significant because
international trade is important in any economy as it is seen as one of
the engine of economic growth and so it is important for us to view the
ways on how we can maximize the benefits and minimize the loses from
international trade. Also this study will be useful to policy makers as
it gives them an insight of the volume of trade thus assisting them to
make policies which will exert positive influence on the balance of
trade. Also the study is helpful to manufacturers, exporters and
importers as it helps them to be aware of the policies on international
trade, exchange rate and the degree of openness of an economy. The study
is useful to foreign partners as this provides information on our
resources and it presents us to them as an economy who is doing well
internationally and this will help increase foreign investment which
will aid economic growth. This study is useful to researches as it
provides an econometric evidence of the impact of international trade on
the growth of the Nigerian economy. Finally the study would also
statistically enrich and add to the existing body of knowledge in the
area of international trade and its contributions to the economic growth
of Nigeria.
1.7SCOPE AND LIMITATION OF THE STUDY
For us to get a full insight into the
study, we have to make use of economic data ranging from 1980-2012 as we
tend to view the era of oil boom, oil glut, Nigeria’s external trade
performance, her economic growth performance over the years and her
recent participation at the world market. This study will be broad as
possible as various articles and journals will be used to examine the
volume of trade, exchange rate, degree of economic openness, inflation
rate and gross domestic product.
A major constraint of this study is the
insufficient time involved to complete the study and the problem of
inconsistent and inaccurate data will give wrong results leading to
wrong policy making.
1.8PLAN OF THE STUDY
The study is structured into 5 chapters with different sections.
Chapter one
This is the introductory part of the
study which contains the background of the study telling us the
foundation from which the study evolves from, the statement of problem
which states the problem associated with the topic of interest, research
questions and hypothesis which the study seeks to answer, the objective
of the study which also tell us the purpose of the study i.e. what the
study seeks to achieve, the significance of the study showing the
importance of the study, scope and limitation of the study opening to us
the length(the time series of data involved) and width