THE IMPACT OF TRADE LIBERALISATI0N ON ECONOMIC GROWTH IN NIGERIA (1970- 2009)

THE IMPACT OF TRADE LIBERALISATI0N ON ECONOMIC GROWTH IN NIGERIA (1970- 2009)

BY

IGBANI JOHN OKORO

2007/147656

BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ECONOMICS, IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A BACHELOR OF SCIENCE DEGREE IN

ECONOMICS

DEPARTMENT OF ECONOMICS

UNIVERSITY OF NIGERIA NSUKKA

AUGUST 2011

TITLE PAGE

THE IMPACT OF TRADE LIBERALISATI0N ON ECONOMIC GROWTH IN NIGERIA (1970- 2009)

APPROVAL PAGE

This project has been supervised and approved as having satisfied the conditions for the award of a Bachelor of Science Degree in the Department of Economics, University of Nigeria, Nsukka.

DEDICATION

This work is dedicated to God Almighty the most high the owner of the universe.

ACKNOWLEDGMENTS

I am grateful to my supervisor Dr. Mrs.Gladys Aneke who ensured the ultimate success of this study.

I also appreciate the invaluable support and prayers made for me by my mother, Mrs. Grace Igbani, Mr Samuel Igbani, Miss Elisabeth Igbani, Miss Lucy Igbani and my other brothers and sisters.

 I am thankful to Dr. Ada Ezeogu and Ms Christy Inwerogu for supporting me. Finally, I acknowledge my most cherished friends Peter Chiejile, Paul Duru, Ben Eke, Philip Mebo ,Izuchukwu Akawor, Chima Eme, Chimobi Ahuekwe, Macdonald Ukah, Tony Ozoemena, Chukwudi Ezeani, Ositadimma, Ebube Dim, Ifoma Anwunna, Ngozi Ibe, Awele Onyeka, Amaka Okafor, Jane Nwachukwu, Nneka Ukwuani and Nneoma Obi.

ABSTRACT

Trade policy has been a very contentious issue in the development of Nigeria. Using data spanning the period 1970-2009, we examine the relationship between trade liberalisation and economic growth in Nigeria. We focus on instabilities in regime, trade policy, and exchange rate using both single and system estimation techniques. We find substantial evidence that trade liberalisation has a systematic impact on growth in Nigeria. Fiscal policy is a determinant of macroeconomic instability in the country. The paper also argues that policymakers in Nigeria can reduce macroeconomic instability and vulnerability to shocks by diversifying the export structures as well as increasing export.

TABLE OF CONTENTS

Title Page…………………………………………………………………………………………….………………..i

Approval Page……………………………………………………………….……………………….……………….ii

Dedication ………………………………………………………………………………………….………….…..…iii

Acknowledgement………………………………………………………………………………….…………......….iv

Abstract……………………………………………………………………………………………..…….…………..v

Table of Contents……………………………………………………………………………………………………..vi

CHAPTER ONE: INTRODUCTION………………………………………………….……….………….………1

1.1 BACKGROUND OF THE STUDY………………………………………………………………………….…1

1.2 STATEMENT OF PROBLEM…………………………………………………………………………………3

1.3 OBJECTIVE OF THE STUDY………………………………………………………………………………..4 

1.4 STATEMENT OF HYPOTHESIS…………………………………………………………………………….4

1.5 SIGNIFICANCE OF THE STUDY……………………………………………………………………………5

1.6 SCOPE AND LIMITATION OF THE STUDY………………………………………………………………6

CHAPTER TWO: LITERATURE REVIEW…………………………………………………………………….7

2.1 THEORETICAL LITERATURE REVIEW………………………………………………………………….7

2.2 THE THEORY OF CUSTOMS UNIONS AND FREE TRADE AREAS…………………………………..9

2.3 REVIEW OF NIGERIA’S TRADE POLICIES…………………………………………………………..….9

2.3.1 PRE-SAP TRADE POLICIES…………………………………………………………………………….10

2.3.2 TRADE POLICIES DURING SAP………………………………………………………………………..13

2.4 EMPIRICAL LITERATURES……………………………………………………………………………....15

CHAPTER THREE: METHODOLOGY……………………………………………………………………….22

3.1ANALYTICAL FRAMEWORK……………………………………………………………………………..22

3.2 MODEL SPECIFICATION…………………………………………………………………………....…….23

3.3EXPLANATION OF VARIABLES THAT ENTERED   THE MODEL………………………………….25

3NATURE AND SOURCES OF DATA………………………………………………………………………...26

3.5DATA DESCRIPTION AND TRANSFORMATION……………………………………………………...26

3.6 ESTIMATION PROCEDURE……………………………………………………..………………..………..27

3.6. 1UNIT ROOT TEST……………………………………………………………..……………….....………..27

3.6.2 TEST OF COINTEGRATION………………………………………………..……………………….…..28

3.7 EVALUATION TECHNIQUES………………..……………………………..……………………………..28

3.7.1TEST BASED ON ECONOMIC CRITERIA……………………………………………………………..28

3.7.2.TEST BASED ON STATISTICAL CRITERIA………………………………………………………….29

3.7.3TEST BASED ON ECONOMETRIC CRITERIA………………………………………………………..30

CHAPTER FOUR: PRESENTATION AND DISCUSSION OF RESULTS…………………………………32

4.4    PRESENTATION AND ANALYSIS OF THE REGRESSION RESULTS…………..…………………32

4.1.1 EVALUATION BASED ON ECONOMIC CRITERIA…………………………………………………33

4.2  EVALUATION BASED ON STATISTICAL CRITERIA (FIRST ORDER    TEST)………...……….34

4.2.1 COEFFICIENT OF DETERMINATION……………………………………………………….……….35

4.2.2 T- TEST..…………………………………………………………………………………………….……..35

4.2.3 THE F-TEST...……………………………………………………………………………………………..36

4.3 EVALUATION BASED ON ECONOMETRIC CRITERIA  (SECOND ORDER TEST)…....………..37

4.3.1 NORMALITY TEST……………………………………………………………………………..………..37

4.3.2. RESULT FOR UNIT ROOT TESTS…………………………………………………………….………38

4.3.3. RESULT FOR COINTEGRATION TEST………………………………………………………..…….39

4.3.4   TEST FOR MULTICOLLINEARITY………………………………………………………….…...….40

4.3.5   TEST FOR HETEROSCEDASTICITY………………………………………………………..……....40

4.3.6.   TEST FOR AUTOCORRELATION…………………………………………………………………...41

4.3.7. PAIRWISE GRANGER CAUSALITY TEST…………………………………………………………42

4.4    EVALUATION OF RESEARCH HYPOTHESIS………………………………………………………42

4.5 CHAPTER SUMMARY………………………………………………………………………….………..44

CHAPTER FIVE…………………………………………………………………………………………...….45

5.1 SUMMARY RECOMMENDATION AND CONCLUSION OF THE RESEARCH FINDINGS……45

5.2. RECOMMENDATION AND CONCLUTION………………………………………………………….46

BIBLOGRAPHY

APPENDIX

CHAPTER ONE

‘The causes which determine the economic progress of nations

 belong to the study of international trade’(A. Marsall,1890)

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

The impact of trade on the economic performance of a country is a highly discussed issue in the political debate of both developing and advanced economies. And for the last two decades, trade liberalisation has been a prominent component of policy advice to developing countries. Economic growth has been the most important claim that springs from it, advocates of trade liberalisation state several chains like higher foreign direct investment (FDI) through which trade promotes the growth of income per capita. In general, they back up their hypothesis by referring to the high growth rates of South Asian countries like the Tiger states and China, which aggressively implement outward oriented strategies.

 On the other hand, sceptics doubt that trade liberalisation promotes long and sustainable growth. They assume that there are economic situations in which things get even worse if a country liberalises trade. They often refer to the negative growth rates of some countries in Eastern Europe and Africa, which followed the advices of the World Bank and the International Monetary Funds to open up their markets, Stiglitz (2002)

The Nigerian main trade policy instrument shifted remarkably away from tariffs to quantitative import restrictions, particularly import prohibition and import licensing from the mid 1970s. This gave rise to the Nigerian customs legislature establishing an import prohibition list for trade item and an absolute import prohibition list for non trade items, Oyejide (1975). The customs legislation empowered the government to modify this list at its discretion by adding or subtracting items through customs and excise notices and government announcement. And over the years there have been several modifications on this list targeted to protect existing domestic industries and reducing the country’s dependence on imports.

 There are three international organisations that have expressed views on Nigerian’s import prohibition policy, these are the World Trade Organisation, the World Bank and the International Monetary Funds. They have advisory role with respect to trade and other policy matters in Nigeria and had advised a more liberal trade policy regime in Nigeria which was initiated in the 1980s. The World Bank and the International Monetary Funds did support this via its lending programme

Prior to the introduction of the structural administration programme (SAP) in 1986 in Nigeria, imports were subjected to quantitative controls implemented through a combination of ban on agricultural and some manufactured goods and a licensing system. But under the SAP, import and export licensing was abolished, price and distribution control on agricultural exports was removed and the prohibited list of imports was reduced.

This issues of whether trade liberalisation would lead to economic growth has become a debate for both pro-traders and protectionists. This has led to a growing change in the trend of world trade. Mostly, African countries have become more careful in embarking in liberalisation of policies.   

1.2 STATEMENT OF PROBLEM 

Trade reforms, even if beneficial for a country overall, may negatively affect some industries or some jobs and many commentators worry about negative effects on the environment. For developing countries the first possible effect of trade liberalisation is the reduction in revenue accrued to tariffs which is a major source of income in most developing countries. It is also perceived to deteriorate primary export, lead to excessive dependency and will be detrimental to less developed countries (LDCs) industrialisation. But to most international organisation like IMF it is the condition for granting aid to LDCs. However, it should not be viewed as flooding the market with imported goods rather; it should be understood as the procedure of removal of import licenses, rationalisation of export control exchange rate and provision of revenue.

The extent to which trade liberalisation affects the economy remain unclear and forms part of the problem which the researcher intend to study considering the following questions

a)     What are the problems facing trade liberalisation policies in Nigeria?

b)    What policy instrument rather than trade liberalisation affects economic growth?

1.3 OBJECTIVE OF THE STUDY

 This state of discussion proves that the influence of trade liberalisation on the income per capita cannot simply be captured by intuition. Due to these reasons, it is necessary to use econometric approaches to get aware of the overall influence of trade liberalisation on economic growth and development in Nigeria. The specific objectives are:

a)     To find the relationship between trade liberalisation and macroeconomic variables in Nigeria.

b)    To examine the trends of trade liberalisation in developing Nigeria

1.4 STATEMENT OF HYPOTHESIS

In carrying out this study, the following hypotheses would be tested.

a)     Trade liberalisation has no significant relationship with the economic growth in Nigeria.

b)    Trade liberalisation has no significant relationship on macroeconomic variables in Nigeria.

c)     Trade liberalisation has no impact on trend in Nigerian economic growth.

1.5 SIGNIFICANCE OF THE STUDY

This study shall act as a basis for understanding the rationale for trade liberalisation and its significance on Nigerian economic growth. It would also show the direction of policy flow that would be beneficial to the achievement of a rapid economic growth. Also, it will add to the stock of knowledge on international trade policy and its impact on LDCs. At the individuals’ level, it will help them to understand the way the government formulates policies and programs also, to know how to respond to certain trade policies of the government. For governments, it will help them to be more responsible and responsive to trade policy needs of the people since they would be aware of the extent of intervention that is needed to leverage the trade and commercial sector for rapid advancement. For other researchers on international trade policy it will pose a challenge for further research in area of trade policies regimes.

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of this study covers the Nigeria economy and will only review the impact of liberal trade policy on Nigerian economy.  This study shall cover a period of 39 years which is, 1970-2009.

CHAPTER TWO

LITERATURE REVIEW

2.1 THEORETICAL LITERATURE REVIEW

Many theoretical models and theories support that international trade enhances economic growth. They suggest several chains through which higher trade shares positively influence income per capita. For example, the mercantilist theories are made possible only in the face of a liberal trade though to a certain degree. Also, the Ricardian trade theory and the Heckscher-Ohlin model both predict that trade promote the specialization of a country so that it can realize trading gains. In Ricardo’s opinion, even when one country has absolute advantage in the production of two goods against another country, it might still be more beneficial to both countries if each of them specialized in the production of only one of the goods. With this, both countries can enjoy the benefits of comparative advantage and enhance the process of exchange between them. While Heckscher-Ohlin model, depicts that trade arises from differences in comparative cost which in turn arises from inter-country differences in relative factor endowment. As a result, real income per capita rises then the standard of living would increase. Though a rise in per capita income is not necessarily an increase in welfare, but it is a key factor that determines increased welfare.

Trade has acted as an important engine of growth for countries at different stages of development, not only by contributing to a more efficient allocation of resources within countries, but also by transmitting growth from one part of the world to another. Not all countries, however, necessarily share equally in the growth of trade or its benefits. This will depend on the production and demand characteristics of the goods that a country produces and trades, the domestic economic policies pursued, and the trading regime it adopts. For example, taking the developing countries as a whole, the volume of exports has grown slower than for developed countries since 1950 – 5 percent per annum compared to 8 percent – because developing countries still largely produce and export primary commodities and low value-added manufactured goods with a relatively low income elasticity of demand in world markets. The discrepancy in rates of growth of exports has been even wider in value terms because the terms of trade of developing countries has deteriorated vis-à-vis developed countries causing the developing countries’ share of the total value of world trade to have fallen from 30 percent in 1965 to 20 percent today, Thirlwall (2000).

To further illuminate trade liberalisation and its impact on economic growth in Nigeria, we would analyse other theories that encapsulates trade liberalisation policies.

2.2 THE THEORY OF CUSTOMS UNIONS AND FREE TRADE AREAS

There have been several attempts for over five decades to promote trade via the creation of unilateral, bilateral and multilateral trade agreements in several forms with the most dominants being in form of customs unions and free trade areas.

The theory of customs unions dated as far back as the pioneering work of Viner in 1950 which shows that customs unions can cause trade creation. The theory does this as it liberates trade between members of the union and as external tariffs are unified on imported goods from the rest of the world.

In free trade areas, there are no common external tariffs but trade barriers are brought down within the areas, yet this is not without the incorporation of domestic content restriction (i.e., the restrictions that defines the quality to qualify for the zero tariffs between the countries) into the trade agreement to avoid complications. These theories show how the removal of trade barriers could be favourable and lead to an increase in welfare for nations.

2.3 REVIEW OF NIGERIA’S TRADE POLICIES

Nigeria’s trade policies could be analysed under two broad trade regimes, that is, the period before the introduction of the Structural Adjustment Programme (SAP), and the period after its adoption. Throughout these regimes, trade policies exhibited identical characteristics of being short-term in nature (operational within each fiscal year and reviewed thereafter), and directed at meeting specific objectives such as, ensuring balance of payments viability and export promotion. They were also meant to complement other policy initiatives, such as, industrialisation policy, employment creation and self-sufficiency policies, etc. The trade policies implemented under the two regimes were as follows:

2.3.1  PRE-SAP TRADE POLICIES

At independence, Nigeria’s economy was in many respects, rural and relatively purely agrarian with narrow industrial base. In an effort to modernize the economy, the early political leaders adopted development planning strategy as a move for securing a steady and rapid growth of the economy. Emphasis was placed on accelerated development of the economy through expansion in the nation’s industrial base. The idea was for the country to be able to at least produce some of her consumables locally and in effect reduce dependence on external sources for the supply of such items. To be able to finance the imports necessary for the implementing of the industrialisation programme, exports of cash crops which were then the main source of foreign exchange had to be enhanced. Thus, farmers were encouraged to expand their production of cash crops with guaranteed external markets by the Marketing Boards.

The export items consisted of cocoa, palm produce, rubber, groundnut, ginger, and some solid minerals, coal and tin. The insatiable urge to quicken the pace of development gave rise to heightened demand for imports, which in turn exerted pressures on the balance of payments. Consequently, the trade policies had to be restrictive in order to moderate the demand pressures. Exchange control measures were then introduced to adjust the demand for foreign exchange to the available supply so as to maximise the use of reserves by ensuring that essential imports were accorded priority over other imports in the use of foreign exchange resources. Also, in order to give effect to the import substitution industrialisation policy, trade barriers in the form of imports licensing was put in place to complement imports tariffs in the control of import, as well as protect domestic industries that were set up to produce import substitutes.

The customs tariff structure was deliberately discriminatory, biased in favour of capital goods and raw materials, Analogbe (2000). Items considered as luxury goods were either put on import prohibition list or had very high import tariffs placed on them.

The second National Development Plan (1970-74) came on the heels of the termination of Nigeria’s civil war. The major strategy of the plan was to secure economic growth through the replacement of destroyed assets and restoration of the productive capacity of the country, as well as ensure equitable distribution of the fruits of development. It was also envisaged that by the end of the plan period, Nigeria would have been able to produce its own goods and services, finance its development, rely on its own labour, as well as strive for the best terms for its exports. Plan was designed to incorporate and enhance the priority areas of the 1962 - 68 plans. That is, enhance agricultural and industrial production, as well as develop high level and intermediate level manpower. Additional inputs were therefore required for the execution of the plan. To moderate the pressures, restrictive trade policies were retained and strengthened. Exchange control measures became stringent with the introduction of foreign exchange budgeting in 1971/72 to relate aggregate foreign exchange expenditure, by category, to income. Similarly, import licensing was intensified and increasing number of non-essential items were placed under ban, while some finished consumer items considered not too essential were placed under specific license so as to keep their importation within specified quota. Mid-way into the execution of the second development plan the external reserves position of the country witnessed dramatic change for the better, following increases in the international price for crude oil. CBN (1979), “the sudden and unexpected increase in the prices of crude petroleum in 1973 coupled with the country’s low absorptive capacity, and the existence of various production bottlenecks in the economy had by 1974 led to a situation whereby the country was faced with surfeit of funds for which it had no immediate investment outlet internally. In the circumstance, it was thought that the exchange control regulations needed further liberalisation”. Consequently, the restrictions on import payments were removed in 1974. The boom from the crude oil export earnings spilled into the Third National Development Plan (1975- 80).

The design of the Third National Development Plan was very ambitious, predicated on enhanced earnings from the oil sector of the economy. Trade policies were accordingly relaxed. By the time the Fourth National Development Plan (1981 -85) came up, the economy had started experiencing declines in foreign exchange earnings which reached its nadir by the oil shock of the early 1980s. Oil price fell precipitously, but the demand for imports maintained the upward direction. The external reserves level which could finance about 24 months of imports in 1974, could only support 1.8 months by the end of 1978, and less than one month in the early 1980s. This was a reflection of the fact that import demand had become price inelastic, and the resultant effect manifested in balance of payments deficits. Concerted efforts were then made to control the import trend through imposition of stricter trade restrictions. The mounting level of controls administered by innumerable persons further created administrative bottlenecks.

2.3.2 TRADE POLICIES DURING SAP

The grandeur of the misalignment in the economy ushered in by the culture of controls made it imperative for government to take urgent and drastic actions to ameliorate the situation. Thus, in July, 1986, the Structural Adjustment Programme (SAP) was introduced to tackle the problem of imbalances in the economy and thereby pave the way for stable growth and development. The main elements of the programme include:

a) Restructure and diversify the productive base of the economy so as to reduce the dependence on the oil sector and on imports;

b) Achieve fiscal and balance of payments viability over time;

c) Lay the basis for sustainable, non-inflationary growth; and

d) The Diminishing of the dominance of unproductive investments in the public sector, improve the sector’s efficiency and intensify the growth potential of the private sector.

A number of strategies were enunciated to achieve the broad objectives of the SAP. Specific to international trade, the primary focus was on liberalization of trade and the pricing system, with emphasis on the use of “appropriate price mechanism for the allocation of foreign exchange”. The Second-tier Foreign Exchange Market (SFEM) was then introduced, under which the exchange rate of the naira was to be determined by the market forces of demand and supply. The price determination mechanism provided the means for ultimate allocation of foreign exchange to end-users as against the former use of administrative discretion. The application of import and export licensing were consequently abolished. To encourage export activities, the policy which required exporters to surrender their export proceeds to the Central Bank of Nigeria, was abolished. Consequently, exporters were allowed to retain 100 percent of their export earnings in their domiciliary accounts from which they could freely draw to meet all their eligible foreign exchange transactions. Furthermore, under the revised duty scheme, exporters as well as producers could import raw materials and intermediate products free from import duty and other indirect taxes and charges. The Export Incentive and Miscellaneous Provisions Decree of 1986 were promulgated to encourage exports.

Through it, the CBN could provide refinancing and rediscounting facilities to banks to encourage them to provide export financing to their customers. Also, the Nigerian Export Credit Guarantee and Insurance Corporation came on stream in 1988, and was subsequently renamed Nigerian Export-Import Bank, to provide credit and risk bearing facilities to banks, so as to encourage them to support exports.

2.4 EMPIRICAL LITERATURES

Sachs and Warner (1995) made comparative analysis between countries with open economy and those with closed economy. They constructed a dummy for liberalisation on protective measures which includes tariff, non-tariff barrier and the role of the state in the economy. Their evidence showed liberal economies grow faster on the average of 1.5% than their close counterparts.

Vamvakidis (1999) estimated the relationship between trade and growth by correlating a time series data over a period of time. He discovered that trade liberalisation impacted positively on economic growth. In his discovery, trade impacted negatively because of restrictions but at more liberal policies growth rate increased. His results, based on a forty-year panel for over one hundred countries, are more convincing than those of purely cross-section studies.   He concluded that multilateral liberalisations over the period 1950–89 were associated with increases in rates of growth, while discriminatory regional trading agreements were not.

Rodrik (1998) examined the link between trade liberalisation and income growth. His objective was to examining the correlation between trade and economic growth. He found out that economic growth could be explained by a few fundamental factors: human resources, demographic and fiscal policies in Africa and that trade have a quantitatively large and robust, though only moderately statistically significant, positive effect on economic growth

Baro and Sala-Martins 1995 estimated the impact of trade protection on growth. Using tariff on capital goods and intermediate good as measure of protection, their result indicated negative impact between trade liberalisation and growth. Countries with low tariffs according to them grow faster than those with high tariffs.

 Andersen and Babula (2008) reviewed the most cited empirical analyses of the relationship between international trade and economic growth and more recent empirical analyses of the link between trade and productivity growth. They conclude that there is a positive relationship between international trade and economic growth. There are, however, two caveats as they found out. First, is concerned about the way problems of measurement error and endogeneity are handled in much of the empirical literature. The second caveat relates to the ability of developing countries to gain productivity growth through trade liberalisation. To do so, it may very well be necessary to invest in, e.g., education facilities, to ensure property rights and to build up institutions.

 In other work, Vamvakidis (1998) has tried to estimate the effect on growth of the size and liberalisation of neighbouring countries, and finds that countries which have neighbours with large liberal economies experience faster growth. Liberalisation matters more than size. Being near a developed country also has a positive spill-over effect. In both respects, sub-Saharan Africa is at a disadvantage, consisting as it does of mainly small and highly protected economies, relatively remote from the industrialised economies of Europe and North America.

Nwafor et al (2005) using the computable general equilibrium model, they found that poverty was relatively low in the urban areas in the 1980s but grew gradually to make urban poverty a fact in Nigeria. By 1996 over half of the urban dwellers were poor .Comparatively high level of poverty is new to the urban area. The rural dwellers experienced high level of poverty as high as 50% as far as 1985.during the structural adjustment programme (SAP) the level of poverty dropped faster in the rural area than in the urban areas. This gives support to the argument that trade liberalisation policies alone will not improve welfare as their measurement showed an overall increase in poverty (living below 2/3 of the mean monthly household expenditure) between 1980 and 1996; from 28.2% of the population in 1980 to 70% of the population in 2001 and these were the period of structural adjustment programmes in Nigeria. Though this result is valid but it has been because all through the reviewed period the general experience of regional trade agreements in developing countries of which Nigeria is one has been disappointing because they have been highly inward-looking and protectionist. 

Establishing an empirical link between liberal trade and growth has not been easy as it faces at least four difficulties;

 First, there is the definition of ‘liberalisation’. In the context of policy advice, it is most directly associated with a liberal trade regime (low tariffs, very few non-tariff barriers etc.) but in fact that is rarely the concept used in empirical work. Thus, for example, Dollar’s (1992) results rely heavily on the volatility of the real exchange rate, while Sachs and Warner (1995) combine high tariff and non-tariff measures with high black market exchange rate, socialism and the monopolisation of exports to identify non-liberal economies. Pritchett (1996) shows the trade indicators are only poorly correlated with other indicators of liberalisation, while Hanson and Harrison (1999) and Rodriguez and Rodrik (2001) show that most of Sachs and Warner’s explanatory power comes from the non-trade components of their measure.

Second, once one comes inside the boundary of near autarchy, measuring trade stances across countries is difficult. For example, even aggregating tariffs correctly is complex – see Anderson and Neary (1996), whose measure depends on imports being separable from domestic goods and services and on an assumed elasticity. Then one needs to measure and aggregate quantitative restrictions and make allowances for the effectiveness and predictability of enforcement and collection. Such measurement problems are less significant for panel data measuring changes in trade policy for a single country, although even here Anderson (1998) shows that different measures point in different directions.

Third, causation is extremely difficult to establish. Does trade liberalisation result in, or from, economic growth? Frankel and Romer (1999) address this problem by examining the effects of the component of liberalisation that is independent of economic growth. This is the part of bilateral trade flows that is explained by the genuinely exogenous variables: population, land area, borders and distances. This component appears to explain a significant proportion of the differences in income levels and growth performance between countries, and from this the authors cautiously suggest a general relationship running from increased trade to increased growth. The problem, however, as Rodriguez and Rodrik (2001) observe, is that such geographical variables could have effects on growth in their own right and that this alone could explain the significance of the instrumental estimate of trade constructed out of them. For example, geography may influence health, endowments or institutions, any one of which could affect growth.

The fourth complication is that for liberal trade policies to have a long-lived effect on growth almost certainly requires their combination with other good policies such as those that encourage investment, allow effective conflict resolution and promote human capital accumulation. Unfortunately the linear regression model, which is standard to this literature, is not well equipped to identify the necessity of variables rather than their additives in the growth process. Hints of the importance of these policies, however, can be found in exercises identifying the structural relationships through which liberalisation effects growth. Thus, for example, Taylor (1998) and Wacziarg (2001) both find that investment is a key link and thus imply that poor investment policies could undermine the benefits of trade liberalisation.

So far, the past works reviewed indicated that trade liberalisation relates positively with the growth in productivity, therefore our effort will focus on using models to analyse the impact of trade liberalisation on the Nigerian economy.

CHAPTER THREE

METHODOLOGY

3.1 ANALYTICAL FRAMEWORK

In chapter two, we have seen that the impact of trade on income per capita is widely discussed in theoretical models and empirical studies. Despite the strong theoretical foundation, there is not much clarifying empirical evidence for the impact of trade on income. Because of the high interest in trade, this seems to be astounding especially if we take into account that income and trade data are easily available for most countries of the world, Osterfeld (2007).This is basically the reason why this study will used ordinary least square (OLS) estimators. It is pertinent to note that the major area of divergence of this work from previous work is in the introduction of regime of government proxy by a dummy variable, as well as the period before and after the liberalisation policy in Nigeria also using a proxy (dummy variable) and exchange rate.

The research will include an evaluation that would take into cognizance economic/theoretical a priori tests, statistical test of significance and econometrics or second order tests.  We shall employ computer software packages like: Microsoft word, Microsoft excel, E-views and Stata 10.

3.2 MODEL SPECIFICATION                                                                                      

We will employ the single equation technique of econometric simulation for this study. This has a plausible theoretical explanatory, estimating and forecasting ability, Gujarati (2006). Using the ordinary least square (OLS) method which is the best linear unbiased estimator especially for testing specific hypotheses in order to get an estimate for the trade effect has been the tradition for works on trade liberalisation and trade openness . But, there have been very little studies which got rid of the causality problem between trade and income, Osterfeld (2007). As a result of this basic difficulty, it is necessary to find an appropriate variable which is correlated with trade as highly as possible and which is at the same time uncorrelated with income or government policies which aim to raise income. Hence, the model is specified as follows:

The functional form of the model is specified as;

RGDP= F (RGDP, TROP, EXR, REGIM, BFSAP)…………………………...……………. (1)

The mathematical form of the model is specified as:

RGDP_t = β₀ + β₁TROP_t + β₂EXR_t + β₃REGIM_t + β₄BFSAPI_t………………..…………….. (2)

This econometric form of the model is specified as:

RGDP_t= β₀ + β₁TROP_t + β₂EXR_t + β₃REGIM_t + β₄BFSAP_t + µ_t………………………….. (3)

For estimation purpose model 3 is re-specified as:

Ln (RGDP_t) = β₀ + β₁ln (TROP_t) + β₂ ln (EXR_t) + β₃ (REGIM_t) + β₄ ( BFSAP_t)  +µ_t….……(4)

Where:

RGDP= Economic growth proxy by Real Gross Domestic Product

TROP=Trade Liberalisation

EXR = Exchange rate

REGIM= Regim1 if military regime 0 if otherwise (civilian regime)

BFSAP=Before the structural adjustment programme 0 if before 1 if otherwise (after).

t = time from 1970-2009

β₀= Intercept Term.

β₁, β_2, β_3, β_4, are the relative slope coefficients and partial elasticity of the parameters.

µ_t = stochastic error term

Guajarati (2009) defines µ_t as a random variable that has well defined probabilistic properties. The stochastic error term represents other variables affecting the dependent variable but not explicitly taken into account by the above model.

3.3 EXPLANATION OF VARIABLES THAT ENTERED   THE MODEL

The choice of variables we have chosen for the model was based on the advice from the work of, Osterfeld (2007). The growth rates of the variables were adopted to eliminate the effects of trend and irregular movements. This is because most macro-economic time series follow an upward trend as the years go by.

Following these, the variables below were chosen for inclusion. It is however noted that this is not an exhaustive list of variables.

TABLE 3.1 VARIABLE DEFINITION TABLE 

VARIABLES	DEFINITIONS	A priori sign
RGDP	Gross Domestic Product adjusted at current basic prices. It is the money value of goods and services produced in an economy during a period of time.	Dependent variable
TROP	The ratio of total trade (exports + imports) to GDP is the standard measure used in much of the ‘new’ growth theory literature for evaluating the degree of trade liberalisation/trade openness in an economy.	+
EXR	Exchange rate is regarded as the value of one country’s currency in terms of another currency. Here we took the value of naira with respect to the US dollar. The nature of the relationship is determined by the imports and exports elasticity.	+/-
REGIM	The régime is widely acknowledged as the type of government obtainable in a country over a period of time that when a country is politically unstable its economic growth is hindered. Political risk is usually measured by the probability of a change of government, as well as political violence as measured by the sum of frequency of political assassinations, violent riots and politically motivated strikes.	-
BFSAP	Before the introduction of the Structural Adjustment Programme (SAP) and Stabilization programme (SP) of the World Bank and the IMF in early 1980s The SAP measures included amongst others cuts in government expenditure, removal of subsidies, liberalization of the economy, privatization of government parastatals, etc. (an integral part of trade liberalization policies).	+

 3.4 NATURE AND SOURCES OF DATA

The data are annual time series data gotten from various secondary data sources as shown in table 3.3.2 below:

Table 3.2 TABLE FOR VARIABLES AND THEIR SOURCES

RGDP	Central Bank Of Nigeria (CBN) Statistical Bulletin 2009 Edition.
TROP	Central Bank Of Nigeria (CBN) Statistical Bulletin 2009 Edition.
Exchange Rate (EXR)	Central Bank Of Nigeria (CBN) Statistical Bulletin 2009 Edition.
REGIME	Assigned the value of 1 for military and 0 otherwise(civilians)
BFSAP	Before the structural adjustment programme 0 if before 1 if otherwise (after).

3.5 DATA DESCRIPTION AND TRANSFORMATION

The obtained data were transformed into logarithm to evaluate growth rates. The following are the transformed data; RGDP, Trade Liberalisation/Trade openness (TROP), and exchange rate.

3.6 ESTIMATION PROCEDURE

3.6.1 UNIT ROOT TEST

The first step of the estimation process is to examine if our time series possesses the properties of the time series data. We look at patterns and trends in the data and test whether the time series variables are stationary (time invariant) i.e. constant mean, constant variance and by extension constant covariance.

This will test the order of integration of the individual series under consideration. The procedure adopted the Phillip-Perron (PP) due to Phillips (1987). The test relies on rejecting a null hypothesis of unit root (the series are non-stationary) in favor of the alternative hypothesis of stationarity. The tests are conducted for each of the time series variables. The general form of Phillip-Perron (PP) test is estimated by the following regression:

Where ; Y is a time series, t is a linear time trend, D is the first difference operator, β₁ is the constant, n is the optimum number of lags in the dependent variable, Σ is the summation sign, and ε_t is a pure white noise error term.

3.6.2        TEST OF COINTEGRATION

Econometrically speaking, two variables will be cointegrated if they have a long term relationship between them. As Granger notes “A test for co-integration can be thought of as a pre-test to avoid spurious regressions situations” (Granger, 1986:226) as cited in Gujarati and sangeetha (2007:841). The test that will be employed here is the two-step residual based Engle-Granger test. The procedure will be as follows:

First, we estimate our regression in equation (4), and obtain the residuals, and use the ADF test to test whether this residual is stationary at level form and if it is we then conclude that the variables are cointegrated.

3.7 EVALUATION TECHNIQUES

3.7.1 TEST BASED ON ECONOMIC CRITERIA

This has to do with the sign expectation set by economic theory. It looks at the signs and sizes of parameters of economic relationships. According to Koutsoyiannis (1979), the parameters in a given model are expected to have signs and sizes that conform to economic theory. If they did they are accepted, if otherwise they are rejected. The a priori signs are shown in table 3.3.1 above.

3.7.2    TEST BASED ON STATISTICAL CRITERIA

a)     The Co-Efficient of Determination Test (R2 and  ): This is used to measure the goodness of fit of a regression equation. It gives the proportion or amount of total variations in the regressand explained by all the explanatory variables jointly.

In this study  would be used for this evaluation since it adjusts for degrees of freedom associated with the sums of squares entering into R2 (unadjusted). R2 are overall measure of how the chosen model fits a given set of data.

b)    The Student t-test: This is used to test for individual significance of the variables used in the model. It involves comparing the absolute value of the estimated t-statistic with the absolute value of its tabulated value at a chosen level of significance.

c)     The F-test: This is used to test for the joint significance of the variables used in the model. It involves testing significance of the regression results as against individual significance of the regressors. This test tells us whether or not there is a strong relationship between the regressand and the regressors.

3.7.3        TEST BASED ON ECONOMETRIC CRITERIA

1.     Normality Test: This study will carry out a normality test to check if the residual, a proxy for stochastic error term follows a normal distribution or not. Symbolically, whether µ_{t ~} N (0, δ²). The normality test that would be used in this study is Jarque-Bera (JB) test of normality

2.     Multicollinearity Test: This is one of the assumptions that must hold before we can make use of OLS estimation technique. It shows the linear relationship between two or more explanatory variables. In this study, the collinearity of the variables used in the model would be performed. The essence of this is to see if there is high collinearity among the variables or not. The correlation matrix table would be used for this test.

3.     Heteroscedasticity Test: One of the assumptions of the random variable µ_t is that its probability distribution should be constant over all observations of X_i, that is, the variance of each disturbance term is the same for all values of the explanatory variables. The aim of this test is to see whether the error variance of each observation is constant or not. Non-constant variance can cause estimated model to yield a biased result. White’s general heteroscedaticity test would be adopted for this purpose.

4. Autocorrelation Test: Another most useful assumption about the random variable µ_t is that there is no serial autocorrelation entering the Population Regression Function (PRF).  Gujarati (2009:413). The aim of this test is to see whether the errors correspond to different observations are serially correlated or not. Uncorrelated errors are desirable, symbolically, E(ui,uj)=0. Nevertheless, if it exists, Newey-West HAC (heteroscedasticity- and autocorrelation-consistent) Standard Error would be used to correct it.

5.     Granger Causality test: This test is used to examine the causal behavior among variables. It tells whether there is a causal relationship among variable.

CHAPTER FOUR

PRESENTATION AND DISCUSSION OF RESULTS

This chapter presents the regression results based on the objectives and hypothesis stated in chapter one above. Its evaluation is based on findings and the model framework set in it and the previous chapter. The regression results shall be subjected to economic, statistical and econometric tests aforementioned in the previous chapter.

4.1 PRESENTATION AND ANALYSIS OF THE REGRESSION RESULTS:

The result of the model presented in chapter 3 is presented in the table below:

Table 4. REGRESSION RESULT TABLE

VARIABLE	MODEL 1
CONSTANT	10.09969 (0.1512987) [66.75]
LOG(TROP)	2.571913 (0.1993157) [12.90]
LOG(EXR)	-.2085518 (0.776254) [-2.69]
REGIM	-0.1105451 (0.1811974) [-0.61]
BFSAP	0.2821251 (0.3569083) [0.79]
R squared	0.9493
Adj R squared	0.9436
F(4, 35)	164.00
Prob > F	0.0000
Durbin Watson	1.038649

In the table above, the topmost value in each cell of the right column is the regression coefficient. The values in the parenthesis (***) are the standard errors while the t-values are given by the values enclosed in the second parenthesis, [***].

4.1   .1 EVALUATION BASED ON ECONOMIC CRITERIA:

This section is concerned with the evaluation of the regression results based on a priori expectations and the magnitude of our estimated coefficients.

As the result shows, the sign of the TROP to GDP ratio conforms to a priori expectation. If the ratio TROP to GDP increases by a unit, say, the growth rate of the economy is increased by 2.57% on the average holding all other variables constant. Above the degree of liberalisation, further liberalisation of trade will actuate output growth rate. This confirms to a priori expectation. As the degree of liberalisation increase above its present level by a percentage point, the mean of the real growth rate of the economy increases by 2.57% ceteris paribus. This shows that the net impact of the trade liberalisation levels is positive to the economy.

The above result also shows that exchange rate does not follow a priori expectation in that a percentage increase in its ratio to GDP will reduce the rate of growth of the GDP by 20% on the average holding other variables constant.

Also, it is clear that the environment is better and favourable for growth when there is a democracy. The result shows a dwindling growth rate of 11% during military regime. This equally confirms to a priori expectation.

The era before the introduction of the structural adjustment programme shows that the growth rate of the economy was at a slower pace but, the introduction of the liberal policies increased the ratio of GDP growth rate by about 28% as other variables are held constant. Cumulatively the impact of the regime and the structural adjusted programme are statistically insignificant but these are positive stance which could stimulate increase in the rate of growth of the economy confirming the a priori reasoning of most researchers.

4.2                EVALUATION BASED ON STATISTICAL CRITERIA

(FIRST ORDER    TEST)

This sub chapter resorts to the R², t – test and the F- test used to determine the statistical robustness of the model. The tests are performed as follows:

4.2.1.     COEFFICIENT OF DETERMINATION (R² and The Adjusted R² () will be used for this test. This is because it has been adjusted for the degrees of freedom. The value of the R² from our regression result is 0.9493 while the adjusted is 0.9436. It entails that the 94% of the variations in the dependent variable is accounted for by the independent variables.

4.2.2.     T- TEST: Through this test we shall determine the variables that affect growth significantly. Since the magnitude of effect is not certain, we adopt a 2-tailed test.

H₀:  β₁ = β₂ = β₃ = β₄ = 0

Decision rule: reject H₀ if the t – statistic of individual variable is greater than the critical value. i.e reject if |t _cal|> |t_tab| at n-k degrees of freedom and 5% level of significance where n is the number of observations and k = number of parameters including the intercept term. n-k = 40-5=35.

The result of the above test is presented in table 4.2 below

Table 4.2. THE T-VALUE TABLE SUMMARY

Variables	t-values	conclusion
Constant	66.75	Statistically Significant
LOG(TROP)	12.90	Statistically Significant
LOG(EXR)	-2.69	Statistically Significant
REGIM	-0.61	Statistically insignificant
BFSAP	0.79	Statistically insignificant

4.2.3        THE F-TEST: The F-test is used to measure the overall significance of the variables used in the model.

Hypothesis Testing:

H₀: β₀ = β₁ = β₂ = β₃ = β₄ = 0

H₁: β₀ ≠ β₁ ≠ β₂ ≠ β₃ ≠ β₄ ≠ 0

At α = 5% with k-1 (numerator) and n-k (denominator) degrees of freedom.

Where k = number of regressors used in the regression and n = number of observations.

Decision Rule:

Reject H₀ if F_cal > F_0.05, Accept otherwise.

From the regression results, F = 164 From the F-table, F_0.05 = 2.69 at 4/35 degrees of freedom. Thus, since F-value = 164> F_0.05 = 2.69, we reject H₀ and conclude that the variables are jointly statistically significant different from zero at 5% level of significance.

4.3.                                     EVALUATION BASED ON ECONOMETRIC CRITERIA                      (SECOND ORDER TEST):

This subsection deals with post mortem tests of the regression results which are:

4.3.1       NORMALITY TEST: The normality test conducted here is Jarque-Bera (JB) normality test.

Hypothesis Testing:

Ho: δ1=0 (the error term follows a normal distribution)

H₁: δ1

The level of significance is 5% and the degree of freedom is 2.

The JB_cal is given as;

……………………………………………… (1)

Where n = no of observations, s= Skewness =-0.5273389 and k = the Kurtosis =4.488532

            Decision Rule:

            Reject H₀ if JB_cal > JB_0.05 (2) df, accept otherwise.

          From the statistic given above JB_cal = 5.547

            While from the Chi-square table JB_tab = 5.992

Therefore, since JB_cal < JB_tab, we do not reject H₀ and conclude that the error      term follows normal distribution at 5% level of significance.

4.3.2. RESULT FOR UNIT ROOT TESTS:

Table 4.3 THE PHILIP-PERRON UNIT ROOT TABLE

Variable	Philip-Perron unit root Test Value	Order of integration
LOG(RGDP)	-5.740  [-3.662]	l(1)
LOG(TROP)	-11.13  [-3.655]	I(0)
LOG(EXR)	-5.036  [-3.655]	I(1)
REGIM	-6.053  [-3.662]	l(1)
BFSAP	-6.166  [-3.662]	l(1)

Note: the figure in parenthesis represent phillips-perron critical value at 1%.

From table 4.1 above, all the variables are stationary at 1% phillips-perron critical value. The log(trop) variable is stationary at level form. But, the other variables are stationary at 1^st difference.

Ho: δ=1 (the variables are non-stationary)

H₁:  δ<1 are="" span="" stationary="" the="" variables="">

Decision Rule:

Reject H₀ If |τ_cal| > |τ_tab|

4.3.3. RESULT FOR COINTEGRATION TEST:

The literature thus reviewed indicates a long run relationship between the variables under consideration. Via the Augmented Engel Granger’s approach we shall seek to find out if such long run relationship exists in the Nigerian context. It involves generating the residuals from regression and then performing stationary test on it.

Hypothesis Testing:

Ho: δ=0 (the variables are not cointegrated)

H₁:  δ<0 are="" cointegrated="" span="" the="" variables="">

Decision Rule: reject H₀ If |τ_cal| > |τ_tab|

Table 4.4 THE T-VALUE TABLE FOR RESIDUALS

VARIABLE	τ – calculated value	τ- tabulated value	Order of integration
Residuals	-4.206	-3.655	l(0)

Note*** the variables are cointegrated at 1% level of significance.

Conclusion: since |τ_cal| > |τ_tab|, we reject H₀ and conclude that the variables may be cointegrated in the long run.

4.3.4   TEST FOR MULTICOLLINEARITY

 In carrying out this test, a simple rule of thumb is used to search for high pair wise or zero order correlation between any two regressors. If the correlation coefficient is in excess of 0.8 then multicollinearity is a serious problem (Gujarati and Sangeetha 2007: 367). Following this rule, there is high multicollinearity between TROP and EXR, between TROP and BFSAP and between EXR and BFSAP. These variables are core to the study and thus dropping them would amount to specification bias.  

See correlation matrix in appendix C2 for the details.   

4.3.5   TEST FOR HETEROSCEDASTICITY

The white General Heteroscedasticity test detection approach is adopted as stated in chapter 3 above. The test which follows a chi square distribution is conducted as follows;

1.      Generate the residuals

2.      Square the residuals.

3.      Square the independent variables.

4.      Regress the residuals on the variables and their squares.

5.      Obtain the R²

6.      Multiply the R² by n (the no of observations).

    The 6^th item above is the _cal.

    H₀: α₁= α ₂= α _{3 …} α _k = 0

 H₁: α₁ ≠ α₂ ≠ α_3… α_k ≠ 0

 Decision Rule:

 Reject H₀ if _cal >_tab at 5% level of significance.

 R² from auxiliary regression = 0.6014, n =40

 n.R² = 40* 0.6014= 24.056, _tab at 5% = 12.5916

 Since _cal >_tab at 5%, we reject the null hypothesis and conclude that at 5%          level of significance there is heteroscedasticity. We will adopt Newey-West HAC (heteroscedasticity- and autocorrelation-consistent) standard errors to correct this.

4.3.6.   TEST FOR AUTOCORRELATION

Established lower limit d_L and upper limit d_U of durbin Watson based on 5% level of significance and k-degrees of freedom.

Where: k=number of explanatory variables excluding the constant.

Table 4.5 DURBIN WATSON D-TEST DECISION RULES TABLE

NULL HYPOTHESIS	DECISION RULE	CONDITION (IF)
No positive autocorrelation	No Decision	dL ≤ d ≤ dU
No negative autocorrelation	Reject	4 - dL < d < 4
No negative autocorrelation	No Decision	4 - dU ≤ d ≤ 4 - dL
No autocorrelation, positive or negative	Do not reject	dU < d < 4 - dU

Hypothesis testing:

a)     H_o: ρ = 0 (no autocorrelation) versus H₁: ρ > 0,

Decision rule: Reject H₀ at α level if d < d_U, that is, there is statistically significant positive autocorrelation.

b)     H₀: ρ = 0 versus H₁: ρ < 0.

Decision rule: Reject H₀ at α level if the estimated (4 − d) < d_U, that is, there is statistically significant evidence of negative autocorrelation.

c)     H₀: ρ = 0 versus H₁: ρ ≠ 0.

Decision rule: Reject H₀ at 2α level if d < d_U or (4 − d) < d_U, that is, there is statistically significant evidence of autocorrelation.

Since Durbin Watson d-statistic = 1.038649 which is lower than d_L that is D-stat< d_L We therefore conclude that there is presence of positive auto-correlation_. . We will also adopt Newey-West HAC (heteroscedasticity- and autocorrelation-consistent) standard errors to correct this.

4.3.7. PAIRWISE GRANGER CAUSALITY TEST  

 4.6 PAIRWISE GRANGER CAUSALITY TESTS TABLE

Direction of causality	p-value	Decision
REGIM→LTROP	0.31435	Do not reject
LTROP→ REGIM	0.61012	Do not reject
BFSAP→LTROP	0.41776	Do not reject
LTROP→BFSAP	0.20461	Do not reject
LEXR→LTROP	0.20461	Do not reject
LTROP→ LEXR	0.01771	We reject
BFSAP→ REGIM	0.76532	Do not reject
REGIM →BFSAP	0.78034	Do not reject
LEXR→REGIM	0.31241	Do not reject
REGIM→LEXR	0.24875	Do not reject
LEXR→BFSAP	0.79755	Do not reject
BFSAP→LEXR	0.07135	Do not reject

This result suggests that there is independence among the variables as there is no causality among them and they do not Granger cause each other but for LTROP and LEXR which shows otherwise.

4.4.             EVALUATION OF RESEARCH HYPOTHESIS:

In chapter one of this study, we stated some hypothesis which would be evaluated below based on the findings of this work. The hypotheses thus stated are:

. Trade liberalisation has no significant relationship with the economic growth in Nigeria.

.Trade liberalisation has no significant relationship on macroeconomic variables in Nigeria.

. Trade liberalisation has no impact on trend in Nigerian economic growth.

These hypotheses will be evaluated based on the results presented above:

The results of this study show that trade liberalisation conformed to a priori expectation which requires it to be both positive and statistically significant. This finding is consistent with what previous studies (such as Adam Smith, 1776,David Ricardo,1817, A.P. Thirlwall, 2000, etc) found. It also confirms a priori reasoning that trade liberalisation has a positive relation with macroeconomic variables in Nigeria. Using data from 1970 – 2009, the economy would grow at the rate of 2.57% if the ratio of trop to RGDP rises marginally. Since the t-value of the trop-RGDP variable is in excess of 2, we therefore conclude that the impact of a trade liberalisation policy on the economy is significant following the simple rule of thumb that if the absolute value of any of the variables in table 4.2 is > 2 then the variable corresponding to that value is statistically significant.

4.5 CHAPTER SUMMARY:

The doctrine that trade liberalisation enhances welfare and growth has a long and distinguished ancestory dating back at least to Adam Smith (1723-90) has been proven a reality in Nigeria. In this chapter, we evaluated the three hypothesis established in chapter one, showing the joint impact of  trade liberalisation, exchange rate and other growth variables on economic growth in Nigeria within the period 1970 – 2009. Trade liberalisation as we saw does have notable impact on the growth of the economy.

CHAPTER FIVE

5.1 SUMMARY RECOMMENDATION AND CONCLUSION OF THE RESEARCH FINDINGS

 The result of this research supports the hypothesis of the dominant paradigm in literatures of trade liberalisation theories. The objective of this research was to determine the impact of trade liberalisation on economic growth in Nigeria and to make policies that will improve trade environment and aid business executives, policy prescribers and makers to analyses and project future trends as we examine the effect of trade liberalisation on economic growth in Nigeria using annual data spanning 1970 to 2009.

 In all specifications, evidence abound that trade liberalisation has systematic effect on GDP growth. However, there is evidence that liberalisation increases instability in consumption and investment .The evidence is weak but it is sensitive to the method of estimation adopted as well as the measure of trade policy used. In particular, the impact of liberalisation on consumption and investment volatilities is significant when we use the trade/GDP as a measure of openness. It is not significant when we measure openness by tariff /non-tariff barriers or by conventional wisdom. The first measurement is better and precise as the ratio (trop to RGDP) increases by a unit. The growth rate of the economy is increased on the average by 2.57% freezing all other variables. This research also showed that for every one unit of increase in other ratio of liberalizing policy to RDGP the economy, the economy grows on an average of .2%.  While taking note of the impact of regime on the economy we discovered that the absence of a free and democratic institution reduces the growth rate of the RGDP by a ratio of about 1%. Though this is not statistically significant, yet we know that little drops of water makes mighty ocean.   

At this point, we will show from a policy standpoint the results of this paper in two important ways.

 First, although deep institutional reasons play a role, to an important extent, countries have the level of development they choose. Policy convergence to best-practice standards is not likely to happen automatically unless the political economy conditions for such a change are present. Identifying and co-opting potential opponents might be necessary to ensure the political sustainability of reforms.

Secondly, policies that on average have a liberalizing effect on markets are not by themselves enough to guarantee their extension to the economy. They can even worsen the situation. In this sense, understanding the interrelation between sectorial reforms, and adjusting the timing accordingly seems of first order importance.

5.2. RECOMMENDATION AND CONCLUTION

There are static and dynamic gains derived from trade between countries but there is nothing in the theory of trade that says that the gains are equitably distributed (like the saying, “a new wine will burst an old wine bottle” the degree and the direction of burst may be imprecise). And the gains from trade to an individual country, based on specialisation, may be affected by welfare losses of unemployment and terms of trade deterioration. In this case, complete specialisation is not optimal.

Trade liberalisation and export growth seem to be positively correlated, and exports act as an engine of growth. How powerful is the engine, however, depends on the production and demand characteristics of the goods produced and exported. Countries specialising in the production and export of primary products do not perform as well as countries specialising in the production and export of manufactured goods. This raises the issue of whether regional trade agreements and unilateral tariff reductions by themselves are sufficient to secure structural change in poor countries.

 Orthodox trade theory ignores the contribution that export growth makes to the demand for output, and particularly in relaxing a balance of payments constraint on demand by providing the foreign exchange to pay for the import content of higher levels of consumption, investment and government expenditure. Most developing countries are constrained in their growth performance by a shortage of foreign exchange and could therefore grow faster with more exports.

 Export growth can also set up a virtuous circle of growth through a process of cumulative causation working through the induced effect of output growth on productivity growth and increased competitiveness.

 The question for Nigeria is not whether to trade but in what to trade and the terms on which it trades with itself and the rest of the world. Regional integration may bring some benefits if wisely designed, but more important is to get right the growth fundamentals of high levels investment in physical and human capital, good governance, and a structure of production that gives scope for scale economies and high productivity which at the same time produces goods, the world demand for which is rising fast. If this requires elements of protection, countries must not be afraid to deviate from free trade. There are legitimate economic grounds for protection if it will raise income and output above what would otherwise be the case. The classic economic arguments are: the infant-industry argument; the externalities argument, and the case where the social cost of production is less than the private cost because of, for example, the unemployment of labour.

 It is worth remembering that historically no country has ever developed on the basis of absolute free trade except the United Kingdom, which was the first country to industrialise. The United States, the countries of Europe, Scandinavia, Japan and other successful countries in South East Asia all adopted various means of protection at one time or another.

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