TRADE LIBERALIZATION AND OUTPUT GROWTH IN NIGERIA: AN ECONOMETRIC ANALYSIS

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND TO THE STUDY

Economists have long been interested in factors which cause different countries to grow at different rate and achieve different levels of wealth. One of such factors is trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output. To a large extent, Nigeria’s economic development depends on the prospects of her export trade with other nations.  Trade provides both foreign exchange earnings and market stimulus for accelerated economic growth.

The inability of Nigeria to fully implement lower tariffs in international trade is making the country to participate marginally in the world economy. The modes and indicators of trade liberalization include the rapid growth of international trade, foreign direct investment (FDI) and international flows of capital and information. This could be one of the reasons for the formation of various regional economic groups around the world such as European Union (EU), Organization of Economic Co-operation and Development (OECD), Organization of Petroleum Exporting Countries (OPEC), with a view to harmonizing policies in order to reap the gains of economic of scale. Hence, the countries in West African have come under one Umbrella-Economic Community of West Africa States (ECOWAS), to maximize their potentials in order to reap the gains of trading with one another.

The liberalization of trade has led to massive expansion in growth of the world trade relative to world output. While world output (or GDP) has expanded fivefold, the volume of world trade has grown 16 times at average compound rate of` over 7% per annum. In fact, it is difficult, if not impossible, to understand the growth and development process of countries without reference to their trading performance (Thirlwall, 2000)

In Nigeria, economic policy in the last two decades had one dominating theme- as an integral element of the structural adjustment program (SAP), trade liberalization was espoused on the arguments that it enhances the welfare of consumers and reduces poverty as it offers wider platform for choice from among wider variety of quality goods and cheaper imports. There are two reasons for this potential of welfare improvement. First, the nation would have access to many goods at relatively cheaper prices than in the domestic markets; they also find more profitable markets in which to sell the products of her industries. Second, production of goods in which the country has comparative advantage expands, while those sectors displaying comparative disadvantage shrink. It is against this backdrop that many developing countries liberalized their imports, reduced average tariffs and dismantled significant number of non-tariff barriers.

A significant number of researchers have attributed in part, the poor performance of Africa economic to the protectionist trade practices. They claimed that most of the economies with high trade barriers are often also characterized government intervention in internal competition and the financial sector, subsidy and tax programme favouring specific sectors in the economy, inefficient bureaucracy, inconsistent macroeconomic policies, and inflation. All these make the objective of the protectionist economies to be futile.

Sachs and Warner (1995) argued that countries that were opened had experienced economic growth at a rate of 4.5 percent annual in the 1970s and 1980s while countries that were closed, barely managed to grow at a rate of 0.7 percent. This is also supported World Bank (1987) that the average growth rates of the strongly outward oriented countries were far higher than others, while the strongly inward oriented economies had a decline in growth between 1973 and 1985. Dollar (1992) had similar results for 95 less developing countries (1976-1985). Therefore, the process of trade liberalization integrates national economies via trade, capital flow, and harmonization of economic policies amongst nations and formation of global market frameworks. It also involves the process that promote the integration of a whole system of interdependence among sovereign state reducing barriers to trade, capital flow, technology transfer, among others.

From the ongoing discussion, it is evident that trade is very important in promoting and sustaining the growth and development of an economy. No economy can isolate itself from trading with the rest of the world because trade act as a catalyst of growth.

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