A ll economies are increasingly open in today’s economic environment of globalization.
Trade plays a vital role in shaping economic and social performance and prospects of countries around the world, especially those of developing countries. No country has grown without trade. However, the contribution of trade to development depends a great deal on the context in which it works and the objectives it serves. In recent decades, a number of developing countries, most notably the East Asian newly industrializing countries, have been able to purposefully use the elemental force of trade to boost growth and development within a relatively short time span. At the same time many other developing countries, especially the least developed countries (LDCs), have embarked on unilateral trade liberalization in recent years, with very limited results at best in terms of increased growth and development.
To act as an engine of development, 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 3 tries to capture. From this standpoint, the trade and development performance of a country cannot be seen as the mere sum of its economic growth and export performance. Instead, it is a composite notion, reflecting how trade relates to the range of choices available to people in a country at a particular point in time. The extent of such choice, in turn, depends much on the interplay among factors that determine both trade outcomes and human development outcomes. The trade and development index (TDI) provides a quantitative indication of the trade and development performance of countries by systematically accounting for the interactions among factors governing these outcomes.
The TDI considers three sets of determinants of trade and human development, namely
(a) Structural and institutional factors;
(b) Trade policies and processes; and
(c) Level of development.
This framework, by systematically accounting for the linkages of these determinants and their constituent elements, aims to serve as a monitoring mechanism of trade and development performance of developing countries, a diagnostic device to identify factors affecting such performance, and a policy tool to help stimulate and promote national and international policies and measures with a view to keeping trade focused on development and poverty reduction.
Exploring these linkages is desirable for a number of reasons:
• It is important to consider trade as a means to its ultimate goal, namely the wellbeing of people. Conventional technical analyses of trade performance of developing countries are for the most part preoccupied with trade trends and liberalization policies, and often overlook the real object of trade and growth.
• Development strategies pursued by countries affect the interaction among the factors defining trade and development performance. It is therefore necessary to shed light on how best such strategies can be designed to enhance trade and development performance.
• Trade negotiations have far-reaching implications for the range of choices, which people can have by affecting their access to goods, services and opportunities.
Outcomes of these negotiations need to be judged against their contribution to human development.
• In recent years, some developing countries have made significant gains in trade and development, while many others, especially LDCs, are struggling to keep up.
It is necessary to keep the spotlight on the constraints faced by countries that have performed poorly, and also to maintain a focus on the need to employ trade in the service of human development in countries that have been more successful.
• The Millennium Development Goals and the 2005 World Summit, by highlighting the role of trade in development, have added to the urgency of examining trade and human development linkages.
Removing trade restrictions and distortions can make a singularly important contribution to raising incomes, boosting long-term growth, increasing financial flows for development and thereby reducing poverty.
However, many of the rules of today’s multilateral trading system were written in past rounds of negotiation when few developing countries participated actively. As a result, areas of particular export interest to developing countries were not at the centre of negotiations and remain subject to many policy distortions that prevent trade from functioning fully as an engine of development.
The Monterrey Consensus recognizes this and clearly spells out the need for more meaningful participation by developing countries in the multilateral trading system. In parallel, the Monterrey Consensus calls on the international community to support efforts to promote regional integration among developing countries and countries with economies in transition in a manner that will promote their global integration. The Consensus also identifies the need to enhance trade competitiveness through the gradual removal of supply-side constraints. To that end, it underscores the need for increased financing resources for trade-related technical assistance and capacity-building.
1.2 OBJECTIVES OF THE STUDY
The study specifically seeks to;
1) Evaluate the impact of Nigeria ’s international trade and then impact on the level of economic development and growth.
2) Analyze Nigeria ’s post-reform export structure in order to identify structural changes and its nature in the Nigeria economy.
3) Analyze the impact of international trade on developing economies and recommend appropriate policy to stimulate growth.
1.3 METHODLOGY OF THE STUDY
The method that will be use in this study is largely deductive and is based on secondary data collected from various statistical book of the federal office of statistics and the CBN. The ordinary least squares regression techniques will be used to analyze the impact of the exogenous variables on the endogenous variable of the model.
1.4 HYPOTHESIS OF THE STUDY
To analyze the relationship, we shall make the following hypothesis;
i. That Nigeria ’s export value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
ii. That Nigeria ’s import value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
iii. That Nigeria ’s exchange rate value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
iv. That Nigeria ’s inflation rate does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
1.4 SCOPE AND LIMITATION OF THE STUDY
The study will basically cover a period of 24years (1980-2003). This study is limited to external trade as it affects the growth and development of the Nigeria economy. A major constraint of this study is the short time needed to complete this study and problem of consistent and accurate data.
SECTION TWO
THE CONCEPT OF INTERNATIONAL TRADE
2.1 HISTORY OF INTERNATIONAL TRADE
International trade has been and is today an economic force that has spurred commerce, promoted technology and growth, spread cultural patterns, stimulate exploration and colonization, and frequent fanned the flames of war.
The history of international trade has gone hand in hand with the development of civilizations. From very ancient times, international trade brought about the exchange of products and raw materials between one land or nation and another. Although such trade was often conducted in barter form and was of small volume by today’s standard, this interchange of products was important in economic and historic development.
International trade in its early beginnings was necessary, not just because it provided one society with products such as cowries from west Africa to other areas, international trade also formed the as is for cultural interchange, thus trading not only on product, but also on lifestyles, customs and technology.
In addition international trade prompted the development of monetary system of record keeping and accounting, and of an entire vocation of commerce. Infact international trade added in public displeasure towards usury (interest in excess of legal rate charged to a borrower for the use of money).
One can state that the economic and political development of the entire western world was spurred and enhance by international trade.
Another distinct contribution of international trade was the strong promotion given to the field of exploration, map making, and ship construction technology. Early international trade routers ranged over vast expanses, thus requiring advances in transportation to make possible further search for new products and markets.
Let us not forget, of course, that such desire for new trade routes products, and markets was the driving force that launched explorations leading to the discovery of the new world.
Columbus set out, as you can recall, not to settle in a new nation, but to discover a new trade route of the Orient. The interest upon his return to Europe center not on his accounts of forest and soil, but on the new products available such as tobacco, corn, cowries etc.
As international trade progressed and technology developed, these explorations were to turn up another area of foreign trade, still important today. This was the import of raw materials by a nation and the re-export of finished and manufactured products. As a result, not only living standards advanced, but national incomes were also increased.
2.2 INTERNATIONAL TRADE- DEFINED
In the simplest form, international trade means exchange of goods and services across international boarders.
In other to know what is happening in the course of international trade, governments keep track of the transactions among nations.
The records of such transactions are made in the balance of payment accounts. International trade and balance of payment are therefore two important aspects in the relationship between nations.
2.3 IMPORTANCE OF INTERNATIONAL TRADE
There are many areas in which the importance of trade can be established. Perhaps the most critical of these areas concerns economic growth. During the 19 th and 20 th centuries, trade has played a leading role in bringing about global economic growth. In addition to its role as an “ engine of growth" for the world economy, international trade has also played a pivotal role in bringing about rapid economic growth and development in several countries. The 19 th century was perhaps the important century for (primary commodity) export-led growth. Expansion of exports can lead to growth through stimulating technical change and investment, or by spilling demand over other sectors.
Expansion of primary commodity exports often led to growth in the 19 th century particularly in Sweden , Australia and Canada . In Sweden , growth was propelled by the exportation of timber and wood products and in Australia , growth was driven by the exportation of wool, lamb and mutton. In Canada , growth was propelled by the export of wheat. This gave rise to the so-called “staple theory" of growth. In practice, different primary products will have different effects on economic growth because they differ as regards conditions of supply and demand. Those primary products with high income and price elasticities of demand are likely to be more growth-inducing than orders. Of course, the most favourable situation is when exports (with high elasticities) are sold in an expanding market at rising prices as was the case with Swedish exports into the U.K. providing foreign exchange for buying capital imports. In the 20 th century, for a host of reasons, there have been no good examples of primary product led-growth, but there are several examples of industrial led growth. These include the city-states of Hong Kong and Singapore , also Taiwan and South Korea .
2.4 AFRICA IN THE WORLD ECONOMY
The socio-economic conditions in African countries deteriorated drastically during the 1980s, a decade that is widely regarded as Africa ’s lost decade of development opportunities. Available empirical evidence shows that, in sub-Saharan Africa, income per capita declined at an annual rate of 2.4%; Africa ’s real GDP per capita fell by 14.3%, investment contracted by 15%, while exports and imports declined drastically during the period. The current acute economic crisis in Africa is attributable to a host of factors, both internal and external. The internal factors border on poor domestic macroeconomic management leading to inflation, unemployment, stagnation and rising fiscal deficits. The external factors reflect the increasingly hostile international economic environment characterized by low and falling primary commodity prices, rising protectionism in the industrialized countries, and dwindling capital flows into African countries resulting in mounting balance of payments deficits and escalating external debt. By 1990, the total external debt of African countries was in excess of US$270 billion, leading to a crushing debt-service burden and further aggravating Africa ’s development problematique.
Many reasons can be adduced for the dismal economic performance of African countries in the 1980s. While domestic policy inadequacies cannot be ignored, it seems certain that external economic conditions played a significant role. According to the World Bank Development Report 1990:
Adverse developments in the world economy also had a part in the falling growth rates of the 1980s. Weak external demand, declining terms of trade, a diminishing supply of external finance, and a great increase in the volatility of interest rates combined to produce an unusually adverse climate.
Infact, in the area of external economic relations, we can identify three main issues which have had significant impact on African economic performance. They are;
i. the escalating external debt and crushing debt-service burden
ii. rising trade deficits, and
iii. the declining inflow of concessional finance and deteriorating terms and conditions of loans
these issues are interrelated and inextricably linked. However, the issue of commodity trade seems to be the most fundamental. This is because it is invariably an imbalance in merchandise trade that leads to financing imperatives like borrowing.
Specifically, any deficit in the trade or current account balance brings about the need to finance it either by external borrowing(leading to escalation of debt) or other non-debt creating financial flows.
The high susceptibility of most African economies to trade and current account deficits arise from the following:
§ extreme volatility of primary commodity prices
§ high dependence on the exportation of a limited range of primary commodities
§ high external trade dependence
§ low world share
§ declining terms of trade; and
§ severe export earnings variability and falling export revenues.
Prices of primary commodities, particularly tropical products and food crops, fluctuate sharply in response to changes in global supply and demand. During the decade of the 1980s,prices of many primary commodities exported by African countries fell to there lowest levels since the end of the Second World War. Many countries in Africa depend on the exportation of a limited range of a limited range of primary commodities. Some countries like Nigeria , Algeria and Libya obtain the bulk of export revenues from oil. In fact, many African countries obtain over half their export their export earnings from one or two primary commodities. In 1988, Uganda derived 100% of its export receipts from primary commodities while sixteen other countries obtained over 90% of their export revenues from primary commodities. It has been found that exports account for almost one-third of the GDP in Africa while imports account for a slightly higher proportion. The typical African country therefore exhibits a higher degree of “trade openness" which renders it unduly susceptible to external shocks. Africa has little or no influence on international trade yet because of its openness. This situation is further worsened by declining terms of trade – which became pronounced in the 1980s when prices for many primary commodities collapsed. By 1989, average commodity prices were still 33% lower than in 1980 in spite of a slight recovery in prices in 1988. The World Bank estimates that the fall in commodity prices during the 1980s cost sub-Saharan Africa 15% of the real purchasing power of exports. All these factors combined to brig about a drastic fall in Africa ’s export earnings and a rising trade a current account deficit in the 1980s.
It should be pointed out that increasing marginalisation of Africa in world trade has been aggravated by the excessive dependence of African countries on the European export market. In 1988, the European community alone absorbed over 60% of exports of many commodities from Africa . Yet, intra-Africa trade accounted for less than 6% of Africa ’s total trade. Thus, until African countries resolve to increase intra-regional trade, the continent will continue to be marginalized in world trade and become increasingly irrelevant in global economic affairs.
SECTION THREE
THEORITICAL FRAMEWORK 3.1 THEORIES OF INTERNATIONAL TRADE The principal objective of any theory of international trade is to explain the cause of trade. Two other objectives of a theory of international trade are to explain the composition and volume of external trade. A theory, which explains these three issues: cause, composition (structure) and volume of trade is conventionally said to be a “complete" theory of international trade. The two complete theories of international trade in existence are the Classical (also called Ricardian) theory and neo-classical theory.
3.2 THE CLASSICAL THEORY OF INTERNATIONAL TRADE
David Ricardo, the 18 th century British economist was the author of the classical theory of international trade and the doctrine of comparative advantage. Ricardo was the first to demonstrate that external trade arises not from difference in absolute advantage but from difference in comparative advantage. By “comparative advantage" is meant by “greater advantage". Thus, in the context of two countries and two commodities, trade would still take place even if one country was more efficient in the production of both commodities (provided the degree of its superiority over the other country was not identical for both commodities).
In his theorizing, Ricardo assumed the existence of two countries, two commodities and one factor of production, labour. He assumed that labour was fully employed and internationally immobile and that the product and factor prices were perfectly competitive. There are no transport costs or any other impediments to trade.
According to Ricardo, differences I climate and environment tend to result in differences in comparative advantage; differences in comparative advantage lead to trade. In the context of a model of two countries, two commodities and one factor of production, Ricardo obtained the result that a country will tend to export the commodity in which it has a comparative advantage and to import the commodity in which it has a comparative disadvantage. Since comparative costs are the other side of comparative advantage, the classical theory is easily couched in terms of comparative costs. Specifically, the theory now states that a country will tend to export the commodity whose comparative cost is lower in autarky and import the product the comparative cost of which is higher in pre-trade isolation.
3.3 NEO-CLASSICAL THEORY OF INTERNATIONAL TRADE
The Neo-classical theory of trade evolved in an attempt to modify some unsatisfactory aspects of the classical theory. Thus, the Neo-classical theory, also called the modern theory, advanced a more satisfactory explanation for the existence of comparative cost differences between countries; introduced capital as a second factor of production; and allowed for international differences in the pattern of demand. The Neo-classical theory is therefore a 2*2*2 model i.e., it assumes the existence of two countries of two countries, two commodities, and two factors of production. The introduction of a second factor of production turns out to e very important. This makes the approach of Neo-classical theory to be different n certain fundamental respects from the classical theory, namely, in handling of the relationship between factor allocation, income distribution and international trade.
3.4 DATA REQUIREMENT AND SOURCES
The data used in this study are compiled from various issues of the central Bank of Nigeria publications which includes the Statistical bulletin, Annual report and Statement of account.
3.5 DATA PRESENTATION
Source: CBN Statistical bulletin 2003.
SECTION FOUR 4.1 EMPIRICAL ANALYSIS
In the empirical analysis of the impact of international trade as an engine of growth in Nigeria , the method used in the empirical analysis is the Ordinary Least Square(OLS) regression techniques. The data used in this analysis are the Gross Domestic Product(GDP), exchange rate, export, import and inflation.
The data for different variables were compiled for a period(1980-2003). To analyze the relationship, we shall make the following hypothesis;
i. That Nigeria ’s export value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
ii. That Nigeria ’s import value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
iii. That Nigeria ’s exchange rate value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
iv. That Nigeria ’s inflation rate does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
4.2 MODEL SPECIFICATION
To test the above hypotheses, we shall specified the following model:
GDP = F(EX,IMP,EXR,INF)
Where
GDP = Gross Domestic Product
EX = Export value
IMP = Import
EXR = Exchange rate value
INF = Inflation
4.3 RESULT PRESENTATION
From preliminary Ordinary Least Squares (OLS) regression calculations using the Microfit 4.1 for windows econometric software for PCs and annual regression data for the 1980-2003 period. The final result are reported below, together with the standard diagnostic test result:
From the result above, after the first regression using the Microfit 4.1 software for windows, it was found that the partial regression coefficients of all the variables does not conform to a priori expectation and fluctuated in different direction.
Clearly from the above result, which was corrected using the cochrane-orcutt method and it converges after 31 iterations.
From the value of the R 2 , it can be concluded that the 4 regressors in the equation explained about 91% of the systematic variation in the dependent variable GDP during the period 1980 – 2003.this, thus represent a good fit.
The F-value of 6.7743 passes the significance test at the 1% level. Thus there is no doubt that there exists a significant linear relationship between GDP and the regressors used.
The signs of the coefficient of the openness (OPN) and inflation (INF) variable conforms to a priori expectation, thus, the more open an economy to the outside world in terms of trade the higher the growth rate of its GDP and also the higher the inflation rate, the lower the growth rate of the GDP.
However, the coefficient of the Export (EXPT), Exchange Rate (EXR), Inflation (INF) and Import (IMP) does conforms to a priori expectation. The positive sign of the export coefficient implies that a 100% growth in GDP will bring about a 93% growth in export, also a 100% growth in GDP will bring about a 73% fall in exchange rate. A 100% growth in GDP will bring about a 33% fall in import, lastly a 100% growth in GDP will bring about an 18% fall in inflation.
The t-values are in parentheses below the coefficients.
Testing at a 1% level of significance, all the coefficient of the variables passes the t-test at a 1% level of significance.
This implies that, at a 1% level we shall reject the null hypothesis that Nigeria’s export value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, that Nigeria’s import value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, That Nigeria’s exchange rate value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, That Nigeria’s inflation rate does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
The computed DW statistic of 2.1 fell in the grey region suggesting that there is no serial correlation.
SECTION FIVE CONCLUSION 5.1 RECOMMENDATION
The lifting of trade barriers should not be followed by the introduction of new ones" – should be modified to reflect that, after years of market distortions favoring developed countries, some form of medium-term investment/tariff/subsidy policy will be necessary to enable developing countries to build their productive capacity, meet their food security needs, and generate surpluses for international markets.
Similarly, the calls for elimination of output and export subsidies in developed countries' agriculture, and of their trade barriers to developing country manufacturing exports are also positive. However, these commitments would be strengthened by reference to the need for concrete policies designed to enhance local productive capacity and food security in developing countries. Distinction should also be drawn between the elimination of developed country export subsidies and the proposal for export credits to stimulate infrastructure investment in developing countries.
There should be a Draft calls for consultations geared towards establishing “a world economic body at the highest political level… to provide political leadership to enhance the coherence and consistency of the international monetary, financial and trading systems in support of development". If such a body better balances economic policy with human rights, social and environmental goals, it could make a significant contribution to solving the problems of development finance over the long term.
A Draft should be made to commit UN agencies to “ensuring greater policy coherence and better cooperation among UN, its agencies, the Bretton Woods Institutions and the World Trade Organization, as well as other multilateral bodies", so as to better provide global public goods and consolidate the international financial system. It should be strengthened to note that the primary goal of enhanced coherence is “development," as defined and measured by the UN human rights framework. Such organizations (the Bretton Woods Institutions and the World Trade Organization ) should serve to support nationally-designed development strategies, rather than undermining them
4.2 SUMMARY AND CONCLUSION
This study has examined International trade as an engine of growth in developing country. At Independence in w1960, agricultural produce was Nigeria major export trade. The advent of petroleum considerably boosted foreign exchange earnings from the early part of the mid-1970s. Export earnings grew at an estimated annual rate of 67.4 during the period of 1970-1974. The trend and pattern of exports tended to suggest that the country was moving from a mono-cultural agrarian economy to a more diversified economy. The illusion in that hope, however, soon became apparent with the observation that expansion in exports till date was singularly accounted for by petroleum and hydrocarbon. This situation created the “Dutch disease" of the 1980s.
The liberal trade policies improved the Nigeria export drive as there was a significant increase in export of non oil export during Sap The study identified other macroeconomic variables as significant determinant of the development of the Nigeria economy, external debt stock, inflation and SAP.
To end this, it is therefore imperative that conscious efforts should be made by government to fine-tune the various policy measures relating to the various macroeconomic variables in order to provide an enabling environment to stimulate international trade.
REFERENCE:
Milton Iyoha (2003) Macroeconomic: Theory and Practice, Mindex publishing Benin City , Edo State . Pp 142-166
United Nations Conference on Trade and Development (UNCTD).2005, developing countries in international trade: trade and development index 2005 united nations New York and Geneva , 2005
Central Bank of Nigeria . 2003. Statistical Bulletin. Abuja .
» left by Ugochi from UNN (303 days 4 hours ago.)
your article is just perfect and is quite helpful to me thanks. Respond to this comment
» left by Sandra E. Graham(3,111) Sandra E. Graham from Paragould, Ar. USA (273 days 7 hours ago.)
I am a person who is politically illiterate. And the ins and outs of world trade falls somewhere in that arena. Of course, even I understand the importance of trade amoung countries to help world-wide growth and sustenance. I also understand how countries use embargos and import/export restrictions to force other countries to cowtow to the majority rule.
Helpful and insightful article, Oviemuno. Keep up the good work.
SEG Respond to this comment
» left by Adeyemo Tayo from Lagos (26 days 9 hours ago.)
Oviemuno you did a good job but I have a few things about your work;
1. The period 1980 to 2003 I do not think will capture international trade properly in Nigeria's case because during this period, Nigeria rely mainly on oil export to earn forex. You would not be able to capture what happened when agric produce was driving the economy.
2. I expected that you would use "Degree of Openness" to measure international trade and and Real GDP to measure growth. With that, inflation as a variable might not be necessary again.
Adeyemo Tayo, Covenant University, Ota, Ogun State.
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