THE EFFECT OF TRADE ON ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Predominantly, in our world today, nothing can be done without an exchange of some value for value which involves money, ideas, product and technology. As a result of this there is direct effect on the economy of any nation, either positively or negatively. Trade can be traced back to the need for exchange, which evolved from the barter system to the money system. Trade in Nigeria, however, became popular with the advent of the colonial rule that brought in their wares and made Nigerians their middle men (Nicks, 2008). By this Nigerians understood the need for trade both domestically and internationally.
International trade has been an area of concern to policy makers and economists. Its importance lies on the ability to obtain goods which cannot be produced in the country or which can only be produced at greater expenses. Also it enables a nation to sell its domestically produced goods to other countries of the world. The performance of a given economy in terms of growth rates of output and per capita income has not only been based on the domestic production and consumption activities but also on international transaction of good and services. The classical and neo-classical economists attached so much importance to international trade in a country‘s development that they regarded it as an engine of growth (Jhingan 2006).
Trade is recognised as a vital catalyst for economic development. For developing countries like Nigeria, the contribution of trade to overall economic development is immense owing largely to the obvious fact that most of the essential elements for development such as,
capital goods, raw materials and technical know-how, are mostly imported because of inadequate domestic supply. However, it is important to note that internal trade complements external trade since domestically produced goods are collected for export, while imported goods are distributed within the country, sometimes into remote areas. It also facilitates internal specialization and the division of labour between the various firms and geographical areas of the country. Therefore, the higher the level of internal trade the greater the level of specialization. This raises the level of efficiency and productivity of the various economic units (Anyanwuocha 1993).
Economic growth is measured by the Gross Domestic Product (GDP) in Nigeria. GDP is a total market value of a country‘s output of goods and services, which are exchanged for money or traded in a market system over certain periods. This indicates that trade is an essential aspect of Economic growth. The Gross Domestic Product (GDP) of Nigeria is $166 billion in 2007. The economy has overdependence on the capital intensive oil sector, which provides 20 per cent of GDP, 95 per cent of foreign exchange earnings, and about 65 per cent of government revenue for 2005. The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports some of its food products.
The overdependence on oil produce not only leads to unbalanced trade but has resulted in economic fluctuations. Nigeria was severely affected by the global economic melt down partly due to the collapse of global oil price in 2008, the prices set by the Organisation of Petroleum Exporting Country‘s (OPEC) which can be influenced by political reasons that might not be favourable to Nigeria economy and the recent Niger Delta Crisis which had a big role to play in slowing down Nigeria‘s economic growth. Economic and trade diversification may serve as a strategy for reducing the exposure of Nigeria economy to external shock associated with commodity production and trade.
However, it must be established that before any significant benefit from trade can be gained, the domestic economy will have to diversify away from overdependence on oil produce and concentration on the production and export of primary commodities.
1.2 STATEMENT OF PROBLEM
Prior to the discovery of crude oil in commercial quantity in Nigeria, the country depended largely on the proceeds of agriculture primary product for the generation of foreign exchange. The country therefore constituted one major agrarian country in Africa. By the mid-1960s, production and export of crude oil had become important in Nigeria‘s export structure, ironically, the ascendancy of petroleum production and export was accompanied by a simultaneous decline of agricultural products in the nation‘s economic activities. Indeed, by the end of the 1970‘s, crude oil accounted for as much as 90 per cent of the country‘s export trade. Nigeria‘s non-oil production structure is still basically of the import-substitution variety, being largely dependent on foreign technology, industrial machinery and raw materials and negligible exports of finished products. It can therefore be said that the pattern of Nigeria‘s trade with the rest of the world has not undergone a structural change since the 1940s. The country had been producing and trading consistently in natural resource products (Akano, 1995).
Crude oil production is an extractive, non-renewable activity which Nigeria had been exploiting since the late 1950s (Akano, 1995). For almost two decades of commercial production, Nigeria produced and exported crude oil in its natural state with minimal processing into higher stages of product development. While other oil producing African countries such as Libya and Algeria have diversified operation into more technology-intensive areas such as the LNG and petrochemicals. Nigeria is still locked essentially in the primary stages of petroleum development (Akano, 1995). The most important implication is that there is adverse effect of making the Nigeria‘s export sector dependent on external factors, outside the control of Nigeria economy.
Nigeria has been diagnosed for suffering from ―The Resource Curse Syndrome‖ (also known as the paradox of plenty) (Soludo, 2005). This refers to the 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 is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to 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 extractive activities) (Auty, 1993).
1.3 AIM AND OBJECTIVES OF THE STUDY
The main objective of this study is to examine the effect of trade on economic growth in Nigeria. Specifically the study hopes to:
1.    Evaluate the impact of Nigeria‘s international trade and its impact on the level of economic development and growth.
2.    Examine the effect of concentration of trade to primary commodities in Nigeria.
1.4 JUSTIFICATION OF THE STUDY
Previous efforts made to examine, the economic impact of trade in Nigeria has been limited to the area of trade policy implementations, trade openness and liberalization. The significance of this study is numerous, though the primary objective is on the effect of trade on economic growth in Nigeria. This study intends to explore deeply into, how the concentration of trade to primary commodities in Nigeria especially the over-dependency on oil has hindered the economy from benefiting significantly in trade and its numerous contributions to economic growth. Though, series of effort have been made both theoretically and empirically to examine the impact of trade on economic growth, so much effort has not been made at identifying trade diversification as a major route for Nigeria to enjoy the various economic benefits attached to trade. And this research work intends to provide insight into this area.
1.5 SCOPE AND LIMITATION OF THE STUDY
The research work is confined to Nigerian economy. Therefore, data that were considered are those relating to Nigeria economy on effect of trade on economic growth in Nigeria. The study will basically cover a period of 25 years (1984-2008). 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.
1.6 RESEARCH METHODOLOGY
Ordinary Least Square (OLS) method is devised for the data analysis. The dependent variable in the study is economic growth which is measured with Gross Domestic Product (GDP) while the explanatory (independent) variables are net export, degree of openness, exchange rate, and trade policy changes.